SEC and FinCEN Propose New Anti-Money Laundering Requirements for RIAs

A proposed rule has been introduced by the Securities and Exchange Commission (SEC) and the Financial Crimes Enforcement Network (FinCEN), aiming to enhance client information and verification processes within the realm of Registered Investment Advisers (RIAs). The objective is to mitigate risks associated with money laundering and other illicit activities.

The regulatory proposal necessitates both RIAs and exempt reporting advisers to establish and maintain comprehensive customer identification programs. These programs are designed to authenticate and document the identities of their clients, with the aim of combating money laundering, terrorism financing, and other forms of unlawful financial activities.

SEC Chair Gary Gensler stated that the proposed rule seeks to address deceptive practices utilized to infiltrate the US financial system. He emphasized that the rule aims to make it more challenging to establish customer relationships with investment advisers using false identities, thereby reducing the risk of illicit funds contaminating US financial markets.

FinCEN Director Andrea Gacki underscored the vulnerabilities within the investment adviser sector that have been exploited by criminal entities. Gacki mentioned that criminal, corrupt, and illicit actors have utilized this sector to access the US financial system and launder funds.

The proposed rule comes in the wake of recent investigations into Morgan Stanley’s wealth unit, which faced scrutiny from several regulatory bodies, including the SEC, the Office of the Comptroller of the Currency, and various offices within the Treasury Department.

The rule also aligns with a previous FinCEN proposal from February, which recognizes investment advisers as financial institutions under the Bank Secrecy Act. This extension imposes anti-money laundering responsibilities and reporting requirements on investment advisers. FinCEN referenced a Treasury department assessment that identified the investment advisor space as a gateway for foreign funds associated with corruption, fraud, tax evasion, and other illegal activities.

Responding swiftly to the SEC’s announcement, the Managed Funds Association (MFA), a global trade association representing hedge funds and private credit funds, expressed support for efforts to deter money laundering. However, MFA urged regulators to avoid overlaps between new regulations and existing anti-money laundering controls implemented by other entities.

MFA President and CEO Bryan Corbett emphasized that alternative asset managers take anti-money laundering issues seriously. He noted that investors in private funds often transfer assets from financial institutions subject to robust anti-money laundering regimes. MFA stated its intent to review the proposal and engage in constructive dialogue with the SEC and FinCEN on anti-money laundering matters.

The proposed rule was published on the SEC website on Monday and will be open for public comment for 60 days. Additionally, the federal securities regulator has provided a fact sheet on the rule to facilitate feedback from commenters.

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