SEC and FinCEN Propose New Rules to Combat Illicit Finance in Investment Adviser Sector

The Securities and Exchange Commission (SEC) and the Financial Crimes Enforcement Network (FinCEN) jointly proposed a new rule on Monday, targeting investment advisers (RIAs) and exempt reporting advisers (ERAs). The rule aims to enhance the fight against criminal, corrupt, and illicit activities such as money laundering and terrorism financing within the investment adviser industry.

According to a recent risk assessment by the Treasury, the investment adviser sector has been identified as a potential gateway for illicit proceeds entering the U.S. market. To counter this, the proposed rule mandates RIAs and ERAs to establish written customer identification programs (CIPs), making it harder for individuals with false identities to engage in illicit financial activities.

SEC Chair Gary Gensler emphasized the necessity of the proposed rule, stating, "The proposed rule is designed to make it more difficult to use false identities to establish customer relationships with investment advisers." He highlighted the potential risk posed by terrorists and criminals accessing U.S. financial markets for unlawful purposes.

FinCEN Director Andrea Gacki echoed similar sentiments, stating, "Criminal, corrupt, and illicit actors have exploited the investment adviser sector to access the U.S. financial system and launder funds." Gacki emphasized the importance of the proposal in empowering investment advisers to identify and prevent such misuse of their services.

If adopted, the rule would require RIAs and ERAs to implement reasonable procedures to verify the identity of their customers. This includes maintaining records of the information used for identity verification, among other requirements. The proposal aligns with existing customer identification program requirements for other financial institutions, ensuring consistency across the sector.

The proposed rule complements a separate FinCEN proposal from February 2024, which seeks to designate RIAs and ERAs as "financial institutions" under the Bank Secrecy Act (BSA). This designation would subject them to anti-money laundering/counter-financing of terrorism (AML/CFT) program requirements and suspicious activity report (SAR) filing obligations.

The proposal will be available for public comment for 60 days after its publication in the Federal Register. Interested parties can find more information on SEC.gov and in the Federal Register. A Fact Sheet detailing the Notice of Proposed Rulemaking is also accessible on the SEC’s website.

By fLEXI tEAM