A proposal to subject advisors to
That's what the U.S. Treasury Department's Financial Crimes Enforcement Network estimates would be one likely effect of the new rule for the more than 15,000 advisory firms now registered at the federal level. In general,
Practically, the change would mean that registered investment advisories with $110 million or more under management would come under a new bevy of recordkeeping requirements and would also be required to submit reports to FinCEN anytime they detect suspicious activity among their clients. FinCEN said its goal is to close holes in the U.S. regulatory system that have enabled bad actors to launder money through financial advisors while many other avenues for such illicit transactions have been closed.
"Investment advisors are important gatekeepers to the American economy, overseeing the investment of tens of trillions of dollars," FinCEN Director Andrea Gacki said in a statement. "The current patchwork of … requirements creates regulatory gaps that criminals and foreign adversaries exploit to launder money, hide illicit wealth and compromise American innovation."
60 reports a year
In estimating that the rule could force firms to send in 60 suspicious activity reports a year on average, FinCEN looked at current submissions by hybrid firms. Since these practices have a broker-dealer division along with an advisory arm, they already fall under anti-money laundering rules.
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It's estimates like that that have groups like the Investment Adviser Association on edge. The group, which represents more than 600 independent advisory firms, warns the proposal is just the latest in a myriad of new rules that threaten to be overly burdensome for small outfits.
"The most worrying thing is the overwhelming effect this will have on small advisors that have very small staffs," said Gail Bernstein, the general counsel of the IAA, in an interview. "To say they must have a dedicated anti-money laundering officer and do all the required reporting and recordkeeping — it's hard to see how they tailored this proposal to the abilities and resources of smaller firms."
Rules for advisors, but not all
The FinCEN proposal would apply primarily to the more than 15,000 independent advisory firms registered at the federal level with the SEC. Also included would be exempt reporting advisors, which work with private funds and venture capital funds and have less than $150 million under management. Because the SEC already oversees both these firms and RIAs, it would have the authority to examine them for money laundering violations under FinCEN's proposals.
Left out from the new requirements, meanwhile, would be the roughly 17,000 advisors who are registered only at the state-level in the U.S. The Treasury Department noted in an
The Treasury has put forward similar proposals in the past only to see them
Besides the burden for small firms, Bernstein and others at the IAA are concerned the proposal could prove duplicative of existing regulations. She noted that advisory firms are already under restrictions aimed at preventing fraud.
"Sometimes what they are generally considering to be money laundering is basically run-of-the-mill fraud," she said. "We do want to get rid of bad actors, but we're worried about regulatory redundancies."
Rise in cases
FinCEN said it proposed the new rule after the U.S. Treasury examined suspicious activity reports filed between 2013 and 2021 and found that registered investment advisors and exempt reporting advisors were mentioned in about 15% of them. The Treasury also found that the number of reports associated with RIAs and exempt advisors increased by fourfold in the same period even though the total number of reports filed was up by only about 140%.
The analysis found instances in which an investment advisor had provided an entry point to the U.S. market for illicit funds stemming from "foreign corruption, fraud, and tax evasion," according to the proposed rule. It also said some advisors help manage money for Russian oligarchs who have helped finance Russia's war against Ukraine, and others oversee funds that China and other countries use to undermine cybersecurity.
The Treasury said separate scrutiny of documents filed under the federal Bank Secrecy Act between the beginning of 2019 and June 2023 found more than 20 advisors with links to "Russian oligarch investors or Russian-linked illicit activities."
"This review also identified 60 additional investment advisers located in the United States who managed private funds in which identified Russian oligarchs have invested, although there was no indication the adviser was engaged in any illicit activity," according to the proposed rule.
No ID requirement
Mark Quinn, the director of regulatory affairs at the independent broker-dealer Cetera Financial Group, said he shares some of the concerns about regulatory redundancy. Since Cetera is a hybrid firm, many of its representatives already fall under federal anti-money laundering rules.
Quinn said it would be unnecessarily duplicative to subject those same people to yet another layer of regulation just to accomplish the same goal.
"But there are a lot of standalone investment advisors," he said. "And in that case, maybe it is appropriate to apply something like this."
Quinn said he was somewhat surprised to see that FinCEN's proposed rule wouldn't place advisors under customer identification requirements that are common elsewhere in the industry. These requirements are a series of steps brokers and banks must take to ensure their clients aren't lying about their identities.
"That's where the rubber meets the road in the retail context," Quinn said. "You've got to say, 'I need to look at your driver's license,' so I can have a sense of if you are who you say you are, so we can do a background check."
FinCEN's proposal says customer identification rules will be developed later with the help of the SEC. It's also putting off similar requirements for the collection of beneficial owner information from legal clients.
Uniformity welcome to some
Jesse Brown, the senior compliance manager at Petra Funds Group — which helps administer private equity and debt funds — said the proposal could provide some needed uniformity in the industry. He said there's not many people who know that advisors, unlike brokers and bankers, don't come under anti-money laundering rules.
"This leads to a lack of comprehensive procedures and ample confusion throughout the investment advisor space," Brown said. "Although the proposed rule would increase the expanding regulatory burden on investment advisors, I do believe many will welcome the regulatory clarity and consistency among their peers."
Firms and other interested parties have until April 15 to comment on FinCEN's proposed rule. If it's adopted, firms will have 12 months to come into compliance.
