Treasury enlists RIAs for front line in money-laundering fight

RIAs could find themselves having to send dozens of additional reports a year under new anti-money laundering rules issued this week.

The U.S. Treasury Department's Financial Crimes Enforcement Network, or FinCEN, released a 310-page regulation bringing federally registered investment advisors and certain small firms under the same anti-money laundering requirements as banks and broker-dealers. Practically, the rule will require RIAs to regularly submit documents like suspicious activity reports used to flag possible instances of money laundering. They'll also have to adopt money-laundering policies and have those audited to show compliance with industry standards.

The requirements come amid growing concerns that the U.S. financial system is being used by groups and individuals looking to perpetuate illicit acts like undermining domestic cybersecurity or financing Russia's war with Ukraine. A separate proposal put forward by the SEC and the Treasury in May seeks to prevent RIAs from working with shady characters by making them responsible for running ID checks on anyone trying to open a new account.

Together, the rules are meant to repair a perceived defect in U.S. defenses against illegal movements of money by criminals, terrorists and other persona non grata. 

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"Investment advisors are important gatekeepers to the American economy, overseeing the investment of tens of trillions of dollars," FinCEN Director Andrea Gacki said when the rule approved Wednesday was introduced in February. "The current patchwork of … requirements creates regulatory gaps that criminals and foreign adversaries exploit to launder money, hide illicit wealth and compromise American innovation."

Heaviest on small firms

Although the proposal excludes advisories registered exclusively at the state level, industry groups have warned it will fall disproportionately on small firms. FinCEN, many note, has estimated the new requirements will have firms filing 60 suspicious activity reports on an average per year.

The Investment Adviser Association, which represents more than 600 RIAs and related entities, has argued the rules will only increase the regulatory burden on small outfits' often already overextended compliance officers. In a letter submitted to FinCEN on April 15, the IAA argued that firms with 100 or fewer employees should be excluded from the new requirements.

FinCEN ultimately did make some revisions to its original proposal in response to such comments. But setting an employee threshold wasn't one of them.

That means concerns about the requirements being overly burdensome persist, said William Nelson, IAA associate general counsel.

"We do believe that the rule is too prescriptive, especially when it comes to smaller advisors," he said. "A lot of the comments we made really revolved around trying to ease some of those burdens while still keeping those protective obligations in place, but really trying to make it more flexible for smaller advisors."

A similar note was sounded in a comment submitted also on April 15 by Andrew Edstrom, a financial planner at the Glendale, California-based RIA WESCAP Group. The firm lists $920 million under management — requiring registration with the SEC — but has fewer than 15 employees, according to Edstrom's letter.

"Having to comply with rules as proposed would present an excessive burden on our business," he wrote. "We are simply not large enough to shoulder this additional burden."

Who's included, who's excluded

The Securities and Exchange Commission generally requires RIAs with $110 million or more under management to register at the federal level. Included with those firms in FinCEN's new rule are so-called exempt reporting advisors, which work with private funds and venture capital funds and have less than $150 million under management. 

FinCEN's original proposal, meanwhile, contained an exclusion for state-registered RIAs that was also adopted as part of the final rule. To that initial carveout were added a few others.

The new rule, for instance, excludes midsize advisors, or firms that manage between $25 million and $100 million and are registered with the SEC. It also exempts multistate advisors — federally registered outfits with listings in 15 or more states — advisors to pension funds and firms with zero reported AUM.

The number of firms meeting those exemption criteria probably runs into the hundreds, Nelson said. Meanwhile, there are more than 15,000 RIAs and more than 5,000 exempt reporting advisors registered at the federal level.

Larger firms can most likely turn to their internal compliance teams for the audits now required to show they have effective anti-money laundering policies, Nelson said. But smaller practices will probably find themselves turning to outside experts.

"The problem is, say you're a five-person shop and you have one compliance officer," Nelson said. "This person who implements the program cannot also test the program."

AML redux

Others have criticized the new rules for being unnecessarily duplicative. In another April 15 letter, Charles Schwab said its brokerage and custodial relationships with thousands of RIAs already extend its anti-money-laundering obligations to those advisory accounts. Schwab's letter contends that regulators seem to be most concerned about advisors to hedge funds, venture capital funds and other private funds and suggests they exclude garden-variety RIAs from the new rules.

"Instead, the proposal extends to more than 20,000 adviser firms, the vast majority of which manage assets for individual investors who maintain accounts with a bank or broker-dealer, and are thus covered by AML programs and for which the risk of being exploited by Russian oligarchs or criminal enterprises in China is quite low," according to the letter, written by Bernie Clark, then the managing director and head of Schwab Advisor Services.

Jan. 1, 2026, start date

Although industry firms and groups may not have gotten everything they wanted, the good news for advisors small and large is that they have plenty of time to prepare. 

The original proposal would have had the new anti-money-laundering rules take effect within 12 months. The revisions decree that that won't happen now until Jan. 1, 2026.

Richard Chen, a legal advocate for advisors and the founder of New York-based Brightstar Law Group, said he thinks firms at a minimum will need to start having employees trained on the new requirements. Smaller firms that lack the resources to do everything in-house will no doubt find compliance consultants are happy to help.

"Fortunately more services will get built up around this over time," Chen said. "The more there is of an obligation, the more this may become something people want to outsource."