Advisors are used to the idea that they have to know their customers. A newly proposed SEC rule would require them to know whether they might launder money.
The Securities and Exchange Commission joined the U.S. Treasury Department on Monday in releasing
Broker-dealers,
"Criminal, corrupt and illicit actors have exploited the investment advisor sector to access the U.S. financial system and launder funds," said Andrea Gacki, the director of the U.S. Treasury's Financial Crimes Enforcement Network, or FinCEN. "This proposal would help investment advisors better identify and prevent illicit actors from misusing their services, while advancing a harmonized set of CIP [customer identification program] obligations."
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The new rule would mainly apply to advisory firms dealing with customers who are opening new accounts. Firms would have to collect those clients' name, date of birth, address and a government ID number, such as a Social Security number. They would then have to take steps to verify the information is accurate and check it against lists of terrorists, criminals and other persona non grata maintained by government agencies.
In practice, said Richard Chen, a legal advocate for advisors and the founder of New York-based
"So it may not be too much more effort," Chen said. "But any time you impose a new regulatory requirement and something goes bad, it leaves an opening for the regulator to come back and say, 'I'm holding you responsible for this.'"
The new proposal comes on top of a
In its own assessment for the rule proposed on Monday, the SEC estimated that the advisory industry would bear slightly more than $404 million a year in internal costs — partly a measure of time spent meeting the new requirements — and $48.4 million in legal bills and similar external expenses. That's based on a calculation that an RIA with 100 customers would have to set aside an additional $26,468 for internal costs and $4,088 for legal bills. Meanwhile, exempt reporting advisers — which typically have less than $150 million under management — would have an estimated $1,675 in additional internal costs and $654 in external costs.
Industry groups said the proposal adds to the burden on firms already staggering under the weight of new rules and regulations. The Investment Adviser Association, which represents more than 600 advisory practices, expressed support for the SEC's and Treasury's goal of combating money laundering.
Gail Bernstein, general counsel for the IAA, said in a statement that she's concerned "the sweeping proposal will capture virtually all SEC advisors and will not accomplish the stated policy goals because it lacks sufficient tailoring to the unique business models and risk profiles of SEC advisors."
"We urge the SEC and the Treasury Department to develop a tailored approach that effectively addresses specific risks while avoiding unnecessary regulatory burdens, especially burdens on smaller SEC advisors," she added.
Advisors will have 60 days to comment on the new rule once it's published in the Federal Register. Bernstein said the comment period for the separate FinCEN proposal on suspicious activity reports should be reopened so the industry can take into account how the two rules are likely to interact.
SEC Commissioner Mark Uyeda, a Republican appointee and often a skeptical voice on new rule proposals, agreed that the anti-money laundering regulations seem overly broad. Uyeda said the rule would seem to require advisors to collect customer ID information for investing activities that are unlikely to be used for nefarious purposes.
RIAs, for instance, often work with investment trusts or devise model portfolios for wrap fee programs.
"Other types of investment advisory services may not at all involve or relate to the transfer of funds or securities," Uyeda said in a statement. "It is difficult to envision a money laundering concern that should be addressed with these activities, and it is unreasonable to require advisers to implement a [customer identification program] and verify customer identities in these circumstances."
The proposed rule notes that U.S. Treasury analysis of suspicious activity reports filed from 2013 to 2021 found that RIAs or exempt reporting advisers were mentioned in 15.4% of the incidents flagged for scrutiny. What's more, the number of times a year an advisory firm or exempt reporting adviser was referenced increased fourfold during the same eight-year period.
Excluded 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
This latest regulatory push comes amid concerns that laundered money is helping to finance Russia's war with Ukraine and to undermine U.S. cybersecurity. Chen said the SEC and U.S. Treasury are most likely thinking of lower-level bad actors as well.
"There's always the off chance that a customer is involved in narcotics or drug trafficking, racketeering or organized crime," he said. "So it's not just necessarily terrorists or foreign nationals."
