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Background
On Sept. 4, 2024, FinCEN adopted the IA AML Rule, which added certain registered investment advisers (RIAs) and exempt reporting advisers (ERAs and with RIAs, collectively, Covered Advisers) to the definition of “financial institution” under the regulations implementing the Bank Secrecy Act, as amended (BSA), effective Jan. 1, 2026.1
The IA AML Rule requires Covered Advisers to establish and maintain anti-money laundering/countering the financing of terrorism (AML/CFT) programs and comply with certain reporting and recordkeeping obligations under the BSA.2 During the rulemaking process for the IA AML Rule, FinCEN noted that it would address the application of a CIP requirement to Covered Advisers via joint rulemaking with the SEC, including the requirement to collect beneficial ownership information for legal entity customers of the Covered Adviser.3
On May 21, 2024, FinCEN and the SEC published the Proposed CIP Rule, which would require Covered Advisers to establish, document, and maintain written CIPs as part of their AML/CFT programs. To date, the Proposed CIP Rule has not been finalized. This staggered rulemaking process has made it difficult for Covered Advisers to develop and implement AML/CFT programs – including CIPs appropriate for their respective business models – and has resulted in limited regulatory clarity and significant uncertainty.
FinCEN’s Postponement of the IA AML Rule
With months left before the effective date of the IA AML Rule, FinCEN announced its intention to issue exemptive relief by delaying the effective date of the IA AML Rule from Jan. 1, 2026, to Jan. 1, 2028. FinCEN also announced that it intends to revisit the IA AML Rule’s scope through a future rulemaking process.
FinCEN noted that it was taking these actions “[i]n order to ensure efficient regulation that appropriately balances costs and benefits[.]” FinCEN also recognized that the rule “must be effectively tailored to the diverse business models and risk profiles of the investment adviser sector” and “extending the effective date of the rule may help ease potential compliance costs for industry and reduce regulatory uncertainty while FinCEN undertakes a broader review of the IA AML Rule.” During the delay, FinCEN and the SEC will jointly revisit the Proposed CIP Rule, which establishes the minimum requirements for CIPs that Covered Advisers would be required to maintain.
Takeaways
Some investment adviser trade associations and industry advocacy groups have expressed concerns that the IA AML Rule may impose disproportionate burdens on smaller investment advisers and have urged FinCEN to reconsider the IA AML Rule’s scope. While FinCEN recognized the investment adviser sector’s diverse business models and risk profiles, it remains unclear whether, and to what extent, FinCEN will narrow the scope of the IA AML Rule.
Covered Advisers may wish to utilize the additional time provided by the extension to develop and implement written AML/CFT compliance programs that are risk-based and reasonably designed to mitigate their money laundering and terrorism financing risk. Covered Advisers that have already established AML/CFT programs on a voluntary basis should consider reviewing their current programs and making any necessary enhancements to be ready to comply with upcoming BSA requirements. Stakeholders should also consider monitoring and engaging during the rulemaking process with FinCEN and the SEC so the industry can raise concerns and provide meaningful feedback to help ensure that final rules provide regulatory clarity and adequately balance risk mitigation with the compliance burden Covered Advisers will assume.
1 The IA AML Rule applies to any person, wherever located, (1) who is registered or required to register with the SEC under section 203 of the Investment Advisers Act of 1940 (Advisers Act) – also known as RIAs or (2) who is exempt from SEC registration under Section 203(l) or 203(m) of the Advisers Act (i.e., ERAs), subject to certain exceptions discussed below.
FinCEN has excluded from the IA AML Rule:
(1) RIAs that register with the SEC solely because they are (i) mid-sized advisers, as set forth in Section 203A(a)(2)(B) of the Advisers Act; (ii) multi-state advisers as defined under 17 C.F.R. 275-203A-2(d); or (iii) pension consultants as defined under 17 C.F.R. 275-203A-2(a);
(2) RIAs that do not report any assets under management in their Form ADV;
(3) state-registered investment advisers;
(4) foreign private advisers as defined in Section 202(a)(30) of the Advisers Act; and
(5) family offices as defined in 17 C.F.R. 75.202(a)(11)(G)-1).
For more information, please see our December 2024 GT Alert.
2 To comply with the IA AML Rule, Covered Advisers must: (1) implement a risk-based and reasonably designed AML/CFT Program; (2) file Currency Transaction Reports and Suspicious Activity Reports; (3) maintain records relating to the transmittal of funds (i.e., Recordkeeping and Travel Rules); (4) establish special information-sharing procedures in accordance with Section 314(a) of the USA PATRIOT Act; and (5) ensure the development and implementation of procedures to comply with Sections 311 and 312 of the USA PATRIOT Act.
3 See 89 FR 12108 (Feb. 15, 2024).