The United States Department of the Treasury has announced that it is working to address what it perceives as money laundering risks associated with investment advisers. Specifically, the agency asserts that absent consistent and comprehensive anti-money laundering (“AML”) and countering the financing of terrorism (“CFT”) obligations, corrupt officials and other illicit actors may invest ill-gotten gains in the U.S. financial system through hedge funds and private equity firms. Treasury indicated its intention to issue a proposal in the first quarter of 2024 that would apply Bank Secrecy Act (“BSA”) AML/CFT requirements, including suspicious activity report obligations, to certain investment advisers.
In preparing this proposal, Treasury is re-examining and updating its 2015 Proposed Rule that had a similar aim (the “2015 Proposal”). The 2015 Proposal covered investment advisers who were, or were required to be, registered with the SEC. The proposal noted that Treasury was considering incorporating other smaller investment advisers, such as state-regulated advisers and other advisers exempted from SEC registration, into subsequent rulemakings. At the time of the proposal, the SEC estimated the rule would cover more than 11,000 investment advisers reporting approximately $61.9 trillion in assets for their clients.
The 2015 Proposal would have designated investment advisers as financial institutions under the BSA and required that they develop and implement a written, risk-based program that is reasonably designed to comply with BSA requirements and prevent the investment adviser from being used to facilitate money laundering and terrorism financing. Minimum requirements for such a program would have included:
- Establishing and implementing policies, procedures, and internal controls;
- Providing for independent testing for compliance conducted by adviser personnel or a qualified outside party;
- Designating a person or persons responsible for implementing and monitoring the operations and internal controls of the program; and
- Providing ongoing training for appropriate persons.
The 2015 Proposed Rule required that investment advisers engage in risk-based evaluations of its clients to determine the AML/CFT risks they pose. In terms of its expectations for such risk assessments, Treasury stated the following: “If the client is an individual, the source of the client’s funds and the jurisdiction in which the client is located, among other things, would be significant factors. If a client is an entity, an investment adviser may consider the type of entity, the jurisdiction in which it is located, and the statutory and regulatory regime of that jurisdiction, if relevant. The investment adviser’s historical experience with the individual or entity and the references of other financial institutions may also be relevant factors.”
The AML/CFT program would have required sign-off by an investment adviser’s Board of Directors or Trustees, or if did not have one, by its sole proprietor, general partner, trustee, or other persons with similar functions.
The 2015 Proposed Rule stalled following a 2017 moratorium on in-process rules. In December 2021, the Biden administration issued its United States Strategy on Countering Corruption report, which called for the imposition of minimum reporting standards for investment advisers and other types of equity funds and disclosed plans to revisit Treasury’s 2015 Proposed Rule. A few months later, on March 30, 2022, a group of U.S. Senators sent a letter to Treasury urging the agency to revive the investment adviser AML rulemaking process. In that connection, in late 2022 it was reported that Treasury had contacted an industry trade group about plans to extend AML obligations to investment advisers. One year later, it now appears that Treasury is poised to go to market with a new rule proposal in the first quarter of 2024.
While it has regained momentum, the prospect of AML rules for investment advisers has historically wavered with the political winds. The staying power of a revived rulemaking process heading into an election year remains to be seen. However, the progress of this proposal should be closely followed as its enactment would impose substantial new burdens on investment advisers.