Fact Sheet: FinCEN Issues Final Rule to Combat Illicit Finance and National Security Threats in the Investment Adviser Sector

The Financial Crimes Enforcement Network (FinCEN) has introduced a final rule aimed at safeguarding the investment adviser sector from illicit finance activities, including exploitation by criminals, foreign adversaries, and other threats related to money laundering and terrorism financing. This rule now classifies certain registered investment advisers (RIAs) and exempt reporting advisers (ERAs) as “financial institutions” under the regulations that enforce the Bank Secrecy Act (BSA).

The rule outlines mandatory Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) programs for RIAs and ERAs, requires them to report suspicious activities to FinCEN, and introduces several modifications to FinCEN’s BSA-related regulations.

Addressing Illicit Finance Risks in the Investment Adviser Sector

This ruling follows the February 2024 U.S. Department of the Treasury risk assessment, which revealed that the investment adviser industry had been exploited by corrupt officials, criminals, and sanctioned individuals. Additionally, the report noted the involvement of foreign states, particularly the People’s Republic of China and the Russian Federation, in using investment advisers to access U.S. financial systems for funding early-stage technology ventures with national security implications.

The final rule aligns with the Biden-Harris Administration’s 2021 U.S. Strategy on Countering Corruption, addressing these risks and promoting transparency.

Key Elements of the Final Rule

The final rule incorporates feedback received from industry representatives and U.S. government agencies, refining several aspects of the initial February 2024 Notice of Proposed Rulemaking (NPRM). The key changes from the NPRM include adjustments to the scope of investment advisers covered and clarifications regarding foreign-located advisers.

Investment Advisers Covered by the Rule:

1. Registered Investment Advisers (RIAs): Those registered with the SEC with assets exceeding $110 million.
2. Exempt Reporting Advisers (ERAs): Advisers exempt from SEC registration, advising private funds with less than $150 million in assets or advising venture capital funds.

Exclusions from the Definition of Investment Advisers:

• RIAs solely registered as mid-sized advisers, multi-state advisers, or pension consultants.
• RIAs that do not report assets under management (AUM) to the SEC.

Foreign-Located Investment Advisers:

The rule applies only to activities conducted in the U.S. or advisory services provided to U.S. clients or private funds with U.S. investors. The final rule excludes foreign advisers from establishing AML/CFT programs within the U.S.

Requirements for RIAs and ERAs

The rule mandates RIAs and ERAs to implement a risk-based AML/CFT program and adhere to several requirements, including:

• Filing Suspicious Activity Reports (SARs) with FinCEN.
• Complying with Recordkeeping and Travel Rules for funds transmission.
• Implementing special information sharing procedures in line with sections 314(a) and 314(b) of the USA PATRIOT Act.

Additionally, RIAs advising mutual funds can exclude them from their AML/CFT programs without further verification of the mutual fund’s compliance status.

Delegation of Examination Authority

FinCEN has delegated examination authority for the implementation of these regulations to the Securities and Exchange Commission (SEC). The SEC’s role includes oversight and regulation of investment advisers, ensuring compliance with FinCEN’s rules, which aligns with the current framework overseeing brokers, dealers, and mutual funds.

Benefits of the Rule

This rule aims to:

• Enhance transparency and integrity within the U.S. financial system.
• Prevent criminals from laundering illicit funds through investment advisers.
• Support national security and law enforcement agencies with critical financial information.
• Align the U.S. with international AML/CFT standards, addressing gaps identified by the Financial Action Task Force (FATF).

Compliance Timeline

The compliance date for this rule has been extended to January 1, 2026, providing investment advisers with additional time to implement the required changes and ensure full compliance with the updated BSA regulations.