RIA Compliance Blog
The Financial Crimes Enforcement Network (“FinCEN”) adopted final rules to bring the majority of the investment advisory industry under the reporting requirements for illicit finance activity. The update brings “investment advisers,” as defined under the new rule, within the definition of “financial institution” for regulation under the Bank Secrecy Act (“BSA”).
The BSA has long attempted to safeguard the US financial system by monitoring and reporting certain activities and transactions. Under the new FinCEN Rule, certain investment advisers have the same regulatory requirements historically reserved for banks, broker-dealers, money transmitters, and casinos.
Under the FinCEN Rule, “financial institution” now includes (1) investment advisers that are registered or required to be registered with the SEC, and (2) SEC Exempt Reporting Advisers (“ERA(s)”). Excluded from the definition of “financial institution,” and therefore not subject to the requirement of the rule, are investment advisers registered with the SEC solely on the basis of being (1) mid-sized advisers (i.e., advisers with $25 million or more who are not required to register under the law of their home state, (2) multi-state advisers, or (3) pension consultants. Additionally, SEC-registered advisers that are not required to report any assets under management (“AUM”) information on their Form ADV Part 1 are excluded from the definition. Additionally, the FinCEN regulation does not apply to investment advisers registered with a state regulator, foreign private advisers, or family offices.
Investment Advisers and ERAs subject to the FinCEN regulations must now adopt a risk-based anti-money laundering and countering the financing of terrorism (“AML/CFT”) program, file Suspicious Activity Reports (“SAR(s)”) with FinCEN, comply with the Recordkeeping and Travel Rules, and fulfil other obligations relevant to the BSA and FinCEN.
While investment advisers should be familiar with implementing risk-based compliance programs under Rule 206(4)-7, the requirement to file SARs may be unfamiliar to most investment advisers. SARs are designed to alert FinCEN and relevant law enforcement agencies to transactions that involve known or suspected criminal violations or pattern of criminal violations, whether committed or attempted. Generally, whether a SAR is required to be filed depends on the facts and circumstances of the transaction, taking into consideration the aggregate total of the transaction(s) and whether a potential subject can be identified.
Under the new rule, Investment advisers and ERAs should develop and implement an AML/CFT program that is reasonably designed to prevent illicit activity under the BSA. Additionally, investment advisers subject to the reporting requirements will need to train compliance staff on how to file using the BSA’s E-Filing System. In both situations, investment advisers may need to consult with legal or compliance consultants to navigate the potentially complex regulations now imposed by FinCEN. The deadline for compliance with the rulemaking is January 1, 2026. After the January 1, 2026, deadline, we expect the SEC to make examination of this area an announced priority.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.