FinCEN reproposes AML rules for fund managers

Fourth proposal in two decades would apply Bank Secrecy Act rules to registered, exempt fund advisers.

The Biden administration on Tuesday is expected to repropose new rules that would require fund advisers both registered and exempt from SEC oversight to develop and implement anti-money laundering programs and to file suspicious activity reports.

Investment advisers have long been exempt from the money-laundering requirements of the Bank Secrecy Act. Tuesday’s proposal from the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) would close that loophole and force fund advisers to develop “risk-based” anti-money laundering policies and procedures, file suspicious activity reports with federal regulators and keep records of their efforts for regulators’ exams.

It’s at least the fourth time this century that Washington has tried to bring investment advisers into the Bank Secrecy Act regime. The previous time was in 2015; a rulemaking that was, until Monday, still technically pending. Biden administration officials say they’re scrapping that 2015 proposal and replacing it with Tuesdays’ rulemaking notice.

Unlike previous proposals, Tuesday’s version of the rulemaking proposal would not impose customer identification programs on fund advisers, although FinCEN says that issue will be addressed in a future proposal with the SEC. Fund advisers also won’t be required to gather information on the beneficial owners of the firms they’re doing business with; that’s already on the books separately.

‘FinCen has been careful’

Backers say the new rules offer the right balance between protecting the American economy from illicit oligarch/terrorism cash while not stifling innovation.

“FinCEN has been careful not to pile on additional or redundant requirements for investment advisers,” regulators say in Tuesday’s fact sheet. “Because investment advisers provide services to open-end investment companies such as mutual funds, which are already defined as ‘financial institutions’ under the BSA, and because of the regulatory and practical relationship between mutual funds and their investment advisers, the proposed rule would not require investment advisers to apply [anti-money laundering and Combating the Finance of Terrorism] programs or [suspicious activity report] filing requirements to mutual funds they advise.”

To buttress its claims, FinCEN also released a new risk report Tuesday that regulators claim justifies the changes. It claims that Russian and Chinese oligarchs, international terrorists, tax dodgers and other bad actors are using American investment advisory industry to hide their money. That’s been especially true in venture capital, especially within AI and other tech start-up investments, regulators claim.

If adopted as written, FinCEN would hand some of its examination authority to the SEC.

The Biden administration is the first in American history to declare “corruption” a threat to national security. Tuesday’s FinCEN proposal is part of an administration-wide effort to clean up American markets.

Comments on the new proposal will be open until April 15.