Private fund advocates push back on AML proposal

Private fund advocates – including a commissioner at the Securities and Exchange Commission – are urging the Biden administration to back off proposed rules that would require private fund managers and other investment advisers to screen their investors’ cash for dirty money.

It’s the fourth time this century that Department of Treasury’s Financial Crimes Enforcement Network has proposed expanding Bank Secrecy and Patriot Act rules to cover investment advisers. The latest proposal, published in February, would require nearly all investment advisers, registered and exempt, to write, implement and enforce “risk-based” anti-money laundering programs tailored to their business models; to test those programs independently and regularly; to designate an AML officer; to train their staff on the firm’s AML policies; to conduct ongoing customer due diligence; and to track and file suspicious activity reports for transactions above $5,000.

Backers of the rule say that the investment adviser industry – particularly, SEC-exempt private equity and venture capital fund managers – are a port of entry for dirty money in the American economy, and that the “patchwork” of AML rules allows oligarchs, tyrants and other global bad actors to hide their ill-gotten gains.

“We worked hard to tailor the proposal to address national security and illicit finance concerns, while minimizing potential burden on US businesses,” FinCEN director Andrea Gacki told a conference held by the Securities Industry and Financial Markets Association on Monday.

“We designed the proposed rule to be risk-based, such that smaller advisers may adopt tailored policies and procedures that are consistent with their (often) simpler, more centralized organizational structures.”

The comment period on the latest proposal closed April 15. The rules, if adopted as written, would land hardest on those private fund managers. Their advocates have noticed.

Not ‘convincing or compelling’

“None of the justifications offered in support of this latest proposal is convincing or compelling,” Republican SEC commissioner Hester Peirce wrote. “The proposal is thin on actual examples of RIAs serving as gateways to illicit activity. The proposed rules would impose yet more costs on RIAs already staggering under the weight of two years of SEC regulatory excesses, along with new mandates from other regulators. I am particularly worried about how these new rules could affect smaller advisers, especially with a wholly unreasonable proposed compliance date of 12 months.”

Private fund advocates are in a tough spot here. Their industry is one of the few not already covered by AML rules, and Russia’s war in Ukraine has sharpened public focus on dirty money in the American economy. That may help explain why so many fund advocates are using “yes, but” type language in their comments.

“MFA supports FinCEN’s anti-money laundering efforts,” Managed Funds Association president and CEO Bryan Corbett said.

“However, FinCEN’s proposal is based on incorrect assumptions about how private funds operate. FinCEN should repropose a rule that accurately reflects the private funds business model and recalibrates investment adviser responsibilities to reflect realities,” he added in urging regulators to go back to the drawing board.

The Investment Adviser Association took a similar tack in its comments, also urging FinCEN to withdraw the proposal.

“We appreciate that the intent of the proposal is to adopt a flexible, risk-based approach to AML compliance that will permit each SEC adviser to tailor its AML program to match the nature and scope of its advisory business,” IAA general counsel Gail Bernstein wrote. “However, the IAA believes that the Proposal is too prescriptive in certain of its specific requirements which will make it more difficult for SEC Advisers to tailor their programs appropriately.”

The American Investment Council said FinCEN’s proposal should do more to “clarify certain issues and address the operational challenges” facing private equity managers. Such firms have “limited” involvement in financial transactions, AIC general counsel Rebekah Goshorn Jurata wrote in her comments, and aren’t “well situated to be the point of the spear for AML compliance,” especially since the costs of the proposed rule “seem disproportionate to the potential incremental benefit.”