SEC and FinCEN Propose New Customer ID Rules for Investment Advisers

The Securities and Exchange Commission (SEC) and the Financial Crimes Enforcement Network (FinCEN) have proposed a new rule requiring registered investment advisers (RIAs) and exempt reporting advisers (ERAs) to implement customer identification programs (CIPs) to combat money laundering, terrorism financing, and other illicit finance activities. This proposal aims to strengthen anti-money laundering regulations in the investment adviser sector, affecting approximately 15,000 advisory firms, and would require them to collect and verify customer ID information, maintain records, and report suspicious activity." This description focuses on the primary topic of the proposed rule, the main entities involved (SEC, FinCEN, RIAs, and ERAs), the context of anti-money laundering regulations, and the significant actions and implications of the proposal. The description also provides objective and relevant details that will help an AI generate an accurate visual representation of the article's content, such as the number of advisory firms affected and the requirements of the proposed rule.

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SEC and FinCEN Propose New Customer ID Rules for Investment Advisers

SEC and FinCEN Propose New Customer ID Rules for Investment Advisers

The Securities and Exchange Commission (SEC) and the Financial Crimes Enforcement Network (FinCEN) have jointly Propose a new rule that would require registered investment advisers (RIAs) and exempt reporting advisers (ERAs) to implement customer identification programs (CIPs) to combat money laundering, terrorism financing, and other illicit finance activities. The proposed rule aims to strengthen the anti-money laundering and countering the financing of terrorism (AML/CFT) framework for the investment adviser sector.

Why this matters: The proposed rule addresses a critical gap in the US financial system, as investment advisers have been exploited by criminal and illicit actors to launder funds. Strengthening AML/CFT regulations in this sector can help prevent the financing of terrorist activities and other illegal operations that threaten national security.

Under the proposal, RIAs and ERAs would need to establish, document, and maintain written CIPs to verify the identity of their customers. The CIP would require procedures for verifying customer identity to the extent reasonable and practicable, and maintaining records of the information used to verify a customer's identity.

"Criminal, corrupt, and illicit actors have exploited the investment adviser sector to access the U.S. financial system and launder funds," said FinCEN Director Andrea Gacki. "This proposal would help investment advisers better identify and prevent illicit actors from misusing their services, while advancing a harmonized set of CIP obligations."

The new rule would apply to approximately 15,000 advisory firms registered at the federal level, including RIAs and ERAs that work with private funds and venture capital funds. Firms would be required to collect customer ID information, including name, date of birth, address, and government ID number, and verify the information against lists of terrorists, criminals, and other persona non grata maintained by government agencies.

The rule is part of a broader effort to enlist the Investment adviser sector in the fight against money laundering, following similar requirements already in place for broker-dealers, banks, and other financial institutions. It complements a separate 216-page anti-money laundering rule proposed by FinCEN in February, which would require RIAs to scour their clients' transactions for signs of illicit dealings and send in suspicious activity reports.

Industry groups have expressed concerns that the proposal adds to the burden on firms already staggering under the weight of new rules and regulations. The SEC estimated that the advisory industry would bear slightly more than $404 million a year in internal costs and $48.4 million in legal bills and similar external expenses under the program.

"We urge the SEC and the Treasury Department to develop a tailored approach that effectively addresses specific risks while avoiding unnecessary regulatory burdens, especially burdens on smaller SEC advisors," said Gail Bernstein, General Counsel for the Investment Adviser Association. The proposed rule will be published in the Federal Register, and a public comment period will remain open for 60 days after publication. The Investment Adviser Association has urged the SEC and Treasury to also reopen the comment period for the separate FinCEN want on suspicious activity reports.

Key Takeaways

  • SEC and FinCEN propose new rule for RIAs and ERAs to implement customer ID programs to combat money laundering and terrorism financing.
  • The rule aims to strengthen AML/CFT regulations in the investment adviser sector.
  • Firms must verify customer identity, maintain records, and report suspicious activity.
  • The rule applies to 15,000 advisory firms, including RIAs and ERAs working with private funds and venture capital funds.
  • Industry groups express concerns about added regulatory burdens and costs.