On August 28, 2024, the Financial Crimes Enforcement Network (FinCEN) finalized a rule that imposes new Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) program requirements on registered investment advisers (RIAs) and exempt reporting advisers (ERAs). For the first time, these advisers will be formally recognized as “financial institutions” under the Bank Secrecy Act (BSA), and thus subject to its AML/CFT regulations. The new rule will go into effect on January 1, 2026, signaling a significant shift for both RIAs and ERAs, who will need to implement comprehensive compliance programs to meet these requirements.

A New Regulatory Era for Investment Advisers

Historically, most investment advisers have not been directly subject to FinCEN’s AML/CFT rules, though some have adhered to these requirements due to affiliations with regulated entities such as banks or broker-dealers. With the adoption of this final rule, however, RIAs and ERAs will now be required to establish risk-based AML programs designed to detect and report suspicious activity, conduct due diligence on clients, and comply with other BSA obligations.

The rule stems from FinCEN's longstanding interest in regulating private equity, hedge funds, and venture capital funds, which play a growing role in the U.S. financial system. FinCEN's review of Suspicious Activity Reports (SARs) from 2013 to 2021 revealed that 15.4% of these investment advisers were linked to SAR filings. This heightened scrutiny is motivated by concerns that private funds could be used to obscure illicit financial activities, including foreign corruption and tax evasion.

Key Provisions of the Rule

Under the new AML/CFT requirements, RIAs and ERAs must implement several core elements within their compliance programs:

1. Customer Due Diligence (CDD) and Risk Assessment: Covered IAs will be required to conduct due diligence on their customers to assess the risk of money laundering or terrorist financing. This includes understanding the nature of customer relationships and developing customer risk profiles.

2. Suspicious Activity Monitoring and Reporting: Investment advisers must establish processes to monitor transactions for signs of criminal activity and file SARs when necessary. This aligns them with other financial institutions already subject to these obligations.

3. Internal Policies and Independent Testing: Firms must establish internal controls and procedures designed to mitigate AML/CFT risks. These programs will also need to be independently tested to ensure compliance.

4. Training Programs: Advisers must provide ongoing training for employees involved in compliance, ensuring that staff are equipped to recognize and report suspicious activity.

5. Oversight and Accountability: Each adviser must designate a compliance officer responsible for implementing and overseeing the firm’s AML/CFT program.

Inclusion of Exempt Reporting Advisers

In a significant move, FinCEN extended the new rule to cover ERAs, which primarily advise private equity and venture capital funds. These exempt advisers represent a particularly high risk for money laundering, given their involvement with private funds and clients operating in jurisdictions with weaker AML/CFT controls. FinCEN determined that excluding ERAs from the rule could create loopholes for illicit actors to exploit, further emphasizing the need for broad inclusion within the AML framework.

Foreign-Located Investment Advisers

The rule also applies to foreign-located investment advisers with significant U.S. connections. Specifically, foreign advisers who conduct advisory activities in the U.S. or provide services to U.S. persons or private funds with U.S. investors will be subject to the new AML/CFT requirements. However, foreign advisers exclusively servicing non-U.S. clients with no U.S.-based personnel will not fall under the rule's purview.

Recordkeeping and Currency Reporting Obligations

The new rule brings RIAs and ERAs into compliance with FinCEN's Recordkeeping and Travel Rules, which require financial institutions to collect and maintain information on certain transactions exceeding $3,000. Additionally, advisers will need to file Currency Transaction Reports (CTR) for transactions involving over $10,000 in cash, aligning them with other financial institutions subject to these reporting requirements.

Tailored Compliance for Investment Advisers

FinCEN has emphasized that these AML/CFT programs should not be "one-size-fits-all." Instead, advisers must tailor their compliance programs to the specific risks posed by their business models. This risk-based approach will require firms to evaluate their client base, transaction volumes, and geographical exposure to determine the level of scrutiny needed for each relationship.

The rule also provides flexibility for advisers affiliated with banks or broker-dealers, allowing them to consolidate their compliance programs, provided that the risks associated with both entities are adequately addressed.

Next Steps for Investment Advisers

Although the rule will not take effect until 2026, RIAs and ERAs should begin preparing now. Implementing an AML/CFT program will require significant time and investment, particularly for firms that need to hire key compliance personnel, develop new policies and procedures, and perform risk assessments. Firms must also conduct due diligence on their current customer base and establish processes for reporting suspicious activity.

Covered advisers should not delay, as compliance will involve a comprehensive overhaul of internal processes and a cultural shift towards a more vigilant and regulated operating environment.

Conclusion

FinCEN's new AML rule represents a major regulatory shift for investment advisers, bringing them into alignment with other financial institutions subject to BSA regulations. While the compliance deadline may seem distant, the scale and complexity of the changes required mean that RIAs and ERAs should start planning now. As the financial landscape becomes increasingly scrutinized, the ability to implement a robust AML/CFT program will be crucial for firms aiming to protect their reputations and avoid potential penalties.

* * *

Attorney Advertising—Anderson P.C. is a U.S. law firm and provides this information as a service to clients, prospective clients, and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship.

Anderson P.C. is a boutique law firm dedicated to defending clients in government investigations and securities enforcement actions initiated by the SEC, FINRA, DOJ, and other regulatory bodies. We provide focused, strategic counsel and regulatory guidance across the full spectrum of federal laws and regulations affecting broker-dealers, investment advisers, banks, asset managers, private funds, public companies, senior executives, and digital assets. Our deep expertise allows us to navigate complex legal challenges and deliver results-driven solutions tailored to our clients' unique needs.

If you have any questions or need legal assistance related to government investigations, securities enforcement actions, or regulatory compliance, please don't hesitate to contact us. Our team at Anderson P.C. is here to provide the expert guidance and support you need to navigate these complex challenges.