Financial Crimes Enforcement Network: Anti-Money Laundering/Countering the Financing of Terrorism Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers and Exempt Reporting Advisers, 72156-72278 [2024-19260]

Download as PDF 72156 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations DEPARTMENT OF THE TREASURY Financial Crimes Enforcement Network 31 CFR Parts 1010 and 1032 RIN 1506–AB58 Financial Crimes Enforcement Network: Anti-Money Laundering/ Countering the Financing of Terrorism Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers and Exempt Reporting Advisers Financial Crimes Enforcement Network (FinCEN), Treasury. ACTION: Final rule. AGENCY: FinCEN, a bureau of the U.S. Department of the Treasury (Treasury), is issuing a final rule to include certain investment advisers in the definition of ‘‘financial institution’’ under the Bank Secrecy Act (BSA), prescribe minimum standards for anti-money laundering/ countering the financing of terrorism (AML/CFT) programs to be established by certain investment advisers, require certain investment advisers to report suspicious activity to FinCEN pursuant to the BSA, and make several other related changes to FinCEN regulations. These regulations will apply to certain investment advisers who may be at risk for misuse by money launderers, terrorist financers, or other actors who seek access to the U.S. financial system for illicit purposes and who threaten U.S. national security. DATES: This rule is effective January 1, 2026. FOR FURTHER INFORMATION CONTACT: The FinCEN Regulatory Support Section at 1–800–767–2825 or email frc@ fincen.gov. SUMMARY: SUPPLEMENTARY INFORMATION: ddrumheller on DSK120RN23PROD with RULES2 I. Introduction In this final rule, FinCEN is adding certain investment advisers to the definition of ‘‘financial institution’’ to regulations issued pursuant to the BSA, prescribing minimum standards for AML/CFT programs to be established by certain investment advisers, requiring certain investment advisers to report suspicious activity to FinCEN pursuant to the BSA, and making several other related changes to FinCEN’s regulations that implement the BSA. This final rule follows FinCEN’s notice of proposed rulemaking on AML/CFT program and suspicious activity report (SAR) requirements for investment advisers released on February 15, 2024 (referred VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 to as the IA AML NPRM or proposed rule).1 This rule aims to address and prevent money laundering, terrorist financing, and other illicit finance activity through the investment adviser industry. As detailed in an investment adviser illicit finance risk assessment (Risk Assessment) published concurrently with the release of the IA AML NPRM, Treasury has identified several illicit finance threats involving investment advisers.2 Investment advisers have served as an entry point into the U.S. financial system and economy for illicit proceeds associated with foreign corruption, fraud, and tax evasion, as well as billions of dollars ultimately controlled by sanctioned entities including Russian oligarchs and their associates. Investment advisers— including those exempt from Securities and Exchange Commission (SEC) registration—and their private funds, particularly venture capital funds, are also being used by foreign states, most notably the People’s Republic of China (PRC) and Russia, to access certain technology and services with long-term national security implications through investments in early-stage companies. Finally, there are numerous examples of investment advisers defrauding their customers and stealing their funds. To address these risks, this rule adds ‘‘investment adviser’’ to the definition of ‘‘financial institution’’ at 31 CFR 1010.100(t) and defines investment advisers to be SEC-registered investment advisers (RIAs) and exempt reporting advisers (ERAs). However, FinCEN is narrowing the definition of ‘‘investment adviser’’ from the proposed rule to exclude RIAs that register with the SEC solely because they are (i) mid-sized advisers, (ii) multi-state advisers, or (iii) pension consultants, as well as (iv) RIAs that do not report any assets under management (AUM) on Form ADV. For investment advisers subject to this rule that have their principal office and place of business outside the United States, FinCEN is clarifying that the rule applies only to their activities that (i) take place within the United States, including through the involvement of U.S. personnel of the investment 1 FinCEN, Anti-Money Laundering/Countering the Financing of Terrorism Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers and Exempt Reporting Advisers, Notice of Proposed Rulemaking, 89 FR 12108 (Feb. 15, 2024). 2 See Treasury, US Sectoral Illicit Finance Risk Assessment Investment Advisers (also titled 2024 Investment Adviser Risk Assessment) (2024), available at https://home.treasury.gov/about/ offices/terrorism-and-financial-intelligence/ terrorist-financing-and-financial-crimes/office-ofstrategic-policy-osp. PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 adviser, such as the involvement of an agency, branch, or office within the United States or (ii) provide services to a U.S. person or a foreign-located private fund with an investor that is a U.S. person. Given that the risk of money laundering, terrorist financing, and other illicit finance activity is generally lower for State-registered advisers, FinCEN, as proposed in the IA AML NPRM, is not applying this rule to State-registered advisers at this time. However, FinCEN will continue to monitor activity involving Stateregistered investment advisers for indicia of money laundering, terrorist financing, or other illicit finance activity, and may take appropriate steps to mitigate any such activity. As in the proposed rule, this final rule also does not cover foreign private advisers or family offices. With respect to the minimum standards for an investment adviser’s AML/CFT program, FinCEN is adopting the minimum requirements largely as proposed in the IA AML NPRM, with several changes. In line with the proposed rule, the final rule maintains the exclusion of mutual funds from the requirements of an investment adviser’s AML/CFT program requirements. It includes modified text, however, to permit an investment adviser to categorically exclude any mutual fund from an investment adviser’s AML/CFT program requirements without obligating the adviser to verify that such mutual fund has implemented an AML/ CFT program. Additionally, FinCEN is expanding the exclusion from the AML/ CFT program to also apply to (i) bankand trust company-sponsored collective investment funds that comply with the requirements of 12 CFR 9.18 or a similar applicable law that incorporates the requirements of 12 CFR 9.18, and (ii) any other investment adviser subject to this rule that is advised by the investment adviser. With respect to the requirement to establish, maintain, and enforce a financial institution’s AML/ CFT program that is the responsibility of, and must be performed by, persons in the United States who are accessible to, and subject to oversight and supervision by, the Secretary of the Treasury and the appropriate Federal functional regulator (the Duty Provision), as discussed further below, FinCEN has determined to not include this requirement in this final rule. With respect to this rule’s other requirements, FinCEN is adopting the SAR filing provisions largely as proposed. The final rule does not exempt investment advisers from the requirements to file Currency Transaction Reports (CTRs), adhere to E:\FR\FM\04SER2.SGM 04SER2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations the Recordkeeping and Travel Rules, or other general recordkeeping requirements.3 Following the proposed application of the information sharing provisions of sections 314(a) and 314(b) under the USA PATRIOT Act,4 the final rule is applying both requirements as proposed, but is clarifying that investment advisers may deem these requirements satisfied for any mutual funds, bank- and trust companysponsored collective investment fund, or any other investment adviser they advise subject to this rule that is already subject to AML/CFT program requirements. With respect to the proposal to implement special due diligence requirements for correspondent and private banking accounts and special measures under section 311 of the USA PATRIOT Act,5 investment advisers may deem these requirements satisfied for any mutual fund, bank- and trust companysponsored collective investment fund, or any other investment adviser they advise subject to this rule that is already subject to AML/CFT program requirements. FinCEN is also extending the proposed date for compliance to January 1, 2026, meaning that no later than this date, investment advisers must have implemented AML/CFT programs, commenced filing SARs when required, and begun complying with the other reporting and recordkeeping requirements in this final rule. II. Background ddrumheller on DSK120RN23PROD with RULES2 A. Statutory Authority Enacted in 1970, the Currency and Foreign Transactions Reporting Act— which, along with its amendments and the other statutes relating to the subject matter, is generally referred to as the BSA—is designed to combat money laundering, the financing of terrorism and other illicit finance activity, and to safeguard the national security of the United States.6 This includes ‘‘through 3 See 31 CFR 1010.310 through 1010.315 (CTR), 31 CFR 1010.410(e) and (f) (Recordkeeping and Travel Rules), and 31 CFR 1010.415 through 110.440. 4 See 31 CFR 1010.520, 1010.540. 5 As discussed further below, in addition to special measures under section 311 of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), investment advisers must also comply with actions taken under section 9714(a) of the Combating Russian Money Laundering Act, codified as a note to 31 U.S.C. 5318A, and section 7213A of the Fentanyl Sanctions Act, codified at 21 U.S.C. 2313a. See infra Section III.G.2. 6 See 31 U.S.C. 5311. Certain parts of the Currency and Foreign Transactions Reporting Act, its amendments, and the other statutes relating to the subject matter of that Act, have come to be referred to as the BSA. The BSA is codified at 12 VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 the establishment by financial institutions of reasonably designed riskbased programs to combat money laundering and the financing of terrorism,’’ as well as ‘‘to facilitate the tracking of money that has been sourced through criminal activity or is intended to promote criminal or terrorist activity.’’ 7 The Secretary of the Treasury (Secretary) is authorized to administer the BSA and to require financial institutions to keep records and file reports that ‘‘are highly useful in . . . criminal, tax, or regulatory investigations, risk assessments, or proceedings’’ or ‘‘intelligence or counterintelligence activities, including analysis, to protect against terrorism.’’ 8 The Secretary may also ‘‘establish appropriate frameworks for information sharing among financial institutions and service providers, their regulatory authorities, associations of financial institutions, the [Treasury], and law enforcement authorities to identify, stop, and apprehend money launderers and those who finance terrorists.’’ 9 The Secretary delegated the authority to implement, administer, and enforce the BSA and its implementing regulations to the Director of FinCEN.10 Pursuant to this authority, FinCEN may define a business or agency as a ‘‘financial institution’’ if such business or agency engages in any activity determined by regulation ‘‘to be an activity which is similar to, related to, or a substitute for any activity’’ in which a ‘‘financial institution’’ as defined by the BSA is authorized to engage.11 Additionally, the BSA requires financial institutions to establish programs to combat money laundering and the financing of terrorism that include certain minimum standards. The BSA explicitly authorizes the Secretary—and thereby FinCEN—to ‘‘prescribe minimum standards’’ for such AML/ CFT programs.12 Similarly, under the BSA, Treasury—and thereby FinCEN— ‘‘may require any financial institution . . . to report any suspicious transaction U.S.C. 1829b, 12 U.S.C. 1951–1960, and 31 U.S.C. 310, 5311–5314, 5316–5336, and including notes thereto, with implementing regulations at 31 CFR Chapter X. 7 31 U.S.C. 5311(2), (3). 8 31 U.S.C. 5311(1). 9 31 U.S.C. 5311(5). 10 Treasury Order 180–01, paragraph 3(a) (Jan. 14, 2020), available at https://home.treasury.gov/about/ general-information/orders-and-directives/treasuryorder-180-01; see also 31 U.S.C. 310(b)(2)(I) (providing that FinCEN Director ‘‘[a]dminister the requirements of subchapter II of chapter 53 of this title, chapter 2 of title I of Public Law 91–508, and section 21 of the Federal Deposit Insurance Act, to the extent delegated such authority by the Secretary.’’ 11 31 U.S.C. 5312(a)(2)(Y). 12 31 U.S.C. 5318(h)(1), (2). PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 72157 relevant to a possible violation of law or regulation.’’ 13 This provision authorizes FinCEN to require the filing of SARs.14 FinCEN also has authority under the BSA to authorize the sharing of financial information by financial institutions 15 in specified circumstances, and to require financial institutions to keep records and maintain procedures to ensure compliance with the BSA and its implementing regulations or to guard against money laundering, terrorist financing, or other illicit finance activity.16 B. Investment Adviser Industry and Regulation 1. Investment Adviser Industry The investment adviser industry in the United States consists of a wide range of business models geared towards providing advisory services to many different types of customers.17 The Investment Advisers Act of 1940 (Advisers Act) and its implementing rules and regulations form the primary Federal framework governing investment advisory activity, along with other Federal securities laws and their implementing rules and regulations, such as the Investment Company Act of 1940 (15 U.S.C. 80a et seq.) (Company Act), the Securities Act of 1933 (15 U.S.C. 77a et seq.) (Securities Act), and the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) (Exchange Act). The Advisers Act also defines an investment adviser as a person or firm that, for compensation, is engaged in the business of providing advice to others or issuing reports or analyses regarding securities.18 Since the Advisers Act was amended in 1996 and 2010, generally only investment advisers who have at least $100 million in AUM or advise a 13 31 U.S.C. 5318(g)(1). U.S.C. 5318(g)(1). 15 See USA PATRIOT Act, Public Law 107–56, sec. 314(a), (b). 16 See 12 U.S.C. 1953; 31 U.S.C. 5318(a)(2). 17 This final rule uses the term ‘‘customers’’ for those natural and legal persons who enter into an advisory relationship with an investment adviser. This is consistent with the terminology in the BSA and FinCEN’s implementing regulations. FinCEN acknowledges that the Advisers Act and its implementing regulations primarily use the term ‘‘clients,’’ and so that term is used in specific reference to Advisers Act requirements; otherwise, the term ‘‘customers’’ is used. 18 See 15 U.S.C. 80b–2(a)(11) for this definition of ‘‘investment adviser.’’ The statute excludes some persons and firms: certain banks, certain professionals, certain broker-dealers, news publishers, persons who advise on or analyze only Treasury-designated exempt securities, statistical ratings agencies, and family offices. See 15 U.S.C. 80b–2(a)(11)(A)–(G). 14 31 E:\FR\FM\04SER2.SGM 04SER2 72158 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 registered investment company 19 may register with the SEC.20 Advisers solely to private funds are only required to register with the SEC if they have least $150 million in AUM in the United States.21 Advisers to only venture capital funds are exempt from registration with the SEC regardless of the amount of AUM. Other investment advisers typically register with the State in which the adviser maintains its principal place of business. SEC-Registered Investment Advisers. Unless eligible to rely on an exemption, investment advisers that manage more than $110 million AUM must register with the SEC, as well as submit a Form ADV and update it at least annually.22 Besides having AUM above $110 million, additional criteria may require an investment adviser to register with the SEC.23 Unless a different exception applies, investment advisers with AUM under $100 million are prohibited from registering with the SEC,24 but must register instead with the relevant State securities regulator. The SEC administers and enforces the Federal 19 See 15 U.S.C. 80a–3 (defining investment company). If an investment company meets the definition of an investment company under 15 U.S.C. 80a–3(a) and cannot rely on an exception or an exemption from the definition of investment company, generally it must register with the SEC under the Company Act and must register its public offerings under the Securities Act. 20 Investment advisers with more than $100 million AUM may register with the SEC, and investment advisers with more than $110 million in AUM must register with the SEC, unless eligible for an exception. See 17 CFR 275.203A–1. 21 See 15 U.S.C. 80b–3(m)(1); 17 CFR 275.203(m)– 1(a), (b). 22 See 17 CFR 275.203A–1.; 17 CFR 275.204–1; see also 15 U.S.C. 80b–3(1) (venture capital fund adviser exemption), 15 U.S.C. 80b–3(m) (private fund adviser exemption). Investment advisers register with the SEC by filing Form ADV and are required to file periodic updates. Form ADV collects certain information about the adviser, including (depending on the adviser’s registration status) its AUM, ownership, number of clients, number of employees, business practices, custodians of client funds, and affiliations, as well as certain disciplinary or material events of the adviser or its employees. A detailed description of Form ADV’s requirements is available at https:// www.sec.gov/oiea/investor-alerts-bulletins/ib_ formadv.html. 23 Other exceptions to the prohibition on SEC registration include: (1) an adviser that would be required to register with 15 or more States (the multi-State exemption); (2) an adviser advising a registered investment company; (3) an adviser affiliated with an RIA; and (4) a pension consultant. Persons satisfying these criteria and the definition of ‘‘investment adviser’’ are required to register as investment advisers with the SEC. See Form ADV: Instructions for Part IA, Item 2. Advisers with a principal office and place of business in New York and over $25 million AUM are required to register with the SEC. 24 17 CFR 275.203A–1. Note that if an RIA’s AUM falls below $90 million as of the end of such RIA’s fiscal year then it must withdraw its registration with the SEC, unless otherwise eligible for an exception to the prohibition on SEC registration. Id. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 securities laws applicable to such RIAs. As of July 31, 2023, there were 15,391 RIAs, reporting approximately $125 trillion in AUM for their clients.25 Exempt Reporting Advisers. An ERA is an investment adviser that would be required to register with the SEC but is statutorily exempt from that requirement 26 because: (1) it is an adviser solely to one or more venture capital funds; 27 or (2) it is an adviser solely to one or more private funds and has less than $150 million AUM 28 in the United States.29 Private funds are privately offered investment vehicles that pool capital from one or more investors to invest in securities and other investments.30 Private funds do not register with the SEC, and advisers to these funds often categorize the fund by the investment strategy they pursue. 25 The number of RIAs and corresponding AUM, and the number of ERAs, are based on a Treasury review of Form ADV information filed as of July 31, 2023, as described in the IA AML NPRM. This Form ADV data is available at Frequently Requested FOIA Document: Information About Registered Investment Advisers and Exempt Reporting Advisers, https://www.sec.gov/foia/docs/ invafoia.htm. The $125 trillion in AUM includes approximately $22 trillion in assets managed by mutual funds, which are advised by RIAs and are subject to AML/CFT obligations under the BSA and its implementing regulations. FinCEN reviewed investment adviser Form ADV filings through June 4, 2024, to assess whether to update the industry data used in the IA AML NPRM. FinCEN found approximately 10 fewer RIAs and ERAs as of June 4, 2024 compared to July 31, 2023. Out of approximately 19,900 entities subject to the final rule, this is not a substantial change. 26 An adviser that is eligible to file reports as an ERA may nonetheless elect to register with the SEC as an RIA so long as it meets the criteria for registration. An investment adviser that relies on one of these exemptions must still evaluate the need for State registration. 27 See 17 CFR 275.203(l)–1 (defining ‘‘venture capital fund’’). 28 Form ADV uses the term ‘‘regulatory assets under management’’ (RAUM) instead of ‘‘assets under management.’’ Form ADV describes how advisers must calculate RAUM and states that in determining the amount of RAUM, an adviser should ‘‘include the securities portfolios for which [it] provide[s] continuous and regular supervisory or management services as of the date of filing’’ the form. See Form ADV, Instructions for Part 1A, Instruction 5.b. 29 See sections 203(l) and 203(m) of the Advisers Act and 17 CFR 275.203(m)–1, respectively. ERAs are exempt from registration with the SEC, but are required to file reports on Form ADV with the SEC and are subject to certain rules under the Advisers Act. 30 Section 202(a)(29) of the Advisers Act defines the term ‘‘private fund’’ as an issuer that would be an investment company, as defined in section 3 of the Company Act (15 U.S.C. 80a–3), but for section 3(c)(1) or 3(c)(7) of that Act. Section 3(c)(1) excludes from the definition of investment company a privately-offered issuer having fewer than a certain number of beneficial owners. Section 3(c)(7) excludes from the definition of investment company a privately-offered issuer the securities of which are owned exclusively by ‘‘qualified purchasers’’ (generally, persons and entities owning a specific amount of investments). PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 These include hedge funds, private equity funds, and venture capital funds, among others. Even though they are not required to register with the SEC, ERAs must still file an abbreviated Form ADV—they are required to answer fewer client-related questions and provide less information about the services they provide—and the SEC maintains authority to examine ERAs. As of July 31, 2023, there were 5,846 ERAs with total gross assets of $5.2 trillion that were exempt from registering with the SEC but had filed an abbreviated Form ADV.31 State-Registered Investment Advisers. State-registered investment advisers are generally prohibited from registering with the SEC and instead register with and are supervised by the relevant State authority, unless they meet certain exceptions or their State does not supervise these entities.32 Stateregistered investment advisers also file a Form ADV, which they submit to the relevant State regulator. As of December 31, 2022, there were 17,063 Stateregistered investment advisers reporting approximately $420 billion in AUM.33 Foreign-Located Investment Advisers. Foreign-located advisers whose principal offices and places of business are outside the United States, but who solicit or advise ‘‘U.S. persons,’’ are subject to the Advisers Act and must register with the SEC unless eligible for an exemption. One of those exemptions is the ‘‘foreign private adviser’’ exemption, and an adviser relying on this exemption is not required to make any filings with the SEC.34 The SEC does not apply the substantive provisions of the Advisers Act to a nonU.S. investment adviser that is registered with the SEC with respect to its non-U.S. clients.35 Non-U.S. 31 The number of ERAs is derived from a Treasury review of Form ADV information filed as of July 31, 2023. See supra note 25. ERAs do not report assets under management on Form ADV, but instead report gross assets for each private fund they advise. 32 See 17 CFR 275.203A–2; see also supra note 23. 33 See North American Security Administrators Association, NASAA Investment Adviser Section 2023 Annual Report 3, available at https:// www.nasaa.org/wp-content/uploads/2023/09/2023IA-Section-Report-FINAL.pdf. 34 The ‘‘foreign private adviser’’ exemption is available to an adviser that (i) has no place of business in the United States; (ii) has, in total, fewer than 15 clients in the United States and investors in the United States in private funds advised by the adviser; (iii) has aggregate assets under management attributable to such clients and investors of less than $25 million; and (iv) does not hold itself out generally to the public in the United States as an investment adviser. See 15 U.S.C. 80b–2(a)(30), 80b–3(b)(3). 35 See SEC, Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers With Less Than $150 Million in Assets Under Management, and Foreign Private Advisers, Final Rule, E:\FR\FM\04SER2.SGM 04SER2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations investment advisers may also file with the SEC as ERAs if they meet the requirements to report as ERAs. ddrumheller on DSK120RN23PROD with RULES2 2. Investment Adviser Regulation Oversight of the investment adviser industry by Federal and State securities regulators is focused on protecting investors and the overall securities market from fraud and manipulation. Most investment advisers are subject to certain reporting requirements and the extent of those requirements depends on whether the investment adviser is an RIA, registered at the State level, exempt from registration as an ERA, or otherwise not required to register with the SEC or State securities regulator.36 RIAs are subject to the Advisers Act and various SEC rules and regulations thereunder that govern, among other things, their marketing and disclosures to clients, best execution for client transactions, reporting of AUM, a code of ethics requirement (including reporting of securities holdings), and ownership in public securities, ensuring compliance with SEC rules governing trading, and disclosures of conflicts of interest and disciplinary information. State-registered investment advisers may have similar requirements under State securities laws and regulations.37 While ERAs are not required to register with the SEC, they must still file an abbreviated Form ADV with the SEC, and the SEC maintains authority to examine ERAs. ERAs are not subject to some of the Advisers Act provisions that apply to RIAs. However, ERAs have fiduciary responsibilities to their clients and must abide by certain other compliance requirements applicable to all investment advisers, including antifraud requirements of the Advisers Act.38 Investment advisers, depending on their registration status, are also generally subject to examination by the SEC or State securities regulators. In some circumstances, Federal securities, tax, or other rules and regulations may impose on investment advisers’ information collection or disclosure Investment Advisers Act Release No. 3222 (Jun. 22, 2011); 76 FR 39645, 39667 (Jul. 6, 2011). 36 For instance, an investment adviser may be exempt from both Federal and State registration requirements if it had less than $25 million AUM and fewer than six clients in a State. Such advisers are not required to register, nor are they ERAs. 37 For example, in California, the California Corporation Code assigns to the Commissioner of the Department of Financial Protection and Innovation authority to issue specific rules and regulations. See Cal. Corp. Code, Ch.3, sec. 25230– 25238; Cal. Code Regs. tit. 10, sec. 260.230–260.238. 38 See 15 U.S.C. 80b–6. See also 17 CFR part 275.206(4)–8 (prohibiting fraudulent practices by an investment adviser to a pooled investment vehicle with respect to any investor or prospective investor in the pooled investment vehicle). VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 obligations similar to some AML/CFT measures. While some of these obligations mitigate illicit finance risks to the investment adviser industry, these obligations are not explicitly designed for that purpose, and the SEC generally does not have existing authority to apply AML/CFT specific requirements to investment advisers. Some investment advisers may nonetheless already apply AML/CFT requirements, for example, if they are also banks (or are bank subsidiaries), are registered as brokers and dealers in securities (broker-dealers), or advise mutual funds, but this is not consistent across the industry.39 Further, some investment advisers have voluntarily implemented certain AML/CFT measures. But implementation of such measures is generally not subject to comprehensive enforcement or examination. This means that providers of the same financial services may be subject to different AML/CFT obligations (if any), and an investor or customer seeking to obscure the origin of its funds or identity can choose an investment adviser that does not apply AML/CFT measures to its customers and activities.40 Overall, there is currently no comprehensive set of obligations directly applicable to most investment advisers that is explicitly designed to address illicit finance risks in this industry. C. Illicit Finance Risk As noted above, concurrent with the publication of the IA AML NPRM, Treasury released the Risk Assessment.41 The Risk Assessment found that, while the degree of risk is not uniform across the sector, RIAs and ERAs pose a material risk of misuse for illicit finance.42 First, as already noted, the lack of comprehensive AML/CFT regulations directly and categorically applicable to investment advisers means they are not 39 Investment advisers that are banks (or bank subsidiaries) subject to the jurisdiction of the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), and the National Credit Union Administration (collectively, the Federal Banking Agencies, or FBAs) are accordingly also subject to applicable FBA regulations imposing AML/CFT requirements on banks. See, e.g., 12 CFR 5.34(e)(3) and 5.38(e)(3) (OCC requirements governing operating subsidiaries of national banks and Federal savings associations). 40 For instance, FinCEN research identified two investment advisers with a focus on Russian customers that advertised investment structures that would allow customers to avoid ‘‘know your customer’’ procedures. 41 See Risk Assessment, supra note 2. 42 Id. at 32. PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 72159 required to understand their customers’ ultimate sources of wealth or identify and report potentially illicit activity to law enforcement. The term ‘‘investment adviser’’ is not presently included in the definition of ‘‘financial institution’’ under the BSA or its implementing regulations. This means that, although they have obligations to report cash transactions above $10,000 via the FinCEN/Internal Revenue Service Form 8300, investment advisers are typically not subject to most of the AML/CFT program, recordkeeping, or reporting obligations that apply to banks, brokerdealers, and certain other financial institutions. Investment advisers that are not dually registered as a bank or a broker-dealer are not required to maintain an AML/CFT program nor satisfy customer due diligence (CDD) or customer identification program (CIP) obligations.43 Investment advisers, because they are not defined as a ‘‘financial institution’’ under the BSA, are also prevented from participating in the USA PATRIOT Act 314(a) and 314(b) information sharing programs, meaning investment advisers cannot provide useful information on suspected illicit finance activity to law enforcement or to other financial institutions participating in 314(b) information sharing associations. As they are not presently included in the BSA definition of ‘‘financial institution,’’ investment advisers are also not afforded the protection from liability (safe harbor) that applies to financial institutions when filing SARs.44 Even though investment advisers are currently able to file voluntary SARs, without the safe harbor they could face increased legal risk from customers or other counterparties. The current patchwork of AML/CFT program implementation by some RIAs and ERAs may also create arbitrage opportunities for illicit actors by allowing them to find RIAs and ERAs with weaker or non-existent customer diligence procedures when these actors seek to access the U.S. financial system. Second, where AML/CFT obligations apply to investment adviser activities, the obliged entities (such as custodian banks, broker-dealers, and some fund administrators providing services to investment advisers and the private funds that they advise) do not necessarily have a direct relationship with the customer or, in the private fund context, the underlying investor in 43 See infra Section II.E (providing a summary of the proposed rule to apply CIP requirements to RIAs and ERAs). 44 31 U.S.C. 5318(g)(3)(A). E:\FR\FM\04SER2.SGM 04SER2 72160 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 the private fund.45 Further, these entities may be unable to collect relevant investor information from the RIA or ERA to comply with the entities’ existing obligations (either because the adviser is unwilling to provide, or has not collected, such information). Additionally, an adviser may use multiple custodians or broker-dealers, so that these entities may not have a complete picture of transactional activity facilitated by the investment adviser for their customers. Investment advisers, while not taking possession of financial assets, often have the most direct relationship with the customers they advise and thus may be best positioned to obtain the necessary documentation and information. In some cases, an investment adviser may be the only person or entity with a complete understanding of the source of a customer’s invested assets. Third, the existing Federal securities laws and regulations are not designed to comprehensively detect illicit proceeds or other illicit activity that is ‘‘integrating’’ into the U.S. financial system through an RIA or ERA.46 These 45 FinCEN notes that, in the private fund context, the adviser’s customer is typically the private fund itself, and not underlying investors in that private fund. However, in many cases an adviser has a relationship (in some cases contractual) with underlying investors and has access to information about underlying investors. Indeed, the SEC requires RIAs and ERAs to report information regarding underlying investors. For instance, Question 13 on SEC Form ADV asks an investment adviser for the approximate number of the private fund’s beneficial owners. See SEC Form ADV, Part 1A at 51 (Aug. 2022). In addition, Question 16(m) on SEC Form PF requires SEC-registered private fund advisers to identify, with respect to each private fund it advises, the approximate percentage of the private fund’s equity that is beneficially owned by different types of investors, including ‘‘Investors that are United States persons,’’ ‘‘Investors that are not United States persons,’’ and, acknowledging that an adviser may not have complete beneficial ownership information in certain circumstances, ‘‘Investors that are not United States persons and about which the foregoing beneficial ownership information is not known and cannot reasonably be obtained because the beneficial interest is held through a chain involving one or more third-party intermediaries.’’ SEC Form PF, Section 1b, at 7 (Dec. 2023) (emphasis original). In addition, Congress, in the Corporate Transparency Act (enacted into law on January 1, 2021, as part of the Anti-Money Laundering Act of 2020), recognized that advisers to private funds file information related to private fund ownership on Form ADV and accordingly that private fund advisers have such information. See 31 U.S.C. 5336(a)(10) and (11)(B)(xi), (xviii). 46 Generally, money laundering involves three stages, known as placement, layering, and integration. At the ‘‘placement’’ stage, proceeds from illegal activity or funds intended to promote illegal activity are first introduced into the financial system. The ‘‘layering’’ stage involves the distancing of illegal proceeds from their criminal source through a series of financial transactions to obfuscate and complicate their traceability. ‘‘Integration’’ occurs when illegal proceeds previously placed into the financial system are VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 laws and regulations are not designed to explicitly address the risk that an RIA or ERA may be used to move proceeds or funds tied to money laundering, terrorist financing, or other illicit activity. They do not incorporate AML/ CFT purposes, do not require an understanding of relevant illicit finance risks and activity, and do not include requirements for processes to report suspicious activity. In turn, existing laws do not provide any Federal regulatory body with comprehensive authority to monitor whether investment advisers are meeting any AML/CFT objectives. Fourth, RIAs and ERAs routinely rely on third parties, some of whom may be located outside of the United States, for administrative and compliance activities. These entities—particularly offshore entities—are subject to varying levels of AML/CFT regulation. The due diligence and verification practices of these fund administrators are not uniform and may vary based upon the requirements of the local regulatory regime as well as the requirements imposed by the fund’s adviser. Fifth, particularly for private funds, it is routine for investors to invest through layers of legal entities that may be registered or organized outside of the United States, making it challenging— under existing frameworks—to collect information relevant to understanding illicit finance risks.47 Regarding investment adviser-related illicit finance risks and threats, Treasury’s analysis showed that 15.4 percent of RIAs and ERAs were associated with or referenced in at least one SAR filed between 2013 and 2021.48 The number of SAR filings associated with or referencing an RIA or ERA increased by approximately 400 percent between 2013 and 2021—a far greater increase than was observed in relation to sectors with a SAR filing obligation.49 This analysis, along with a review of law enforcement cases and other information available to the U.S. government, identified cases of the made to appear to have been derived from a legitimate source. 47 For examples of how these private funds are structured, see Risk Assessment, supra note 2, at 8– 10. In its review of law enforcement cases and BSA reporting conducted for the Risk Assessment, FinCEN found several instances where advisers to private funds had ongoing contact or relationships with underlying investors in those funds, to include discussing investment strategies or fund distributions. 48 Id. at 16. SARs are not themselves conclusive evidence of illicit conduct but can generate important information about potential criminal activity that can prompt or assist a law enforcement investigation or support the identification of threats or vulnerabilities in the U.S. financial system. 49 Id PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 investment adviser industry having served as an entry point into the U.S. financial system for illicit proceeds associated with foreign corruption, fraud, and tax evasion. The analysis further showed that certain advisers manage billions of dollars ultimately controlled by sanctioned entities including Russian oligarchs and their associates who help facilitate Russia’s illegal and unprovoked war of aggression against Ukraine.50 Finally, certain RIAs and ERAs and the private funds they advise are also being used by foreign states, most notably the PRC and Russia, to access certain technology and services with long-term national security implications through investments in early-stage companies.51 D. IA AML NPRM In the IA AML NPRM released on February 15, 2024, FinCEN proposed to designate certain investment advisers as ‘‘financial institutions’’ under the BSA and subject them to AML/CFT program requirements and SAR filing obligations, as well as other BSA requirements.52 Specifically, the IA AML NPRM would have added ‘‘investment adviser’’ to the definition of ‘‘financial institution’’ at 31 CFR 1010.100(t), and then would have defined investment advisers to mean RIAs registered or required to register with, or ERAs that report to, the SEC. Accordingly, RIAs and ERAs would have then been required to comply with several AML/CFT requirements. The proposed rule would also have required RIAs and ERAs to keep records relating to the transmittal of funds (Recordkeeping and Travel Rules) and to meet other obligations of financial institutions under the BSA. The proposed rule would also have applied information-sharing provisions between and among FinCEN, law enforcement, government agencies, and certain financial institutions, and would have subjected investment advisers to certain ‘‘special measures’’ imposed by FinCEN 50 Id. 51 Id. Foreign state-funded investment vehicles may seek to hide their involvement in an effort to gain access to sensitive technology, processes, or knowledge that can enhance their domestic development of microelectronics, artificial intelligence, biotechnology and biomanufacturing, quantum computing, and advanced clean energy, among others. See Risk Assessment, supra note 2, at 21. Exploitation of this access can advance foreign-state economic and military capabilities at the expense of the United States. See Safeguarding Our Innovation, National Counterintelligence and Security Center 1 (Jul. 24, 2024), available at https://www.dni.gov/files/NCSC/documents/ products/FINALSafeguardingOur InnovationBulletin.pdf. 52 See 89 FR 12108 (Feb. 15, 2024). E:\FR\FM\04SER2.SGM 04SER2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 pursuant to section 311 of the USA PATRIOT Act.53 In the IA AML NPRM, FinCEN did not propose to include a CIP requirement for investment advisers, nor did it propose to require investment advisers to collect beneficial ownership information for legal entity customers. FinCEN has proposed to apply CIP requirements to investment advisers via a joint rulemaking with the SEC (described below, Section II.E) and intends to address the requirement to collect beneficial ownership information for legal entity customers in a subsequent rulemaking. The proposed rule would have allowed an investment adviser to exclude any mutual fund that it advised from the investment adviser’s AML/CFT program and SAR filing requirements, provided that the mutual fund had developed and implemented an AML/ CFT program compliant with the relevant regulations governing mutual funds.54 The proposed rule would also have removed the existing requirement that investment advisers file reports for the receipt of more than $10,000 in cash and negotiable instruments using Form 8300. Investment advisers would have instead been required to file a CTR for a transaction involving a transfer of more than $10,000 in currency by, through, or to the investment adviser, unless subject to an applicable exemption. Finally, FinCEN proposed to delegate its examination authority to the SEC given the SEC’s expertise in the regulation of investment advisers and the existing delegation to the SEC of authority to examine broker-dealers and certain investment companies for AML/ CFT compliance. 53 See also section 9714(a) of the Combating Russian Money Laundering Act; 21 U.S.C. 2313a. 54 As used in this release, ‘‘mutual fund’’ has the same definition as in FinCEN’s regulations, and refers to an ‘‘investment company’’ (as the term is defined in section 3 of the Company Act (15 U.S.C. 80a–3)) that is an ‘‘open-end company’’ (as that term is defined in section 5 of the Company Act (15 U.S.C. 80a–5)) that is registered or is required to register with the SEC under section 8 of the Company Act (15 U.S.C. 80a–8). See 31 CFR 1010.100(gg). Exchange-traded funds (ETFs) are a type of exchange-traded investment product that must register with the SEC under the Company Act and are generally organized as either an open-end company (‘‘open-end fund’’) or unit investment trust. The SEC’s ETF Rule (rule 6c–11 under the Company Act), issued in 2019, clarified ETFs are issuing ‘‘redeemable securit[ies]’’ and are generally ‘‘regulated as open-end funds within the meaning of section 5(a)(1) of the [Investment Company] Act.’’ FinCEN’s definition of a mutual fund under 1010.100(gg) applies to an ETF that is registered as an ‘‘open-end company’’ (as the term is defined in section 5 of the Company Act). VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 E. Customer Identification Program NPRM In the IA AML NPRM, FinCEN noted that it intended to address the application of a CIP requirement for investment advisers through a joint rulemaking with the SEC.55 On May 21, 2024, FinCEN and the SEC published a joint NPRM to apply CIP requirements to RIAs and ERAs (IA CIP NPRM).56 As proposed in the IA CIP NPRM, RIAs and ERAs would be required to establish, document, and maintain written CIPs appropriate for their respective sizes and businesses. The CIPs would include risk-based procedures to identify and verify the identity of their customers 57 to the extent reasonable and practicable within a reasonable time before or after the customer’s account is opened. The procedures would have to enable RIAs and ERAs to form a reasonable belief that the adviser knows the true identity of their customers. RIAs and ERAs would be required to obtain certain identifying information with respect to each customer, such as the customer’s name, date of birth or date of formation, address, and identification number. The proposed rule would also require procedures for, among other things, maintaining records of the information used to verify the person’s identity, notifying customers that the adviser is requesting information to verify their identifies, and consulting lists of known or suspected terrorists or terrorist organizations provided to the RIA or ERA financial institution by any government agency to determine whether a person seeking to open an account appears on any such list.58 CIP requirements are a long-standing, foundational component of a financial institution’s AML/CFT requirements and they are required for banks, brokerdealers, futures commission merchants and introducing brokers in commodities, and mutual funds. The comment period for the IA CIP NPRM closed on July 22, 2024, and FinCEN and the SEC received 36 comments. Treasury and the SEC are reviewing comments and are working toward finalizing the CIP rule. As 55 89 FR at 12129. FinCEN and SEC, Customer Identification Programs for Registered Investment Advisers and Exempt Reporting Advisers, Notice of Proposed Rulemaking, 89 FR 44571 (May 21, 2024). 57 The IA CIP NPRM proposed to define a customer as a person who opens a new account with an investment adviser. Id. at 44573. 58 The IA CIP NPRM proposed to define ‘‘account’’ for these purposes as ‘‘any contractual or other business relationship between a person and an investment adviser under which the investment adviser provides investment advisory services,’’ with limited exclusions. Id. 56 See PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 72161 FinCEN and the SEC noted in the IA CIP NPRM, adoption of CIP requirements for RIAs and ERAs would depend on—and not occur unless—investment advisers are first designated as ‘‘financial institutions’’ for purposes of the BSA.59 F. General Summary of Comments FinCEN received 49 comments on the IA AML NPRM. Of the 49 comments, 16 were from individual commenters; 16 were from trade associations representing various financial services entities (including seven that were a form letter provided by one association); six were from think-tanks or nongovernmental organizations (NGOs); and five were from RIAs. For the remainder, one comment letter was from a law firm, one comment letter was from a selfregulatory organization, one comment letter was from an association of state securities regulators, one comment letter was from a service provider to investment advisers, one comment letter was from an office within another federal government agency, and one comment letter was from seven U.S. Senators. Several commenters noted support for the proposed rule and the application of comprehensive AML/CFT requirements to RIAs and ERAs, noting that it would address illicit finance risks or other illicit activity involving investment advisers. Several other commenters, including a self-regulatory organization, an association of state securities regulators, seven U.S. Senators, several financial transparency NGOs and a think-tank, and some financial services trade associations, supported adoption of the proposed rule, but had suggested changes. These changes included expanding the scope of coverage to include State-registered investment advisers, family offices, and foreign private advisers, as well as modifying certain exemptions or requirements in the proposed rule. Other commenters who generally supported the rule requested that FinCEN apply CIP requirements and the obligation to collect beneficial ownership information for legal entity customers as soon as possible. These proposed changes are discussed below. Another group of commenters, including several financial services trade associations and some RIAs, noted that they generally supported the objectives of the proposed rule, but thought that the rule as drafted was overly broad and/or too prescriptive and would impose significant costs on investment advisers without a corresponding benefit to efforts to 59 Id. E:\FR\FM\04SER2.SGM at 44572, note 11. 04SER2 ddrumheller on DSK120RN23PROD with RULES2 72162 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations combat illicit finance. They suggested several more significant changes that would exempt certain categories of advisers or advisory activities from the proposed rule and instead focus on what they considered higher-risk activities. They also suggested not applying certain requirements that may be duplicative of obligations applied by other financial institutions, such as broker-dealers and banks, which are involved in advisory activities, as well as modifying requirements of the proposed rule in the context of private funds activity. These commenters’ proposed changes are discussed below. Several commenters opposed the rule, primarily highlighting the potential burden on investment advisers and that the requirements in the proposed rule were duplicative of AML/CFT requirements imposed on broker-dealers and custodians that facilitate transactions for investment advisers and their clients. One commenter noted that AML/CFT measures, along with measures related to sanctions issued by Treasury’s Office of Foreign Assets Control (OFAC), were implemented by the fund administrator for their hedge fund. Another commenter indicated that foreign-located fully regulated RIAs and ERAs are already subject to extensive AML/CFT and anti-bribery requirements by their home country regulators. Regarding the burden, one commenter noted that advisers, especially those that advise private funds, were already facing additional costs to implement recently finalized or proposed SEC requirements. Other commenters also highlighted the potential costs for smaller investment advisers. Two commenters noted their opposition to applying the proposed rule to venture capital advisers. One of those commenters stated that the requirements of the proposed rule would have a significant and adverse effect on venture capital advisers and the innovative start-ups they advise. The other commenter claimed that the identified risks did not justify applying AML/CFT rules to venture capital advisers, would produce less valuable information because of the limited interactions that venture capital advisers have with limited partner investors, and would not lead to a more effective AML/CFT regime. One commenter reasoned that, given the focus on the risks posed by private funds, the rule should be narrowed to address those higher-risk activities, and not apply to advisers that manage assets for individual investors. Two commenters requested that FinCEN address concerns raised in the comments with respect to private fund VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 advisers and venture capital advisers, respectively, and issue a revised NPRM. III. Discussion of Final Rule A. Illicit Finance Risk Commenters expressed varying views on the illicit finance risks associated with RIAs and ERAs that were discussed in the IA AML NPRM and Risk Assessment. Several commenters agreed that illicit actors, including corrupt officials, have exploited the U.S. investment adviser sector, particularly the private funds sector, to hide or obscure illicit proceeds, and that the lack of AML/CFT requirements for investment advisers presented illicit finance and national security risks. One commenter described how corrupt officials had exploited the U.S. private investment industry and would continue to do so unless effective and robust AML/CFT controls were applied. Another commenter concurred with the findings of the Risk Assessment and wrote that it was consistent with the commenter’s own research, which found significant foreign ownership in private funds that are managed by advisers who report to the SEC. This commenter’s research suggests that this level of foreign ownership in private funds presents a challenge to the United States’ ability to effectively monitor foreign investment. Other commenters agreed with the national security risks identified and provided additional examples of misuse, including narcotics trafficking and laundering proceeds of corruption or funds from authoritarian regimes. One commenter observed that while broker-dealers may hold or trade assets controlled by an investment adviser, they may have no independent knowledge of the investment adviser’s customers, and that investment advisers are often in the best position to obtain information about their customers that is relevant for AML/CFT purposes. Finally, another commenter, a nonprofit coalition, agreed that, given the growth of the private funds industry and investment advisers’ role in critical sectors of the economy, investment advisers should be held to the same standard as other financial market participants. However, several other commenters took issue with the findings regarding the level of illicit finance risk facing investment advisers. Several commenters disagreed that the case examples cited provided adequate support for the rulemaking, noting that the examples involved concealment of ownership, complicit actors whose activity would not be addressed by the PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 requirements of the proposed rule (but that were addressed by laws criminalizing money laundering, or anti-fraud provisions of the Federal securities laws), or compliance failures at financial institutions already subject to AML/CFT requirements. They also claimed that the case examples were too few to justify the cost associated with the proposed rule’s requirements. One commenter said that the cases also demonstrated that BSA requirements for banks and broker-dealers were already identifying illicit activity. One commenter questioned the accuracy of the analysis of SARs included in the Risk Assessment and felt that they lacked context or that findings tied to SARs were not proof of illicit activity. Other commenters noted that existing OFAC sanctions requirements addressed the examples and data on illicit finance tied to Russian oligarchs, and that the blocking of assets owned by sanctioned Russian parties demonstrated those sanctions were effective in mitigating this illicit finance risk. Another commenter stated that most investments made by Russian oligarchs occurred prior to their designation, that there was nothing illegal about their investments in U.S. assets, and that the proposed requirements would thus not have addressed the AML/CFT risks arising from Russia’s invasion of Ukraine. Regarding risks associated with private funds, one commenter claimed that private funds generally present a low risk of money laundering and terrorist financing due to several key factors, including the long-term nature of the investments made in such funds and the existing due diligence by funds into potential investors (including sanctions screening). Another commenter disagreed with the money laundering risk associated with hedge funds, noting that, at the hedge fund where they worked, the transfer agent would ‘‘perform KYC [know your customer procedures] and check OFAC and sanctions lists before admitting a new investor or paying a redemption’’ and ‘‘are required to report suspicious activities.’’ Regarding venture capital funds, in particular, two commenters stated that none of the examples in the preamble of incidents in which illicit finance was uncovered included venture capital funds or advisers and therefore such examples do not illustrate the need for the adoption of AML/CFT programs by venture capital advisers. These commenters claimed that illiquidity and long-term focus are standard features of venture capital funds that make them poor targets for money launderers. One commenter argued that FinCEN E:\FR\FM\04SER2.SGM 04SER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations acknowledges this in the release accompanying the proposed rule, but nevertheless proposes AML requirements for venture capital advisers. One commenter alleged that the proposed rule does not focus on the use of venture capital funds by foreign actors (including foreign governments) to facilitate illicit finance activity, but on attempts to access sensitive or dualuse technology by potentially hostile foreign state interests. The commenter claimed that this threat would not be addressed through the application of AML/CFT requirements to venture capital funds, and are more appropriately addressed through other government authorities, such as the Committee on Foreign Investment in the United States (CFIUS). One commenter indicated that FinCEN does not provide evidence or disclose essential facts that might support a decision to extend the AML/CFT program requirement to venture capital advisers and that such inclusion would amount to an arbitrary and capricious application of the rule. Regarding the vulnerabilities discussed in the IA AML NPRM, some commenters stated that investment advisers were much less likely to serve as channels to the U.S. financial system that can be taken advantage of by criminal actors, as compared to other financial institutions that are already subject to AML/CFT requirements under the BSA. Several commenters noted that RIAs and ERAs rely heavily on banks, brokerdealers, custodians, and other financial institutions that are already subject to AML/CFT requirements to custody customer and investor monies, process funds transfers, or effect securities transactions on behalf of advisers. Commenters also noted that banks and broker-dealers regularly request AML/ CFT and sanctions-related representations and affirmations from RIAs and ERAs as part of their diligence processes. One commenter also noted that RIAs and ERAs and their affiliates already maintain robust records of the types of transactions that would be captured by the proposed rule, such as adviser or broker-dealer requirements applicable to maintaining transaction records related to financial transactions between advisers’ customers and those customers’ investors. Another commenter opined that ‘‘a failure to conduct adequate due diligence or to otherwise fail in complying with applicable AML laws could . . . expose a Covered IA to a fund to accusations that it failed to satisfy its fiduciary duties [to the fund] . . . [and] given the risk that an AML error or oversight could create claims of fiduciary breach, VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 Covered IAs are already strongly incentivized to develop and maintain robust AML policies and procedures.’’ FinCEN responds below to these comments. Following consideration of comments, for the reasons discussed below, FinCEN continues to assess that there is a material risk that RIAs and ERAs can be abused for illicit finance activity, although the degree of risk is not uniform across the sector. Regarding the case examples, as FinCEN noted in the IA AML NPRM, some of the examples both in the NPRM and in the Risk Assessment involve complicit individuals at a financial institution.60 FinCEN notes that other commenters provided additional research confirming the risks associated with foreign investors in private funds that were identified in the Risk Assessment, as well as additional examples of misuse.61 Further, the Financial Industry Regulatory Authority (FINRA), a SelfRegulatory Organization (SRO) responsible for regulating member broker-dealers, conducted a review of referrals that its specialized insider trading, market fraud, and offering review teams made to other regulators and law enforcement between January 1, 2023 and March 14, 2024. This review suggests that at least 14.5 percent of those referrals related to investment advisers or their customers. These cases are intended to be illustrative, and, as FinCEN noted in the proposed rule, ‘‘an investment adviser may be unwittingly complicit in this type of activity if they are not required to understand the origin of funds or nature of their owner. A customer wishing to launder money could ask an investment adviser to establish a private fund to certain specifications without informing the adviser of the customer’s broader scheme.’’ 62 In addition, the IA AML NPRM referenced the comprehensive Treasury review contained in the Risk Assessment, which included substantial information beyond the case examples, including a review of BSA reporting, materials derived from civil enforcement actions, analysis provided by U.S. government agencies, and other non-public information that demonstrated investment advisers could be misused to help launder illicit proceeds. What the 60 See 89 FR at 12114–12115. commenters from think tanks and nongovernmental organizations provided additional examples of misuse, while one commenter provided a report titled Private Investments, Public Harm: How the Opacity of the Massive U.S. Private Investment Industry Fuels Corruption and Harms National Security. The report is available at https:// thefactcoalition.org/wp-content/uploads/2021/12/ TI_Private-Investments-Public-Harm-10.pdf. 62 See 89 FR at 12115. 61 Several PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 72163 case examples in the IA AML NPRM and Risk Assessment demonstrate is that a range of illicit actors view investment advisers as potential entry points into the U.S. financial system, and have sought to exploit them. Further, without an AML/CFT program requirement or an obligation to file SARs, an investment adviser has no obligation to evaluate the risk of money laundering, terrorist financing, or other illicit finance activity associated with its advisory customers and activities. As discussed below, FinCEN understands, as some commenters have explained, that investment advisers often conduct certain due diligence and screen against sanctions lists, that they may provide AML/CFT and sanctions-related representations and affirmations regarding their clients at the request of banks or broker-dealers, and that an adviser’s fiduciary duty requires it to act in the best interest of its clients. At the same time, FinCEN notes that investment advisers to private funds are most commonly compensated based on a combination of (i) management fees that are based on total AUM invested in (or committed to be invested in) the private fund and (ii) performance-based compensation based on the private fund’s performance. These compensation arrangements incentivize private fund advisers to add new investors and grow their private fund assets.63 This incentive may lead to some advisers refraining from voluntarily conducting a robust review of illicit finance risk, as such review could lead to the adviser turning away certain AUM, and thus lead to less compensation for the adviser. As described in the IA AML NPRM, this can lead an investment adviser to unwittingly assist in illicit finance activity.64 This rule will require investment advisers to adopt a risk-based approach pursuant to which they must ask questions and analyze potential money laundering, terrorist financing, and other illicit finance risks—steps that will make it more likely that an investment adviser will detect illicit finance activity. The reporting and recordkeeping requirements of the BSA, especially SAR filing obligations, are intended, among other things, to assist federal law enforcement in the enforcement of existing money laundering statutes, including by identifying instances of money 63 Other investment advisers, who are often compensated as a percentage of AUM even if they do not also receive performance-based compensation, are similarly incentivized in general to increase their assets under management. 64 See 89 FR at 12115. E:\FR\FM\04SER2.SGM 04SER2 ddrumheller on DSK120RN23PROD with RULES2 72164 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations laundering activity to help facilitate investigation and prosecution. In addition, AML/CFT requirements can serve as a separate basis for civil or criminal enforcement action. The Risk Assessment’s conclusions were also supported by an analysis of SARs. This analysis included approximately 12,000 SARs filed over seven years where the investment adviser was identified either as a subject of the SAR or in the narrative section of the SAR (with the number of SAR filings in the analysis increasing 400 percent over the review period). FinCEN agrees with the statement made by one commenter that SARs are not by themselves proof of illegal activity, but are intended to assist law enforcement in identifying potential violations of law. FinCEN also notes that the SAR trend and pattern analysis undertaken to support development of the Risk Assessment can be valuable in helping the public and private sectors identify and address illicit finance trends and systemic vulnerabilities. For example, in section 6206 of the Anti-Money Laundering Act of 2020 (AML Act), Congress mandated that FinCEN publish semiannual threat pattern and trend information derived from BSA filings.65 Such efforts will only be enhanced by requiring investment advisers to file SARs as well, which will provide additional relevant information for FinCEN to analyze. Regarding illicit finance tied to Russian oligarchs, FinCEN recognizes that, as noted by some commenters, many of these investments were made prior to the designation of these individuals and entities by OFAC. Many investment advisers, along with other financial institutions, took action to freeze assets linked to designated Russian individuals and entities. However, even prior to their designation, many of these individuals and entities were publicly known to be linked to corruption, other criminal activity, or Russian malign influence campaigns; yet they were still able to make investments through the U.S. financial system.66 By engaging in such activities these individuals and entities may be violating U.S. law and engaging in sanctionable conduct even if they are not yet designated. Additional AML/ CFT requirements may have helped identify—or even mitigate the extent of—assets or accounts that were owned, controlled, or otherwise linked to 65 See 31 U.S.C. 5318(g)(6). See also FinCEN’s Financial Trend Analyses, issued pursuant to section 6206 of the AML Act of 2020, available at https://www.fincen.gov/resources/financial-trendanalyses. 66 See 89 FR at 12115–12116. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 criminal or sanctionable activities before the relevant individuals were designated by forcing investment advisers to adopt a risk-based approach to working with these individuals. More broadly, such AML/CFT requirements are likely to help identify additional assets or accounts that are owned, controlled, or otherwise linked to designated persons, in turn supporting effective sanctions enforcement efforts.67 FinCEN agrees with the point raised by some commenters that certain characteristics of private funds, such as longer lock-up periods or limited opportunities to make withdrawals, may make these funds less attractive for certain illicit finance activity that seeks to rapidly enter and exit a financial product. However, as noted in the NPRM, these requirements are unlikely to deter certain illicit actors who have a medium- to long-term investment horizon and do not need immediate access to invested capital, such as corrupt foreign officials, financial facilitators for transnational criminal networks, or those acting on behalf of designated persons, especially because of the potential for high returns in these private funds.68 In addition, some illicit actors may see private fund investments, in combination with the use of a trust or other legal arrangement, as an alternative if they are unable to launder or obscure funds directly through a bank or brokerage account.69 FinCEN acknowledges that while private fund advisers may perform sanctions or politically exposed person (PEP) screening as part of their investor diligence, such efforts are only one part of effective AML/CFT compliance. In addition, because such advisers are not subject to consistent supervision for AML/CFT compliance measures they may undertake, such measures may not be applied consistently, and any deficiencies in these measures may not be identified or remediated. 67 See FIN–2023–Alert002, FinCEN Alert on Potential U.S. Commercial Real Estate Investments by Sanctioned Russian Elites, Oligarchs, and Their Proxies (Jan. 25, 2023) (noting that investors seeking to evade sanctions may lower their interest in an investment fund to just below the threshold set by a financial institution’s CDD standards to avoid detection). 68 For instance, one subset of SARs analyzed for the Risk Assessment found that RIAs that advised private funds were associated with or referenced in SARs at twice the rate of RIAs that did not advise private funds. The higher rate of filing tied to private funds may result from custodians and other entities with SAR filing obligations lacking insight into the identity and source of wealth of underlying investors in the fund, even where those filers may pursue additional diligence. 69 See Risk Assessment, supra note 2, at 16 & 27. PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 For venture capital funds in particular, FinCEN notes that the threat of misuse is not only for purposes of illicit technology transfer through investments in portfolio companies of venture capital funds, but also to facilitate the laundering and growth of illicit proceeds. As noted in the IA AML NPRM and Risk Assessment, a Treasury review of select BSA reporting filed between January 2019 and June 2023 identified more than 20 private fund advisers located in the United States where the adviser was identified as having significant ties to Russian oligarch investors or Russian-linked illicit activities. The vast majority of those private fund advisers advised investment funds that held themselves out as pursuing a venture capital strategy. Some of these Russian oligarch-linked investors may have been attracted to investing in venture capital funds because, like other venture capital investors, they had a medium-to-long term investment horizon and were willing to accept higher risk for higher investment returns.70 FinCEN also notes that while the BSA and its reporting and recordkeeping requirements were originally developed to combat money laundering, Congress has added to the purpose of the BSA over time an objective to combat terrorism,71 as well as addressing other threats to U.S. national security.72 Illicit technology transfer—that is, the transfer of technology in violation of sanctions, export controls, or other applicable laws—is both a threat to national security and may be linked to money laundering and other forms of illicit finance. For instance, in 2022 and 2023 FinCEN issued a series of joint alerts with the Department of Commerce’s Bureau of Industry and Security (BIS) to assist financial institutions in detecting transactions linked to Russian attempts 70 A Treasury review of select BSA reporting identified several U.S. venture capital firms with significant ties to Russian oligarch investors that invested in firms developing emerging technologies with national security applications. These include autonomous vehicle technology and artificial intelligence systems, as well as contractors to the U.S. military, intelligence, and other government agencies. See Risk Assessment at 21–22. 71 See 31 U.S.C. 5311(2) (preventing the financing of terrorism). Section 358 of the USA PATRIOT Act added to the purposes of the BSA to require reporting or recordkeeping highly useful in ‘‘intelligence or counterintelligence activities, including analysis, to protect against international terrorism.’’ Public Law 107–56, sec. 358(a). 72 See 31 U.S.C. 5311(4) (safeguarding the national security of the United States). Section 6101 of the AML Act amended the purposes of the BSA to include ‘‘assess the money laundering, terrorism finance, tax evasion, and fraud risks to financial institutions, products, or services to . . . safeguard the national security of the United States.’’ Public Law 116–283, Div. F, sec. 6101(a). E:\FR\FM\04SER2.SGM 04SER2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 to acquire military or dual-use technology.73 These alerts reflect the reality that money laundering and other forms of illicit finance may be part of illicit technology transfer because adversaries must conceal their illegal attempts to obtain technology. FinCEN assesses that applying AML/CFT measures to RIAs and ERAs will assist in combating these and other threats to the U.S. financial system and national security. FinCEN does not believe that the comments regarding the absence thus far of an adviser to a venture capital fund engaging in illicit finance in the IA AML NPRM requires any change to the final rule. The examples cited in the preamble are meant only to be illustrative of the risks and do not lay out the full evidence available to FinCEN, and these comments rely upon a particularly narrow framing of the evidence presented in the IA AML NPRM. The IA AML NPRM states that ‘‘according to the FBI, the PRC government routinely conceals its ownership or control of investment funds to disguise efforts to steal technology or knowledge and avoid notice to CFIUS.’’ 74 As one commenter acknowledges, the IA AML NPRM discusses state-guided or -owned venture capital funds acting on behalf of the PRC and Russia.75 Furthermore, as noted by other commenters, there are public reports of specific venture capitalists with ties to Russian oligarchs or Russian government-backed institutions.76 Indeed, a recent bulletin published by the National Counterintelligence and Security Center highlights how foreign threat actors can exploit venture capital and other private investment to undermine U.S. national security.77 For these reasons, FinCEN’s 73 See FIN–2022–Alert003, FinCEN and the U.S. Department of Commerce’s Bureau of Industry and Security Urge Increased Vigilance for Potential Russian and Belarusian Export Control Evasion Attempts (Jun. 28, 2022); see also FIN–2023– Alert004, Supplemental Alert: FinCEN and the U.S. Department of Commerce’s Bureau of Industry and Security Urge Continued Vigilance for Potential Russian Export Control Evasion Attempts (May 19, 2023). 74 89 FR at 12116. 75 Id. 76 See, e.g., Joseph Menn et al., From Russia with money: Silicon Valley distances itself from oligarchs, Washington Post (Apr. 1, 2022); Giacomo Tognini, Russian Oligarch Roman Abramovich Invested In Startups That Received U.S. Government Contracts, Forbes (June 9, 2023). 77 See Safeguarding Our Innovation at 1, supra note 51. This bulletin highlighted common tools that foreign threat actors use to penetrate the U.S. financial system, including complex ownership structures, investments through intermediaries, and limited partner investments. Id. at 2. For example, one firm identified in the bulletin that had been added to the Department of Defense’s list of VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 assessment that venture capital funds pose illicit finance risk is supported by the available evidence. In response to the suggestion that these threats would be better addressed through other government authorities like CFIUS, FinCEN seeks to clarify fundamental differences between the CFIUS process and the AML/CFT obligations set out in this rule. FinCEN notes that CFIUS reviews are focused on certain transactions involving foreign investment in the United States and certain real estate transactions by foreign persons, in order to determine the effect of such transactions on the national security of the United States.78 Whereas CFIUS reviews lawful investments, this rule is aimed at combating illicit activity, whether in the form of money laundering and other illicit finance, or in the form of technology transfer in violation of applicable law. CFIUS jurisdiction has well-established limits, and many common financial transactions, such as certain loans or passive fund investments, are not subject to CFIUS jurisdiction.79 By Executive Order, CFIUS mitigation agreements may only address national security risks ‘‘not adequately addressed by other provisions of law,’’ such as the BSA.80 Within its jurisdiction, CFIUS has a broad mandate to assess the effect of a covered transaction on national security; it need not find any violation of law in order to recommend the transaction to the President who has the authority to block or unwind a transaction, as appropriate under CFIUS legal authorities.81 The connection between CFIUS and the final rule would therefore be limited: SARs identifying potential unlawful activity will assist CFIUS in identifying transactions linked to such activity that may raise national security concerns, and recordkeeping and other requirements may facilitate the collection of additional information on certain participants in CFIUS transactions who may seek to obscure their role through private funds. In the IA AML NPRM and Risk Assessment, FinCEN considered the existing requirements under the ‘‘Chinese military companies’’ in January 2024 is an ERA that has made investments in more than 1,600 companies, including several U.S. firms. 78 See Executive Order (E.O.) 11,858, as amended, sec. 6(b), 73 FR 4677, 4678 (Jan. 23, 2008) (‘‘The Committee shall undertake an investigation of a transaction in any case . . . in which . . . the transaction threatens to impair the national security of the United States and that the threat has not been mitigated.’’). 79 31 CFR 800.302(b), 800.306(a). 80 50 U.S.C. 4565(d)(4)(B); E.O. 11858, sec. 7(a) as amended by E.O. 13456. 81 See, e.g., 50 U.S.C. 4565(b), (d). PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 72165 Advisers Act and its implementing regulations, the extent to which AML/ CFT requirements were applied to advisory activities, and how other rules and regulations, such as those issued by OFAC to implement sanctions requirements,82 may mitigate the identified illicit finance risks. While AML/CFT obligations for banks, brokerdealers, and other financial institutions can assist in detecting some illicit activity, these entities may not directly interact with an adviser’s underlying customers. Moreover, these entities may not be in the best position to obtain the necessary documentation and information about the customers that is relevant for AML/CFT purposes, such as the source of customers’ assets, the customers’ backgrounds, and the customers’ investment objectives. One commenter observed that in connection with oversight of broker-dealers for compliance with AML/CFT requirements, investment advisers often have the sole or most direct relationship with customers and possess knowledge of the full spectrum of transactions effected through broker-dealers and other custodians that may present money laundering or other illicit finance risks. Another commenter noted that investment advisers in some cases already provide other financial institutions with AML/CFT and sanctions-related representations and affirmations regarding customers they advise (including private funds), which underscores the fact that advisers often have more information on their customers than banks or broker-dealers have. Further, requiring RIAs and ERAs to apply AML/CFT measures may lead to earlier notification of illicit finance activity via SAR filings, and reduce the time law enforcement needs to receive relevant information and take action against illicit actors. While existing requirements under the Advisers Act and its implementing regulations, including recordkeeping, compliance, and reporting requirements, can assist in implementation of AML/CFT measures, they do not require the collection of the same information as do the AML/CFT requirements. The illicit finance risks 82 While OFAC sanctions requirements are separate from AML/CFT requirements, investment advisers, like other U.S. persons, must comply with OFAC sanctions. AML/CFT requirements and OFAC sanctions also share a common national security goal, apply a risk-based approach, and rely on similar recordkeeping and reporting requirements to ensure compliance. For this reason, many financial institutions view compliance with OFAC sanctions as related to AML/CFT compliance obligations and may include sanctions compliance and AML/CFT compliance in a single enterprisewide compliance program. E:\FR\FM\04SER2.SGM 04SER2 72166 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations documented in the IA AML NPRM and Risk Assessment remain, despite such existing requirements and the assertions in comments about existing fiduciary duty, and thus FinCEN has determined that the final rule is necessary and appropriate to mitigate those risks. Further, while FinCEN recognizes that an adviser involved in facilitating illicit finance activity could face contractual liability on a variety of bases, these violations generally result in civil liability to private parties. This is not an adequate substitute for the comprehensive government civil and criminal enforcement mechanisms available for violations of AML/CFT laws, and the range of effective, proportionate, and dissuasive penalties that can be applied. These measures are necessary to address the public harm resulting from illicit finance activity that may occur through investment advisers. B. Definition of ‘‘Financial Institution’’ and ‘‘Investment Adviser’’ ddrumheller on DSK120RN23PROD with RULES2 1. Defining Investment Advisers as ‘‘Financial Institutions’’ Proposed Rule: FinCEN proposed to add ‘‘investment adviser’’ to the definition of ‘‘financial institution’’ under the regulations implementing the BSA because FinCEN has determined that investment advisers engage in activities that are ‘‘similar to, related to, or a substitute for’’ financial services that other BSA-defined financial institutions are authorized to engage in. Comments Received: FinCEN received comments that both supported and did not support including investment advisers within the definition of ‘‘financial institution’’ under the regulations implementing the BSA and including RIAs and ERAs within the definition of ‘‘investment adviser.’’ Three commenters noted that the proposed definition is a proactive step to address gaps in existing AML/CFT framework and called for FinCEN to retain a comprehensive definition in the final rule. One commenter called for FinCEN to also include foreign private advisers, family offices, and advisers to real estate investment funds within this definition. Nine commenters disagreed with adding ‘‘investment adviser’’ to the definition of ‘‘financial institution’’ in the regulations issued pursuant to the BSA. Several of these commenters asserted that doing so would apply redundant and unnecessary AML/CFT requirements to investment advisers, as the entities that process cash and securities transactions, such as broker- VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 dealers and banks, are already subject to AML/CFT requirements. One commenter claimed that as investment advisers are not specifically enumerated in the statutory definition of ‘‘financial institution’’ under the BSA, FinCEN may not have the authority to define investment advisers as ‘‘financial institutions’’ under the BSA without additional Congressional action. This commenter also disagreed with FinCEN’s determination that investment advisers engaged in activities that were ‘‘similar to, related to, or a substitute for’’ activities in which any of the enumerated financial institutions are authorized to engage. The commenter stated that BSA-defined financial institutions, such as banks and broker-dealers, are required to apply AML/CFT requirements because of their status as banks and broker-dealers, and not because they engage in particular activities. This commenter also asked whether FinCEN intended to include within the definition of ‘‘financial institution’’ other professions or entities that are authorized to make investment or other financial decisions on behalf of a principal. The commenter argued that the proposed rule could raise questions about whether trustees, attorneys, executors of estates, receivers in bankruptcy proceedings, or others similarly situated are substituting for the activities of BSA-defined financial institutions and are covered by the proposed rule. Another commenter stated that entities defined as ‘‘financial institutions’’ under the BSA have in common the fact that they have custody over customer’s funds. The commenter noted that investment advisers, by contrast, do not take custody of a customer’s funds, and must act in conjunction with other financial institutions to transact on behalf of their clients. The commenter suggested that if the proposed rule were to be finalized, the definition of ‘‘investment adviser’’ must be narrowed to capture only advisers who engage in activities that arguably more closely resemble financial institution activities. Another commenter suggested that FinCEN apply AML/CFT requirements to private funds rather than to the investment advisers to those funds, noting that the fund itself has the contractual relationship with the investor and receives customer due diligence information. Two other commenters raised questions about the impact of including ‘‘investment adviser’’ in the definition of ‘‘financial institution’’ in the regulations that implement the BSA. PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 These two commenters indicated that FinCEN must account for the differences in the roles and functions of investment advisers from banks and broker-dealers in existing and future BSA rulemakings, and should consult with investment advisers before applying general AML/ CFT requirements for ‘‘financial institutions’’ to investment advisers. Final Rule: For the reasons described in the IA AML NPRM, FinCEN is adding ‘‘investment adviser’’ to the definition of ‘‘financial institution’’ under the regulations implementing the BSA, as proposed, because FinCEN has determined that investment advisers engage in activities that are ‘‘similar to, related to, or a substitute for’’ financial services that other BSA-defined financial institutions are authorized to engage in. While the BSA has an enumerated list of entities that are ‘‘financial institutions,’’ 83 the statute also explicitly provides the Secretary of the Treasury with the authority to add entities to that list upon determining, ‘‘by regulation,’’ that any business or agency is engaged in ‘‘an activity similar to, related to, or a substitute for any activity’’ in which any of the enumerated financial institutions are authorized to engage.84 This language provides Treasury with the statutory authority to define additional entities as financial institutions as business and organizational structures, and risks, in financial services evolve and illicit actors seek to exploit potential gaps in AML/CFT regulation, as FinCEN has observed with respect to investment advisers. FinCEN continues to see ample evidence that investment advisers engage in activities ‘‘similar to, related to, or a substitute for’’ activities in which other financial institutions are authorized to engage. As noted in the IA AML NPRM, investment advisers work closely with financial institutions when they direct broker-dealers to purchase or sell client securities, and therefore engage in activities that are closely related to the activities of covered financial institutions. An RIA must use a qualified custodian—such as a bank or broker-dealer—to take custody of client assets, even when advising private funds.85 In addition, investment 83 31 U.S.C. 5312(a)(2), (c)(1). U.S.C. 5312(a)(2)(Y) (emphasis added). FinCEN may also designate businesses ‘‘whose cash transactions have a high degree of usefulness in criminal, tax, or regulatory matters’’ as financial institutions. 31 U.S.C. 5312(a)(2)(Z). 85 See 17 CFR 275.206(4)–2; see also 12 CFR 225.125(a) (FRB determining that investment adviser activities ‘‘to be so closely related to banking or managing or controlling banks as to be a proper incident thereto’’). 84 31 E:\FR\FM\04SER2.SGM 04SER2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations advisers are frequently owned by or under common ownership with banks, broker-dealers, and other financial institutions. Broker-dealers may conduct certain similar advisory activities for their customers 86 and investment advisers must compete with other financial institutions that provide investment opportunities, such as banks and broker-dealers, to attract investor funds. There is ample evidence that RIAs and ERAs who advise private funds engage in activities ‘‘similar to, related to, or a substitute for’’ activities in which other financial institutions are authorized to engage. The services provided by RIAs and ERAs advising private funds are closely related to the services provided by broker-dealers who buy and sell securities on their behalf. Private fund advisers may be under common ownership with banks, brokerdealers, or other financial institutions. Broker-dealers, like RIAs or ERAs advising private funds pursuant to the Advisers Act, may ‘‘advis[e] others . . . as to the value of securities or as to the advisability of investing in, purchasing, or selling securities.’’ 87 And an RIA or ERA advising private funds must also compete with other financial institutions that offer investment opportunities for investor assets. FinCEN’s statutory authority to designate investment advisers as financial institutions is confirmed by clear evidence of Congressional intent. The legislative history during the drafting of the USA PATRIOT Act supports that Congress viewed RIAs as sufficiently similar to certain other financial institutions that Treasury could require them to file SARs.88 Congress reaffirmed this view more recently when, in connection with appropriations legislation passed in December 2022, Congress highlighted the illicit finance concerns associated with ‘‘investment advisers such as hedge fund managers’’ and encouraged FinCEN ‘‘to update and finalize its 2015 investment adviser rule as soon as possible.’’ 89 86 See 15 U.S.C. 80b–2(a)(11)(C). U.S.C. 80b–2(a)(11). See also SEC, Commission Interpretation Regarding the Solely Incidental Prong of the Broker-Dealer Exclusion From the Definition of Investment Adviser, Interpretation, 84 FR 33681 (Jul. 12, 2019). 88 House Report 107–250(I), Financial AntiTerrorism Act of 2001, 2001 WL 1249988 at *66 (Oct. 17, 2001); see also Public Law 107–31, Title III, sec. 321 (Oct. 26, 2001) (section of USA PATRIOT Act adding futures commission merchants, commodity trading advisors, and commodity pool operators to the definition of ‘‘financial institutions’’ for purposes of 31 U.S.C. 5312(a)). 89 See Consolidated Appropriations Act, 2023, Public Law 117–328, 136 Stat. 4459, Joint ddrumheller on DSK120RN23PROD with RULES2 87 15 VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 FinCEN also notes that having custody or directly holding customer funds is not a prerequisite for being included within the definition of ‘‘financial institution’’ in the regulations issued pursuant to the BSA. For example, the BSA defines an ‘‘investment company’’ and an ‘‘operator of a credit card system,’’ as a ‘‘financial institution,’’ and neither of these institutions routinely custody or directly hold customer funds.90 In addition, an ‘‘investment banker’’ and ‘‘persons involved in real estate closings and settlements’’ are also defined in the BSA as financial institutions, but may not directly receive, send, or transmit any customer funds. While brokerdealers and banks provide custodial services to their customers, they are also authorized to engage in a range of other financial services—such as extending credit—that do not involve taking custody of client funds, but are nonetheless subject to AML/CFT requirements. In sum, the statutory language authorizes Treasury to define as a financial institution any business that engages in activity similar to any activity in which the enumerated financial institutions are authorized to engage, not just specific activities involving the transfer or custody of customer funds. In response to the comment asking whether FinCEN intends to regulate other entities or professions that act as agents for a principal and whether this would create ambiguity for those entities and professions, FinCEN notes that the rule would only apply to RIAs and ERAs, categories of entities that are clearly defined under the Advisers Act. If FinCEN were to regulate such other entities or professions in the same manner as in the final rule, this would occur through a new rulemaking on which any affected person could comment. An attorney, trustee, executor, or other person in a principalagent relationship therefore has no reason to find the scope of the final rule ambiguous as applied to them; they merely need to know if they have registered (or are required to register) or have filed with the SEC as an RIA or ERA. Regarding whether to apply AML/CFT obligations to private funds rather than the advisers to those funds, FinCEN notes that in many cases the adviser to a private fund will have a relationship (in some cases contractual) with underlying investors and has access to Explanatory Statement (Division E), p.1156, available at https://www.congress.gov/117/cprt/ HPRT50347/CPRT-117HPRT50347.pdf. 90 31 U.S.C. 5312(a)(2)(L), (M). PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 72167 information about underlying investors. Indeed, the SEC requires RIAs and ERAs to report information regarding underlying investors on Form ADV and Form PF.91 Further, private funds also typically lack employees, and are reliant upon their service providers, such as their advisers, to satisfy the private fund’s legal and compliance obligations. Accordingly, the adviser, rather than the fund, is best positioned to apply the full range of AML/CFT measures beyond customer due diligence. FinCEN also acknowledges the point made by commenters that there are AML/CFT requirements that may be applied to all BSA-defined financial institutions, which if amended, would also change the obligations of investment advisers.92 If FinCEN were to amend these AML/ CFT requirements, it anticipates considering the specific attributes of investment advisers when deciding whether and how to apply such requirements to investment advisers. 2. Registered Investment Advisers Proposed Rule: FinCEN proposed to include SEC-registered investment advisers (RIAs) in its definition of investment adviser with regard to the proposed changes to the definition of financial institution under 31 CFR 1010.100. Comments Received: Six commenters commented on the proposed definition of ‘‘investment adviser’’ and the impact it would have on smaller RIAs. One commenter stated that smaller advisers generally pose less illicit finance risk and should be excluded for the same reasons that FinCEN had proposed to exclude State-registered advisers, namely their lower AUM, fewer customers, and that their customers tend to be localized. Another commenter asserted that the reliance on AUM as the sole determinant for regulatory thresholds overlooks the practical considerations of the size and capacity of RIAs, particularly smaller firms, and that AUM may not accurately reflect the complexity or scale of a firm, especially when AUM is primarily derived from a small number of clients. They suggested that regulatory thresholds be evaluated based on a combination of factors, including the number of employees and average AUM per client. 91 See supra note 45. instance, FinCEN did not include ‘‘investment adviser’’ in the proposed rule to amend the AML/CFT program requirements for other types of BSA-defined financial institutions. See FinCEN, Anti-Money Laundering and Countering the Financing of Terrorism Programs, Notice of Proposed Rulemaking, 89 FR 55428 (Jul. 3, 2023). 92 For E:\FR\FM\04SER2.SGM 04SER2 ddrumheller on DSK120RN23PROD with RULES2 72168 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations Two commenters suggested advisers with fewer than 20 employees should be exempt from the requirements of the proposed rule, while one commenter suggested that firms with fewer than 100 employees should be exempt from the requirements of the proposed rule. These commenters claimed that smaller advisers would need to divert resources from client-servicing functions and other compliance requirements to invest in building out an AML/CFT program, and would need to outsource the independent testing requirement to a third party, which would create additional burden. One commenter requested that investment advisers who do not manage client assets be excluded from the proposed rule. That commenter contended that applying AML/CFT requirements to these investment advisers would produce no valuable information for law enforcement or regulators, as these advisers are not involved in the management of client assets or funds transfer activity. Another commenter suggested that RIAs whose client’s investments are held by an account custodian should be exempt from the proposed regulation. Final Rule: FinCEN is modifying the definition of ‘‘investment adviser’’ from the proposed rule to exempt certain types of RIAs in response to comments.93 Accordingly, these types of RIAs will not be subject to the final rule. FinCEN recognizes the concerns raised by commenters regarding the impact of the proposed rule on smaller RIAs, based on AUM or other applicable criteria. As noted in the IA AML NPRM, FinCEN is mindful of the effect of new regulations on small businesses, given their critical role in the U.S. economy and the special consideration that Congress and successive administrations have mandated that Federal agencies should give to small business concerns. FinCEN would like to reiterate that the AML/CFT requirements in this rule are designed to be risk-based and that their cost will vary with the size of the business, along with the risk level of its advisory activities and customers. This means that smaller advisers would be expected to adopt AML/CFT programs that are consistent with their (often) simpler, more centralized organizational structures and so would be more likely to have lower implementation-related costs, absent other high-risk attributes for illicit finance risks. In reviewing the comments that addressed this issue, FinCEN sought to 93 These changes reflect, in part, comments received in response to the IA AML NPRM. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 identify an approach that would balance concerns about the burden on smaller RIAs as well as ensure that such an approach is easily understood by advisers subject to the final rule, systematically addresses illicit finance risk in the investment adviser sector, and is administrable in practice by FinCEN and the SEC (and other relevant regulators). Regarding the proposal to exempt advisers with fewer than either 20 or 100 employees, FinCEN notes that the number of employees that an adviser has is not necessarily aligned with the types of advisory customers, activities, or other factors relevant to the illicit finance risk of an adviser. Some advisers may manage significant assets from a small number of customers, while other advisers may manage small accounts held by a large number of customers, requiring additional employees to service those accounts. To create a threshold for application of AML/CFT requirements based on employee numbers alone would be inconsistent with Treasury’s understanding of risk in the sector. For example, an adviser managing significant assets, but with few employees, is of greater risk of being used by malign actors to launder large sums of money than an adviser with more employees but a small amount of assets under management. Further, imposing such a threshold could lead to perverse outcomes where RIAs are incentivized to hirer fewer non-revenue staff, such as those responsible for AML/CFT compliance. A threshold could also raise questions with respect to other BSA-defined financial institutions, which typically do not have such thresholds. FinCEN therefore declines to apply the proposed exemption for RIAs with fewer than either 20 or 100 employees. However, FinCEN has sought to appropriately tailor the scope of entities covered by the final rule to balance commenters’ concerns about the potential burden on smaller advisers with the investment adviser sector-wide identified illicit finance risks. FinCEN also sought to, while considering the diversity of business models in the advisory business, fashion the rule in a way that can be clearly applied and examined by the SEC, and that is transparent to RIAs and ERAs subject to the rule. Therefore, FinCEN is exempting from the definition of ‘‘investment adviser’’ RIAs that register with the SEC because they are (i) MidSized Advisers, (ii) Multi-State Advisers, and (iii) Pension Consultants, as well as (iv) RIAs that do not report any AUM on Form ADV. The final rule’s PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 exemptions apply, however, only to investment advisers that are registered with the SEC on only one or more of the above listed bases, and have no other basis for registration.94 For example, an investment adviser that registers (or could register) with the SEC both because: (a) it has AUM of more than $110 million (and so registers as a ‘‘large advisory firm’’ on Form ADV) and (b) it would otherwise be required to register with more than 15 states, will not be eligible for the exemption. As described below and in the Risk Assessment, FinCEN assessed Stateregistered advisers as generally lowerrisk for money laundering, terrorist financing, or other illicit finance activity. Therefore, FinCEN has chosen not to apply the proposed rule to Stateregistered advisers at this time. At the same time, FinCEN notes that there are certain types of RIAs that resemble State-registered advisers because they would otherwise be prohibited from registering with the SEC but are required to or choose to do so because they satisfy the conditions of certain exemptions from the prohibition on SEC registration. First, there are certain RIAs who have AUM between $25 million and $100 million but who either: (i) are not required to be registered as an adviser with the state securities authority in the state where they maintain their principal office and place of business; or (ii) are not subject to examination as an adviser by the state in which they maintain their principal offices and places of business (Mid-Sized Advisers).95 These Mid-Sized Advisers are required to register with the SEC.96 According to a review of information filed on Form ADV, there are 468 MidSized Advisers who, on average, have $54.6 million in AUM, 6 employees, and 129 customers, 97 percent of which are natural persons.97 Second, advisers who would otherwise be required to register in more 94 See 31 CFR 1010.100(nnn)(ii)(1) (exempting an investment adviser that is registered ‘‘only’’ because it meets the conditions of being is either a midsized adviser, a pension consultant, or a multi-state adviser). For the avoidance of doubt, an investment adviser that is registered because it meets the conditions of more than one of these exemptions, but that is not otherwise required to register, is also exempt from the definition of ‘‘investment adviser.’’ 95 See 15 U.S.C. 80b–3a(a)(2). On Form ADV, these Mid-Sized Advisers check the box in Item 2.A noting they are a ‘‘mid-sized advisory firm.’’ See Form ADV, Instructions for Part 1A, available at https://www.sec.gov/about/forms/formadvinstructions.pdf. 96 See 15 U.S.C. 80b–3a(a)(2); Form ADV, Instructions for Part 1A, available at https:// www.sec.gov/about/forms/formadv-instructions.pdf. 97 This information is derived from a Treasury review of Form ADV information filed as of July 31, 2023. See supra note 25. E:\FR\FM\04SER2.SGM 04SER2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations than 15 states, but have less than $100 million in AUM, can choose instead to register with the SEC (Multi-State Advisers).98 According to a review of the information filed on Form ADV, in 2023 there were 90 Multi-State Advisers who, on average, have $27.6 million in AUM, 28 employees, and 1,300 customers.99 While the majority of Multi-State Advisers’ customers are legal entities, approximately 90 percent of these customers are United States persons. These firms have a larger number of employees and customers than the average State-registered adviser, but relatively small AUM.100 FinCEN has decided to exempt these two categories of advisers because their advisory activities and customers are generally lower-risk,101 more closely resembling State-registered advisers than RIAs who satisfy the general requirements for registration, to address some of the concerns regarding possible burden on smaller advisers that were raised by commenters. Along with these two categories of RIAs, FinCEN also identified two categories of RIAs that do not directly manage client assets and, as discussed below, pose little or no risk of being used as an entry point into the U.S. financial system for illicit proceeds. First, there are some RIAs who do not manage client assets as part of their advisory activities, and report zero AUM on Form ADV.102 According to information derived from Form ADV, as of July 2023 there were 655 RIAs who report zero AUM on Form ADV.103 98 See 17 CFR 275.203A–2(d). information is derived from a Treasury review of Form ADV information filed as of July 31, 2023. See supra note 25. 100 This exemption was designed to allocate regulatory responsibility to the SEC for larger investment advisers, whose activities are likely to affect national markets, and to relieve these advisers of the burdens associated with multiple state regulations. See SEC, Exemption for Investment Advisers Operating in Multiple States; Revisions to Rules Implementing Amendments to the Investment Advisers Act of 1940; Investment Advisers with Principal Offices and Places of Business in Colorado or Iowa, Final Rule, 63 FR 39708, 39709 (Jul. 24, 1998). 101 This determination is based on the tailored BSA analysis on this subset of RIAs described infra. 102 See supra note 28 (for additional information on how AUM is calculated). The Form ADV instructions provide general criteria for determining whether an investment adviser provides continuous and regular supervisory or management services. For example, the instructions to Item 5.F state that an investment adviser provides such services if it has ‘‘discretionary authority over and provide[s] ongoing supervisory or management services,’’ and the Form ADV Glossary of Terms defines ‘‘discretionary authority’’ for these purposes. The Form ADV instructions are available at https:// www.sec.gov/about/forms/formadv-instructions.pdf. 103 This information is derived from a Treasury review of Form ADV information filed as of July 31, 2023. See supra note 25. ddrumheller on DSK120RN23PROD with RULES2 99 This VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 These RIAs have, on average, 73 employees and 640 customers, and 90 percent of their customers were United States persons.104 Services provided by these advisers may include nondiscretionary financial planning (such as fee-only advice) and publication of securities-related newsletters, ‘‘model portfolios,’’ or research reports. FinCEN agrees with commenters that such advisers are generally unlikely to have sufficient information about a customer’s source of funds, background, and investment objectives to detect suspicious financial activity, and, in some instances, may lack even the names of individual customers. While these advisers may have more employees and customers than the average State-registered adviser, as described above, these advisers’ activities are unlikely to be used for illicit finance activity, these advisers may not be able to provide useful information to law enforcement or other government authorities, and, to the extent their customers effect financial transactions in the United States on the basis of the services received from the investment adviser (e.g., trading based on reading research reports), they likely do so as direct customers of a BSAregulated financial institution, such as through a brokerage account. FinCEN also identified 186 RIAs who register with the SEC because they are ‘‘pension consultants’’ as that term is defined under the Advisers Act regulations.105 According to a review of information filed on Form ADV, these RIAs have, on average, 334 employees, and over 20,000 customers.106 Advisers registered as pension consultants advise at least $200 million in assets held by certain employee benefit plans subject to, or described in, the Employee Retirement Income Security Act of 1974 (ERISA).107 As FinCEN understands, many of these advisers do not exercise investment discretion over assets they advise, but generally assist other investment advisers or ERISA plan fiduciaries in designing investment lineups for employee benefit plans.108 104 Id. 105 An investment adviser is a ‘‘pension consultant’’ for purposes of rule 203A–2(a)(2) if it provides investment advice to (i) any employee benefit plan described in section 3(3) of ERISA, (ii) any governmental plan described in section 3(32) of ERISA, or (iii) any church plan described in section 3(33) of ERISA (29 U.S.C. 1002(33)). 17 CFR 275.203A–2(a)(2). 106 This information is derived from a Treasury review of Form ADV information filed as of July 31, 2023. See supra note 25. 107 17 CFR 275.203A–2(a)(1). 108 See Rules Implementing Amendments to the Investment Advisers Act of 1940, Final Rule, 76 FR 42950, 42959 (Jul. 19, 2011) (‘‘[P]ension consultants PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 72169 In addition, as noted by commenters, employee benefit plans are generally subject to strict contribution and withdrawal limits, are usually available to only employees of a participating company, and are subject to other requirements under ERISA (or similar state laws) and/or the Internal Revenue Code (IRC).109 While these are not, on average, ‘‘smaller’’ advisers, they exclusively engage in certain activities that are less likely to be used for, or to generate useful information for law enforcement about, illicit finance activity. For instance, their advisory activities on behalf of these employee benefit plans are subject to additional disclosures and restrictions on compensation arrangements under ERISA and other relevant statutes that limit their incentive to facilitate the movement of illicit proceeds. While the misuse of employee benefit plans has been linked to certain types of financial crime, such as fraud or account takeover activity,110 these plans, whether defined benefit plans or defined contribution plans, are less likely to be misused to obscure illicit proceeds generated from a separate criminal scheme. While defined benefit plans may invest plan assets in private funds, there is not the same uncertainty as to beneficial ownership and source of wealth as with other private fund investors.111 For defined benefit plans, the funds are typically derived from the employer contributions to the defined benefit plan. In addition, these advisers are less typically do not have ‘‘assets under management,’’ but we have required these advisers to register with [the SEC] because their activities have a direct effect on the management of large amounts of pension plan assets.’’); Rules Implementing Amendments to the Investment Advisers Act of 1940, Final Rule, 62 FR 28112, 28117 n. 60 (May 22, 1997) (‘‘[A] pension consultant has substantially less control over client assets than an adviser that has assets under management.’’). See also SEC, Staff Report Concerning Examinations of Select Pension Consultants, 1 (May 16, 2005), available at https:// www.sec.gov/news/studies/pensionexamstudy.pdf. 109 See, e.g., 29 CFR 2520 (rules and regulations for reporting and disclosure for ERISA plans). 110 See, e.g., FBI, IC3 2023 Elder Fraud Report, at 14, 19, available at https://www.ic3.gov/Media/PDF/ AnnualReport/2023_IC3ElderFraudReport.pdf. 111 For the avoidance of doubt, the absence of uncertainty as to beneficial ownership and source of wealth is the case only when the investment in a private fund comes from a defined benefit plan. When an investment adviser directs investment into a private fund, the risk of any other investments directed into the private fund must be evaluated separately. An investment adviser who is not a pension consultant and advises a private fund that receives investments from a defined benefit plan may not exclude such private fund from its obligations under this rule, although, as explained below, such an adviser may account for the source of such investment in determining which policies, procedures, and controls to apply to the fund on a risk basis. E:\FR\FM\04SER2.SGM 04SER2 72170 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 likely to have unique information or knowledge about plan activities or assets to identify and report suspicious activity. As such, FinCEN assesses that these advisers will likely not generate relevant information to assist government authorities in combating illicit finance and subjecting these advisers to the rule’s coverage would not meaningfully advance the rule’s objectives. FinCEN, in coordination with federal law enforcement, reviewed BSA reporting associated with these four groups of RIAs (i.e., Mid-Sized Advisers, Multi-State Advisers, pension consultants, and advisers who report zero AUM on Form ADV). This analysis found that 5.5 percent of these RIAs were associated with, or referenced in, at least one SAR (i.e., they were identified either as a subject or in the narrative section of the SAR) between 2013 and 2023. That is substantially less than the 15.4 percent of all RIAs and ERAs that were associated with or referenced in at least one SAR between 2013 and 2021. When considering this information with other information on illicit finance threats available to FinCEN, and the structural factors discussed above that may make these subgroups of RIAs less vulnerable to misuse for illicit finance, FinCEN has determined that exempting these groups of RIAs from the final rule would be consistent with the objective of this rule. Therefore, for all of the reasons noted above, FinCEN has determined to exempt from the definition of ‘‘investment adviser’’ investment advisers that register with the SEC solely on the basis that they are MidSized Advisers, Multi-State Advisers, pension consultants, and advisers who report zero AUM on Form ADV. FinCEN notes that, should the registration status of an RIA change such that the RIA would no longer be exempt from the definition of ‘‘investment adviser,’’ the adviser will become subject to the AML/ CFT requirements in this rule as of its next annual updating amendment to Form ADV.112 The scope of such advisers exempted from the final rule’s definition of ‘‘investment adviser’’ is reflected in the regulatory text added at 1010.100(nnn)(ii). 3. Exempt Reporting Advisers Proposed Rule: FinCEN proposed to include Exempt Reporting Advisers (ERAs) in its definition of ‘‘investment 112 Under the Instructions to Form ADV, Item 2 of Part 1A, which addresses an investment adviser’s basis for registration with the SEC, must be updated annually. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 adviser’’ with regard to the proposed changes to the definition of financial institution under 31 CFR 1010.100. Comments Received: Four commenters supported FinCEN’s proposal to include ERAs in the definition of ‘‘investment adviser,’’ noting the significant illicit finance risks present in this subset of the investment adviser sector and the ‘‘loophole’’ that would be created by subjecting RIAs but not ERAs to the proposed regulations. Some of these commenters noted that the Risk Assessment found that the risks were higher amongst ERAs than RIAs. One commenter stated that ERAs should be subject to the requirements in the proposed rule because they were already subject to rules and prohibitions under the Federal securities laws designed to root out misconduct in financial markets, and that the rationale for applying these requirements supports applying AML/CFT requirements to ERAs. However, other commenters were generally opposed to the rule’s scopingin of ERAs, with one commenter asserting the outsized regulatory impact of the proposed regulation on ERAs was not merited given the low number of examples provided regarding illicit finance risk amongst ERAs. Another commenter stated that FinCEN lacked statutory authority to include ERAs in the scope of the proposed regulation. One commenter claimed that FinCEN had failed to put forward an adequate reason for the expansion of AML/CFT requirements to ERAs beyond citation to the Risk Assessment and further claimed that the Risk Assessment does not identify ERAs as particularly vulnerable to illicit finance risks. One commenter suggested that ERAs below a certain threshold of U.S. AUM be exempt from the proposed rule, and that this AUM threshold should be measured similar to the private fund adviser exemption in the Advisers Act and its implementing regulations. The commenter claimed that this would be consistent with the goal of the SEC to avoid imposing U.S. regulatory and operational requirements on a foreignlocated adviser’s foreign-located advisory business. Final Rule: FinCEN is implementing this part of the definition of ‘‘investment adviser’’ without change from the proposed rule. Accordingly, each ERA will be subject to the final rule. For the reasons stated above, in Section III.B.1, FinCEN has determined that it has legal authority to determine that ERAs are ‘‘financial institutions’’ for BSA purposes. Including ERAs in scope of the regulation, as proposed, is supported by the findings of the Risk PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 Assessment as well as the responses from several commenters supporting inclusion of ERAs demonstrating the illicit finance and national security risks posed by ERAs. As noted by a commenter, while ERAs are not subject to certain requirements under Federal securities laws, they are subject to many of the requirements designed to prevent misconduct in financial markets, for instance. In addition, FinCEN agrees with the point made by several commenters that exempting ERAs could create a loophole through which illicit actors would be able to access a range of private funds without being directly subject to AML/CFT requirements. The Risk Assessment found that, within the investment adviser sector, ERAs bear the highest risks as they solely advise either private funds or venture capital funds, both of which were found in the Risk Assessment to be involved in illicit finance and other criminal investigations carried out by U.S. law enforcement.113 In addition, private funds are more likely than other types of customers to be based in jurisdictions with weaker and less effective AML/ CFT controls, making it more difficult for the ERA to assess the risk posed by the relationship or prevent abuse.114 Through the course of its advisory activities, an ERA may collect information about either the private fund it advises (the customer of the ERA) or the underlying investors in that private fund that may alert the ERA to illicit activity. FinCEN has also assessed 113 See supra note 47 and accompanying text (discussing the analysis of BSA reporting linked to private fund advisers). See also Risk Assessment, supra note 2, at 20–22, 26–28 (noting that private funds, including those advised by ERAs, have served as an entry point into the U.S. financial system for sanctioned Russian oligarchs and their associates, and as back door for hostile nation-state actors to acquire assets of interest in the United States, such as equity stakes in companies developing critical or emerging technologies). 114 Only 52 percent of the total net asset value of private funds managed by U.S. investment advisers is held by funds domiciled in the United States. Of the remaining 48 percent held in offshore funds, most is held by funds domiciled in the Cayman Islands (33 percent) and the remainder is held by funds in Luxembourg (5 percent), Ireland (4 percent), Bermuda (1 percent), British Virgin Islands (1 percent), United Kingdom (1 percent), and other jurisdictions (4 percent). See SEC, Private Fund Statistics, Third Calendar Quarter 2023, Page 13, Table 11, https://www.sec.gov/files/investment/ 2023q3-private-funds-statistics-20240331.pdf. These figures come from publicly available data provided by the SEC aggregating periodic filings made on Form PF. While this data represents only the subset of RIAs required to file Form PF (RIAs that manage at least $150 million in private fund AUM), this accounts for a substantial amount of overall private fund assets and FinCEN assesses the geographic distribution of fund domiciles is generally consistent for ERAs. See also 89 FR at 12114 (discussion on the effectiveness of foreign AML/CFT supervision for private funds domiciled in certain jurisdictions). E:\FR\FM\04SER2.SGM 04SER2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 that ERAs, along with RIAs advising private funds, are exposed to higher money laundering, terrorist financing, or other illicit finance risks compared to advisers who do not advise private funds.115 Adding ERAs to the definition of ‘‘investment adviser’’ is therefore consistent with the categorization of other entities as a financial institution and with FinCEN’s authority to make changes to the list of financial institutions under FinCEN’s regulations implementing the BSA in order to combat illicit activity. FinCEN also declines to limit the applicability of the proposed rule to only certain ERAs with assets exceeding a specified threshold, such as $100 million AUM, as was proposed by one commenter. FinCEN considered setting such a threshold and understands that many RIAs below this threshold will not be subject to the rule, given the rule’s definition of ‘‘investment adviser.’’ However, as noted above, FinCEN has concerns that such a threshold would mean that ERAs advising funds with fewer assets but carrying material illicit finance risks would remain out of scope of AML/CFT controls. The Risk Assessment and some of the underlying examples analyzed for the Risk Assessment show that private funds with relatively small AUM may still bear substantial illicit finance risk.116 Such a threshold would also be challenging to administer; for example, ERAs do not currently report AUM on Form ADV.117 In addition, a threshold based on AUM or similar metric would mean that an ERA hovering just above or below the threshold would come in and out of coverage based on market returns, making it more challenging for the SEC and FinCEN to accurately assess systemic money laundering, terrorist financing, or other illicit finance risk among ERAs. FinCEN also declines to categorically exclude ERAs reporting zero private fund assets on Form ADV. FinCEN notes that ERAs do not report regulatory AUM on Form ADV, and that the information they do report—gross assets of each 115 See supra Section III.A; Risk Assessment, supra note 2, at 20–22, 32. 116 See Risk Assessment, supra note 2, at 18, 20, and 31 (noting the highest illicit finance risk in the sector is for ERAs). Several of the 20 private fund advisers identified as having significant ties to Russian oligarch investors or Russian-linked illicit activities managed private funds with less than $100 million in AUM. 117 ERAs do not report AUM on Form ADV, but instead report gross assets for each private fund they advise. However, they only report gross assets for a private fund if that fund is not reported by an RIA or ERA in its own Form ADV; therefore, some ERAs report zero gross assets because all of the funds they advise are also reported by an RIA or ERA. See Form ADV, Instructions for Part 1A. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 private fund they advise—does not necessarily distinguish between ERAs that manage client assets from those that do not. ERAs that report zero gross assets for private funds they advise may still have discretion for customer assets and thus present the risk of being misused for illicit finance activities.118 FinCEN therefore declines to exclude ERAs reporting zero gross assets for private funds they advise from the requirements of the final rule. Regarding the applicability of the requirements of the final rule to the activities of foreign-located ERAs, those are discussed in the next section. FinCEN notes the concerns raised by some commenters about the specific burden that may apply to ERAs but reiterates that the AML/CFT requirements in this rule are designed to be risk-based and their cost will vary with the size of the business, along with the risk level of its advisory activities and customers. FinCEN will work with the SEC staff so that any examinations of ERAs for compliance with requirements of the final rule take into account the risk-based nature of AML/ CFT programs. 4. Foreign-Located Investment Advisers Proposed Rule: In the proposed rule, FinCEN noted that the proposed definition of ‘‘investment adviser’’ would include certain foreign-located investment advisers that are physically located abroad (i.e., whose principal office and place of business is outside the United States) but nonetheless are: (i) registered or required to register with the SEC (for RIAs), or (ii) file reports with the SEC on Form ADV (for ERAs). FinCEN therefore proposed that the rule’s requirements would ‘‘apply on the same basis’’ to such foreign-located advisers as to domestic advisers.119 FinCEN requested comment on any challenges for foreign-located advisers in taking this approach, including any potential conflicts with domestic or foreign law. Comments Received: FinCEN received eight comments regarding the application of the proposed rule to foreign-located investment advisers. One commenter stated that the proposed scope of application of the proposed rule conflicts with Congress’ intent during its original passage of the BSA in 1970. Other commenters raised concerns about the application of the 118 See 17 CFR 275.203(m)–1(d)(1) (excluding from the calculation of regulatory AUM, for purposes of the private fund adviser exemption, assets associated with certain types of private funds). See also Risk Assessment, supra note 2, at 18, 20. 119 89 FR at 12130. PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 72171 proposed rule deviating from past positions of FinCEN regarding BSA regulation and the SEC regarding Advisers Act regulation. One commenter suggested an AUM threshold for foreign-located ERAs that would draw from the SEC’s AUM thresholds for RIAs and its approach to measuring AUM for foreign-located private fund RIAs, specifically suggesting that foreign-located ERAs with less than $100 million of U.S. AUM be exempt from the proposed rule. Several commenters raised concerns that foreign-located investment advisers will face significant challenges in adhering to the proposed BSA requirements. First, commenters indicated that obligations under the BSA may not be consistent with local privacy rules and other requirements, potentially creating ‘‘conflict-of-laws and compliance challenges.’’ Another commenter suggested that applying this rule to foreign-located advisers would ‘‘deprive U.S. clients and investors from [sic] the expertise of foreign-located investment advisers’’ due to additional compliance burdens and ‘‘make it less likely that non-U.S. investment advisers hire U.S.-based employees or engage in other economic activity in the United States.’’ One commenter noted that the substantive provisions of the Advisers Act do not apply to ‘‘a non-U.S. adviser’s relationship with its non-U.S. clients and non-U.S. funds (including funds with U.S. investors)’’ and recommended that for non-U.S. advisers, this rule not apply ‘‘with respect to their non-U.S. clients, including non-U.S. private funds, even if such non-U.S. private funds have U.S. investors.’’ Commenters called for FinCEN to provide clarification on the reach of the proposed rule to foreign-located advisers. One commenter called on FinCEN to clarify that application of the proposed rule would be confined to investment advisers ‘‘organized and operating in the U.S., or to foreign-based or foreign-organized [investment advisers] only to the extent they are operating in the U.S.’’ One commenter called for foreign-located ERAs from Financial Action Task Force (FATF)compliant jurisdictions to be excluded from the rule and another raised concerns about the proposal’s application to foreign-located subadvisers. Several commenters called for FinCEN to fully exempt foreignlocated advisers from the proposed rule. Final Rule: FinCEN is applying the requirements of the proposed rule to foreign-located investment advisers, and is clarifying the scope of their advisory activities that are subject to the E:\FR\FM\04SER2.SGM 04SER2 ddrumheller on DSK120RN23PROD with RULES2 72172 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations requirements in the final rule. Accordingly, the final rule will define ‘‘investment adviser’’ to include foreignlocated investment advisers that are registered or required to register with the SEC (RIAs, subject to the exemptions set forth in 1010.100(nnn)(ii) for certain types of RIAs) or that file reports with the SEC on Form ADV (ERAs). Including foreignlocated investment advisers in this final rule is consistent with the BSA’s express authorization for the Secretary to, by regulation, determine new types of financial institutions 120 as well as the BSA’s intelligence, national security, and counter-intelligence purposes, which are inherently international in nature.121 Moreover, this interpretation of authority granted by the BSA is aligned with FinCEN’s existing approach applying BSA obligations to certain types of foreign-located BSAdefined financial institutions that have a nexus to the United States. FinCEN has considered the illicit finance risks arising from foreign-located investment advisers and the funds they advise, as well as the alternatives for mitigating these risks consistent with the purposes of the BSA enumerated at 31 U.S.C. 5311. For these reasons, FinCEN has determined that the requirement of a U.S. nexus provides a lawful basis for this rule to apply to foreign-located investment advisers. Section 1032.110 of the final rule defines a ‘‘foreign-located investment adviser’’ as an ‘‘investment adviser whose principal office and place of business is outside the United States.’’ Section 1032.111 of the final rule sets forth the scope of a foreign-located investment adviser’s obligations, stating that the requirements of part 1032 apply to a foreign-located investment adviser only with respect to its advisory activities that (i) take place within the United States, including through involvement of U.S. personnel of the investment adviser, such as the involvement of an agency, branch, or office within the United States, or (ii) provide advisory services to a U.S. person or a foreign-located private fund with an investor that is a U.S. person.122 With respect to services provided to a foreign-located private fund with an investor that is a U.S. person, as described below, the rule incorporates SEC definitions and standards for 120 31 U.S.C. 5312(a)(2)(Y). 31 U.S.C. 5311. 122 In contrast, an adviser with its principal office and place of business in the United States must comply with the final rule with respect to all of its advisory activities. 121 See VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 identifying investors that are U.S. persons in foreign-located private funds. To determine whether an investment adviser is a foreign-located investment adviser (as defined at section 1032.110), the adviser must look to its ‘‘principal office and place of business,’’ which FinCEN considers to be the executive office of the investment adviser from which the officers, partners, or managers of the investment adviser direct, control, and coordinate the activities of the investment adviser.123 RIAs and ERAs are required to identify their principal office and place of business on Form ADV, making it clear which investment advisers consider themselves to be ‘‘foreign-located investment advisers’’ for the purposes of this final rule. Moreover, all foreign-located advisers subject to the final rule have a U.S. nexus with certain advisory activities such that they are required to or have chosen to register with or file reports with the SEC, and therefore are subject to SEC regulation. The Advisers Act requires registration of investment advisers that have a minimum amount of assets under management 124 and who ‘‘make use of the mails or any means or instrumentality of interstate commerce in connection with his or its business as an investment adviser,’’ unless subject to an exemption, such as ERAs,125 and the scope of the registration requirement has been further refined in SEC regulations and guidance as discussed above. Moreover, de minimis ties to the United States do not automatically make a foreign-located investment adviser subject to the final rule, particularly because foreign private advisers as defined pursuant to the Advisers Act are not subject to the requirements of the final rule. An adviser may be a foreign private adviser if it: (i) has no place of business in the United States; (ii) has, in total, fewer than 15 clients in the United States and investors in the United States in private funds advised by the adviser; (iii) has aggregate assets under management attributable to these clients and investors of less than $25 million; and (iv) does not hold itself out generally to the public in the United States as an investment adviser.126 Foreign-located RIAs and ERAs covered 123 This definition is consistent with that used by the SEC in regulations applicable to investment advisers. See 17 CFR 275–222.1(b). 124 Certain other investment advisers that make use of the mails or any means or instrumentality of interstate commerce in connection with their business as an investment adviser may also be permitted or required to register with the SEC. See footnote 23, supra. 125 15 U.S.C. 80b–3(a), (l), (m). 126 See 15 U.S.C. 80b–2(a)(30), 80b–3(b)(3). PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 by the final rule therefore not only have sufficient nexus to the United States to trigger SEC registration or filing requirements, but also a U.S. nexus too great to qualify as a foreign private adviser (or have voluntarily chosen to be regulated as RIAs or ERAs).127 As noted above, a foreign-located investment adviser’s advisory activities must also have a U.S. nexus to be subject to the requirements of the final rule. Under section 1032.111, foreignlocated investment adviser’s advisory activities are subject to the requirements of the rule if the advisory activities: (i) take place within the United States, including through involvement of U.S. personnel of the investment adviser, such as the involvement of an agency, branch, or office within the United States, or (ii) provide advisory services to a U.S. person or a foreign-located private fund with an investor that is a U.S. person (subject to specified definitions of ‘‘foreign-located private fund,’’ ‘‘investor,’’ and ‘‘U.S. person’’). For the purposes of section 1032.111, U.S. personnel means, regardless of citizenship, any director, officer, employee, or agent of the investment adviser conducting advisory activities from a U.S. agency, branch, or office of the investment adviser. U.S. personnel would be involved in advisory activities if, for example, an employee of the investment adviser manages assets of a client from a U.S. office or other U.S. workplace of the investment adviser, or if the employee works remotely from the United States on a regular basis. Conversely, a U.S. citizen employee of the investment adviser managing assets of a client from a non-U.S. office of the foreign-located investment adviser would generally not constitute U.S. personnel involved in advisory activities for this purpose.128 The term ‘‘agency, branch, or office’’ of the investment adviser is not exclusive, and the rule would apply to any location in the United States from which U.S. personnel of the foreign-located investment adviser perform advisory activity. For the avoidance of doubt, personnel that perform activity that is 127 Certain RIAs or ERAs may opt to register or report to the SEC despite the fact that they could rely on the foreign private adviser definition; such investment advisers have chosen to subject themselves to the U.S. regulatory requirements and supervision applicable to such advisers, and so will be subject to this final rule. 128 However, a U.S. employee (of a foreign-located investment adviser) whose advisory activities are undertaken from a non-U.S. office for the purpose of evading the final rule or as part of a course of conduct the employee undertook while based in the United States, would constitute U.S. personnel involved in advisory activities and be covered by the final rule. E:\FR\FM\04SER2.SGM 04SER2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 clerical or administrative in nature are not involved in advisory activity for purposes of the final rule.129 For a foreign-located investment adviser, the final rule also applies to the provision of advisory services to a U.S. person or a foreign-located private fund with an investor that is a U.S. person. This includes, but is not limited to, providing investment advice to a U.S. person, regardless of the location from which such investment advice is provided. A foreign-located investment adviser would be providing advisory services to a U.S. person if, for example, the investment adviser manages assets from an office outside of the United States on behalf of an individual U.S. person. For purposes of determining a foreignlocated investment adviser’s activities subject to this rule, the final rule defines ‘‘U.S. person’’ as a person meeting the definition in 17 CFR 230.902(k), which is part of Regulation S under the Securities Act. The SEC relied on this definition for purposes of the foreign private adviser exemption because it provides specific rules when applied to various types of legal structures.130 FinCEN adopts the Regulation S definition for this reason, consistency with other SEC regulations crossreferenced in section 1032.111, and administrability because this definition is already familiar to investment advisers. This definition also includes an element designed to mitigate potential evasion concerns.131 With respect to a foreign-located investment adviser’s advisory activities to a foreign-located private fund, the final rule requires a foreign-located investment adviser to determine whether any foreign-located private fund that it advises has at least one investor who is a U.S. person.132 This determination must be made with 129 This discussion of ‘‘clerical or administrative’’ activity is intended to apply to foreign-located investment advisers only and is not intended to apply for any other purpose. This is because it aligns with the reporting of ‘‘clerical workers’’ on Item 5.A of Form ADV with which investment advisers are already familiar and enhances consistency with SEC regulation in a portion of the final rule that references several SEC regulations. 130 See 76 FR 39645, 39697–39678 (Jul. 6, 2011). 131 17 CFR 230.902(k)(1)(viii) (encompassing any corporation or partnership formed by a U.S. person principally for the purpose of investing in unregistered securities unless owned or incorporated by accredited investors who are not natural persons, estates or trusts). 132 A U.S.-located private fund advised by a foreign-located investment adviser is itself a U.S. person under this definition, and so a foreignlocated investment adviser will also be required to apply the final rule with respect to any U.S.-located private fund it advises, irrespective of the presence or absence of any U.S. person investors in such U.S.-located private fund. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 respect to every investor in that foreignlocated private fund in accordance with SEC requirements familiar to private fund advisers. If a foreign-located private fund has at least one U.S. person investor, the foreign-located investment adviser must apply the final rule with respect to that foreign-located private fund. This standard is designed to be both administrable—it incorporates SEC standards for identifying investors that are U.S. persons in private funds—and tailored to address risks to the U.S. financial system through foreign-located private funds, which FinCEN has identified as presenting significant illicit finance risk. The final rule defines ‘‘foreign-located private fund’’ by reference to section 202(a)(29) of the Advisers Act, which defines ‘‘private fund’’ to mean ‘‘an issuer that would be an investment company, as defined in section 3 of the [Company Act] (15 U.S.C. 80a–3), but for section 3(c)(1) or 3(c)(7) of that Act.’’ The ‘‘foreign-located’’ aspect of the definition refers to a fund that is a legal entity or arrangement that is incorporated or organized outside the United States and therefore is not a U.S. person for purposes of the final rule. This definition therefore covers the types of foreign-located private funds advised by ERAs and that FinCEN has identified as giving rise to illicit finance risks. It is also commonly used by investment advisers in complying with the federal securities laws, including, for example, in completing multiple portions of Form ADV.133 The final rule defines ‘‘investor’’ by reference to Advisers Act Rule 202(a)(30)–1(c)(2), under which a foreign private adviser can determine whether private funds it advises have more than 14 ‘‘investors in the United States.’’ That rule, in turn, refers to sections 3(c)(1) and 3(c)(7) of the Company Act, which generally exclude certain issuers from the definition of investment company based on the number of beneficial owners or qualifications of their security holders, respectively.134 Consistent with statements by the SEC and its staff and 133 See Form ADV Glossary, defining Private Fund to mean ‘‘An issuer that would be an investment company as defined in section 3 of the Investment Company Act of 1940 but for section 3(c)(1) or 3(c)(7) of that Act.’’ 134 Section 3(c)(1), 15 U.S.C. 80a–3(c)(1), excludes from the definition of investment company a privately-offered issuer having fewer than a certain number of beneficial owners. Section 3(c)(7), 15 U.S.C. 80a–3(c)(7) excludes from the definition of investment company a privately-offered issuer the securities of which are owned exclusively by ‘‘qualified purchasers’’ (generally, persons and entities owning investments whose value exceeds a specified threshold). PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 72173 the SEC’s underlying authorities,135 depending upon the facts and circumstances, persons other than the nominal holder of a security issued by a private fund may be counted as the beneficial owner under section 3(c)(1), or be required to be a qualified purchaser under section 3(c)(7).136 For purposes of section 3(c)(1), if a company owns 10 percent or more of the outstanding voting securities of the issuer (the prospective private fund), and is, or but for section 3(c)(1) or 3(c)(7) of the Company Act, would be an investment company, the issuer must ‘‘look through’’ that investing company to the holders of the company’s securities.137 In the context of this rule, a foreign-located investment adviser is required to perform the same look through with respect to any private fund it advises that relies on section 3(c)(1) of the Company Act with two modifications: (1) the foreign-located investment adviser must count beneficial owners of a private fund’s commercial paper as investors (consistent with Advisers Act Rule 202(a)(30)–1(c)(2)); and (2) a person who is considered a beneficial owner for purposes of section 3(c)(1) will be considered an ‘‘investor’’ in the private fund despite holding its interests indirectly. If this look through results in a U.S. person being considered an investor in the private fund, the foreignlocated private adviser must apply the requirements of the final rule to that fund. Similarly, for purposes of both section 3(c)(1) and section 3(c)(7), a foreignlocated investment adviser will be required to ‘‘look through’’ any entity 135 See, e.g., 76 FR 39645, 39676 (Jul. 6, 2011); Privately Offered Investment Companies, Final Rule, 62 FR 17512, 17519, 17524 (Apr. 9, 1997) (‘‘The Commission understands that there are other forms of holding investments that may raise interpretative issues concerning whether a Prospective Qualified Purchaser ‘owns’ an investment. For instance, when an entity that holds investments is the ‘alter ego’ of a Prospective Qualified Purchaser (as in the case of an entity that is wholly owned by a Prospective Qualified Purchaser who makes all the decisions with respect to such investments), it would be appropriate to attribute the investments held by such entity to the Prospective Qualified Purchaser.’’); see also Cornish & Carey Commercial, Inc., SEC Staff No-Action Letter (June 21, 1996) (staff discussed the application of section 3(c)(1)(A) to an issuer relying on section 3(c)(1)), available at https://www.sec.gov/ divisions/investment/noaction/1996/ cornishcarey022696.pdf. 136 Section 3(c)(1)(A) of the Company Act requires a private fund relying on section 3(c)(1) to ‘‘look through’’ any company that owns 10 percent or more of the company’s voting securities. ‘‘Voting security’’ is defined in section 2(a)(42) of the Company Act, 15 U.S.C. 80a2(a)(42). In contrast, this 10 percent look-through is not required for purposes of section 3(c)(7). 137 See 15 U.S.C. 80a–3(c)(1)(A). E:\FR\FM\04SER2.SGM 04SER2 72174 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 that is formed for the purpose of investing in a foreign-located private fund it advises.138 For purposes of the final rule, if a foreign-located investment adviser determines that an investing entity has been formed for purposes of investment in the private fund, such an adviser must look through the entity to determine whether it has U.S. person investors. Consistent with statements by the staff of the SEC and the SEC’s underlying authorities,139 a foreign-located investment adviser’s determination that an entity is formed for the specific purpose of investing in a foreign-located private fund will depend upon an analysis of all of the surrounding facts and circumstances (including any knowledge that the foreign-located adviser has regarding the identity of its customers). Thus, to the extent that a foreign-located investment adviser determines that there is an underlying U.S. person investor (by conducting a look-through or because of other information available to the foreign-located investment adviser), the foreign-located investment adviser must apply the final rule with respect to the foreign-located private fund in which the U.S. person is indirectly invested. These tests are incorporated into the final rule in order to address the illicit finance risks posed by foreign-located investment advisers. The greatest risks arise, as discussed above, from private funds advised by foreign-located investment advisers. The requirement of a U.S. nexus in the form of at least one investor that is a U.S. person is consistent with FinCEN’s desire to focus on risks to the U.S. financial system. The presence of a U.S. person investor increases the likelihood that illicit finance risk associated with a private fund affects the U.S. financial system and the likelihood that U.S. persons 138 See, e.g., 17 CFR 270.2a51–3(a) (discussing an entity formed for the purpose of acquiring securities of an issuer relying on section 3(c)(7)); Cornish & Carey Commercial, Inc., SEC Staff No-Action Letter (June 21, 1996) (staff discussing an entity formed for the purpose of acquiring securities of an issuer relying on section 3(c)(1)), available at https:// www.sec.gov/divisions/investment/noaction/1996/ cornishcarey022696.pdf. For purposes of section 3(c)(1), SEC staff guidance states that if a company or fund invests more than 40 percent of its assets in a 3(c)(1) fund, it is potentially formed for the purpose of investing in a 3(c)(1) fund. For purposes of section 3(c)(7), 17 CFR 270.2a51–3(a) requires an investment adviser to determine whether the beneficial owners of the entity formed for purposes of investment in the fund are also qualified purchasers. 139 See, e.g., American Bar Association Section of Business Law, SEC Staff No-Action Letter (Apr. 22, 1999) at 19–20 (describing circumstances under which an entity would be deemed to be formed for the specific purpose of acquiring securities in a private fund that relies on section 3(c)(7)), available at https://www.sec.gov/divisions/investment/ noaction/1999/aba042299.pdf. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 might be involved in the underlying illicit finance activity. Although the presence of one investor that is a U.S. person requires the investment adviser to apply the requirements of the final rule to the entirety of a private fund, FinCEN notes that the fund as a whole is the customer of the foreign-located investment adviser. By their nature, private funds involve the commingling of investor assets in a pooled vehicle. As previously detailed in the Risk Assessment, the pooled nature of such funds may be used to obscure ownership of investments (which may present the possibility of higher returns on capital) by illicit actors who seek stable returns and do not need immediate access to capital.140 While FinCEN considered other thresholds for establishing an appropriate U.S. nexus, including whether or not to apply the rule’s obligations with respect to non-U.S. private funds with U.S. investors, FinCEN balanced addressing the relevant illicit finance risks to the U.S. financial system (such as arising from investments by illicit actors in non-U.S. private funds that are commingled with funds from U.S. investors and enter the U.S. financial system),141 the purposes of the BSA, and administrability. FinCEN also considered, as noted by a commenter, the SEC’s approach in applying substantive provisions of the Advisers Act and the purposes underlying that approach. FinCEN further considered other SEC rules and practices, such as the foreign private adviser exemption and Advisers Act Rule 202(a)(30)–1(c)(2). The SEC standards incorporated in section 1032.111 are used to focus on illicit finance risks associated with private funds specifically and are familiar to foreign-located investment advisers from SEC regulations.142 By setting a 140 See Risk Assessment, supra note 2, at 16. at 16–20. 142 The standards for determining beneficial ownership of investments in private funds, including by U.S. persons, should be familiar to investment advisers from SEC reporting requirements and determining the status of such funds under the Company Act. See Instructions to Form PF, Section 2b Item 16 (requiring reporting of a fund’s equity that is beneficially owned by various categories of investors, including individuals who are U.S. persons); Question 16 of Section 7.B.(1) of Schedule D to Form ADV (requiring the reporting of the percentage of a private fund’s beneficial owners that are non-U.S. persons); 15 U.S.C. 80b–2(a)(30) and 17 CFR 275.202(a)(30)–1 (foreign private adviser exemption). See also 76 FR 39645, 39678 (Jul. 6, 2011) (‘‘A non-U.S. adviser would need to count the same U.S. investors [as in connection with Investment Company Act exclusions] (except for holders of short-term paper with respect to a fund relying on section 3(c)(1)) in order to rely on the foreign private adviser exemption. In this respect, 141 Id. PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 clear minimum standard of at least one U.S. private fund investor defined by reference to Advisers Act Rule 202(a)(30)–1(c)(2), this places clear limits on the ability of investment advisers or illicit actors seeking to obscure their ownership or control of certain assets through a private fund to avoid application of the final rule by admitting U.S. persons as indirect investors through intermediate entities. Advisers must ‘‘look through’’ nominee and similar arrangements to the underlying holders of private fundissued securities to determine whether the private fund has an investor that is a U.S. person. Moreover, a foreign-located investment adviser retains the option of availing itself of foreign private adviser status if it has limited U.S. ties and does not wish to apply the requirements of the final rule to private funds with lower levels of U.S. investment. Given this option, FinCEN anticipates it is unlikely that a significant number of foreign-located investment advisers will be required to apply the requirements of the rule on the basis of having a small number of investors that are U.S. persons or small amount of U.S. investment. When a foreign-located investment adviser’s activities involving a private fund fall within the scope of the final rule, the foreign-located investment adviser will be expected to subject its advisory activities with respect to the fund to internal policies, procedures, and controls reasonably designed to prevent the investment adviser from being used for money laundering, terrorist financing, or other illicit finance activities and to achieve compliance with the applicable provisions of the BSA and implementing regulations. Advisers are often involved in implementing such internal policies, procedures, and controls for their funds for both AML/ CFT requirements (if the fund implements such requirements voluntarily or to comply with the AML/ CFT laws of a foreign jurisdiction) as well as requirements under securities or other corporate laws. Therefore, foreignlocated investment advisers should be able to apply the requirements of this final rule, including applicable internal policies, procedures, and controls, to advisory activities with respect to these private funds, and doing so will help prevent these funds from becoming gateways into the U.S. financial system for illicit finance activity. therefore, the look-through requirement of the foreign private adviser exemption will generally not impose any new burden on advisers to non-U.S. funds.’’). E:\FR\FM\04SER2.SGM 04SER2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 Certain of a foreign-located investment adviser’s advisory activities are not subject to the final rule. This is similar to the SEC’s regulation of investment advisers pursuant to the Advisers Act: non-U.S. advisers are not required to apply the substantive provisions of the Advisers Act when advising non-U.S. clients.143 While taking into account the distinct purposes of the BSA, FinCEN believes that the final rule’s requirements should not apply to a foreign-located adviser when it: (i) provides services exclusively to a foreign-located person,144 and (ii) the personnel providing such advisory services are all outside of the United States as discussed above. To ensure that activities within the scope of the rule are properly included, a foreign-located investment adviser should (i) determine to the extent reasonable and practicable whether its customers and the investors in its private funds are within the scope of this rule based upon the regulatory text as clarified in this preamble and any relevant future guidance that FinCEN might issue, and (ii) ensure that it does not provide advisory services to its private fund customers in a manner that results in the adviser being unable to identify a potential U.S. customer or investor. The final rule states that upon request, a foreign-located investment adviser must make available to FinCEN or the SEC (in its capacity as delegated examiner for this rule) records and reports required under this rule and any other records that it has retained regarding the scope of its activities covered by this rule. As discussed below, the records that an investment adviser—including a foreign-located investment adviser—is required to maintain to comply with the requirements of the final rule include those required when developing and implementing an AML/CFT program as required under section 1032.210, including but not limited to a written AML/CFT program that includes internal policies, procedures, and controls, as well as those required by subpart D of the final rule, which are 143 See, e.g., 76 FR 39645, 39681 (Jul. 6, 2011); SEC No-Action Letter, Uniao de Bancos Brasileiros S.A. (Unibanco), 1992 WL 183054 at *3 (Jul. 28, 1992), available at https://www.sec.gov/divisions/ investment/noaction/1992/ uniaodebancos072892.pdf. The SEC’s approach considers the location of the client. The final rule does not modify the SEC’s position on the application of the Advisers Act to non-U.S. investment advisers. 144 Other than a private fund with a U.S. person investor, as described above. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 generally records of certain transactions and transfers of funds. As for any investment adviser subject to this final rule, for a foreign-located investment adviser, properly scoping the advisory activities covered by its AML/CFT program is an important part of ensuring that its AML/CFT program is reasonably designed to prevent the investment adviser from being used for money laundering, terrorist financing, or illicit finance activities, and of achieving and monitoring compliance. As part of establishing a risk-based and reasonably designed AML/CFT program, and to comply with other requirements in this final rule, a foreign-located investment adviser should generate records to reflect how it properly scoped the advisory activities covered by the final rule. A foreign-located adviser must provide such records to FinCEN and the SEC upon request. The final rule’s treatment of foreignlocated investment advisers broadly is consistent with how FinCEN has treated other foreign-located financial institutions, such as foreign-located money service businesses (MSBs) and broker-dealers. Specifically, the definition of MSBs under FinCEN’s regulations includes persons engaged in specified activities ‘‘wherever located, doing business . . . wholly or in substantial part’’ within the United States.145 ‘‘This includes but is not limited to the maintenance of any agent, agency, branch, or office within the United States.’’ 146 FinCEN’s 2011 MSB final rule explained that whether a person engages in MSB activities is based on ‘‘all of the facts and circumstances,’’ including whether U.S. persons are obtaining services from the foreign-located MSBs.147 FinCEN applies the same principles taking into account all of the facts and circumstances of a foreign-located investment adviser’s activities, tailored as described above to the investment adviser sector, in this rule. Foreign-located broker-dealers that are registered or required to be registered with the SEC are similarly subject to BSA requirements. FinCEN regulations define a ‘‘broker-dealer’’ as a ‘‘person registered or required to be registered with the SEC under the Exchange Act, except persons who register pursuant to 15 U.S.C. 78o(b)(11).’’ 148 Foreign located broker145 31 CFR 1010.100(ff). 146 Id. 147 FinCEN, Bank Secrecy Act Regulations; Definitions and Other Regulations Relating to Money Services Businesses, Final Rule, 76 FR 43585, 43588 (Jul. 21, 2011). 148 See 31 CFR 1023.100(b). The BSA regulations also use the related term ‘‘broker or dealer in PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 72175 dealers may be required to register with the SEC,149 and if they are required to register, such broker-dealers are required to comply with applicable BSA requirements for broker-dealers, including the maintenance of an AML/ CFT program and compliance with BSA recordkeeping requirements.150 While broker-dealers registered with the SEC that are located outside the United States are not required to file SARs,151 this is a policy choice that FinCEN made for broker-dealers based on the relevant considerations for that sector and does not reflect an interpretation of FinCEN’s authority to require such reporting.152 Although MSBs and broker-dealers located abroad have been subject to FinCEN’s regulations under the BSA, some commenters suggested that the final rule’s application to foreignlocated investment advisers would contravene longstanding territorial limits on the application of the BSA. The BSA authorizes the Secretary of the Treasury (since re-delegated to FinCEN) to define financial institutions and does not place territorial limitations on that authority. The BSA does not define the term ‘‘financial institution’’ in general and simply lists the types of businesses that may be financial institutions at 31 U.S.C. 5312(a)(2) without specifying where they may be located.153 FinCEN has interpreted this authority to enable regulation of foreign-located institutions that operate within the United States or provide services to persons in the United States. Moreover, as discussed above, the BSA authorizes the Secretary to determine, by regulation, new types of financial institutions 154 and the final rule is an exercise of that authority. The BSA confers authority to apply significant obligations of the final rule— notably the AML/CFT program and SAR requirements—to all ‘‘financial institutions’’ as defined by FinCEN.155 FinCEN therefore interprets the statutory authority to determine investment advisers as a financial securities,’’ which is defined based on the same provisions of the Securities and Exchange Act. 31 CFR 1010.100(h). 149 See SEC, Registration Requirements for Foreign Broker Dealers, Final Rule, 54 FR 30013, 30016 (Jul. 18, 1989); Guy P. Lander, Registration requirement and jurisdiction, 3 U.S. Sec. Law for Financial Trans. § 13:2 (2d ed.). 150 31 CFR 1023.210, 1023.400, 1023.410. 151 See 31 CFR 1023.320(a)(1). 152 Amendment to the Bank Secrecy Act Regulations—Requirement that Brokers or Dealers in Securities Report Suspicious Transactions, Final Rule, 67 FR 44048, 44052 (Jul. 1, 2002). 153 31 U.S.C. 5312(a)(2). 154 See 31 U.S.C. 5312(a)(2)(Y). 155 See, e.g., 31 U.S.C. 5318(g)(1) (SARs); 31 U.S.C. 5318(h)(1) (AML/CFT program). E:\FR\FM\04SER2.SGM 04SER2 ddrumheller on DSK120RN23PROD with RULES2 72176 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations institution to impose such obligations on certain foreign-located investment advisers in the final rule. Certain requirements of the final rule, however—in particular the recordkeeping obligations of subpart D and the special measures of subpart F— apply to ‘‘domestic financial institution’’ as defined in the BSA (also sometimes referred to as a ‘‘domestic financial agency’’).156 The BSA describes the term ‘‘a domestic financial institution’’ as applying to ‘‘an action in the United States of a financial agency or institution.’’ 157 Congress thus defined a domestic financial institution based on where an institution acts rather than where it is organized or headquartered. FinCEN interprets, as it has in the past, ‘‘an action in the United States’’ to include actions with a nexus to the United States. While the final rule’s AML/CFT program and SAR requirements rest on FinCEN’s broader authority to define ‘‘financial institutions,’’ through its focus on a U.S. nexus, the final rule’s approach with respect to foreign-located financial institutions is consistent with the reach of ‘‘domestic financial institution’’ as defined in the BSA. Requirements for foreign-located investment advisers apply when a foreign-located investment adviser engages in advisory activities with a U.S. nexus, whether by having staff in the United States or advising U.S. persons or advising foreign-located private funds with an investor who is a U.S. person. FinCEN took a similar approach with regard to foreign-located MSBs in requiring them to comply with its regulations for activities with a U.S. nexus even if some portion of the activity occurs in a foreign jurisdiction (such as transmitting funds to the United States from abroad). Thus, in accord with existing practice, FinCEN is regulating foreign-located investment advisers with a U.S. nexus based upon Congress’ authorization of the Secretary to determine financial institutions by regulation and to regulate foreignlocated institutions acting within the United States.158 Nonetheless, one commenter argued that Congress intended to limit the application of the BSA to financial institutions located in the United States when it passed the Currency and Foreign Transactions Reporting Act in 1970 (the ‘‘1970 Act’’), which later became part of the BSA. At the outset, 156 See, e.g., 31 U.S.C. 5318(a)(2) (recordkeeping); 31 U.S.C. 5318A(a)(1) (special measures). 157 31 U.S.C. 5312(b)(1). 158 See 31 U.S.C. 5312(a)(2)(Y); 31 U.S.C. 5312(b)(1). VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 the text of the 1970 Act is not limited in this manner nor is FinCEN aware that Congress otherwise intended it to be. Section 203 of the 1970 Act, which defines the term ‘‘financial institution,’’ states that ‘‘the term ‘domestic’, used with reference to institutions or agencies, limits the applicability of the provision wherein it appears to the performance by such institutions or agencies of functions within the United States.’’ 159 Similar to the term ‘‘domestic financial institution’’ in the current BSA, this use of the term ‘‘domestic’’ grants jurisdiction based upon where a financial institution acts—in the 1970 Act, by performing certain functions—rather than where it is located. Even if Congress intended to limit the reach of the 1970 Act with regard to foreign located financial institutions, the 1970 Act was a distinct statute focused on ensuring that banks and other institutions maintained sufficient records to assist government investigations.160 While maintaining certain records to assist in government investigations remains one of the purposes of the BSA, Congress has repeatedly amended the BSA to expand its scope, including the Money Laundering Control Act of 1986; 161 the Annunzio-Wylie AntiMoney Laundering Act of 1992; 162 the USA PATRIOT Act of 2001,163 and the AML Act.164 For example, Title III of the USA PATRIOT Act of 2001—styled the International Money Laundering Abatement and Anti-Terrorist Financing Act—amended the BSA to address the threat of international terrorism,165 including the BSA’s AML program and SAR filing requirements.166 The AML Act amended the purposes of the BSA to include addressing a number of international phenomena, including the facilitation of ‘‘intelligence and counterintelligence activities . . . to protect against terrorism’’ and assessments to ‘‘safeguard the national security of the United States.’’ 167 These amendments to the BSA since 1970, among others, demonstrate that the BSA is intended to protect the United States against international threats to the financial system and national security, among other purposes, which may involve regulating some conduct 159 Public Law 91–508, Title II, sec. 203(e), (f). at § 202. 161 Public Law 99–570, Title I, Subtitle H. 162 Public Law 102–550, Title XV. 163 Public Law 107–56, Title III. 164 Public Law 116–283, Div. F. 165 Public Law 107–56, Title III, sec. 358(a), (b). 166 See, e.g., id. at sec. 351–52. 167 See id. at 6101(a) (codified at 31 U.S.C. 5311). 160 Id. PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 occurring only in part within the United States. Commenters further argue that FinCEN has changed its position on the scope of the BSA. In so doing, they point to a Treasury report from 1987,168 the SAR requirements applicable to broker-dealers, and the 2003 investment adviser NPRM. These sources are inapposite to the final rule. The 1987 report was issued in response to a statutory requirement to inform Congress regarding BSA regulation of the foreign branches of U.S. banks at the time.169 The concept of a foreign ‘‘branch’’ of a U.S. bank has a specific legal meaning tied to how banks are supervised and regulated that is not applicable in the context of investment advisers, which are a different type of financial institution.170 Moreover, the 1987 report was written before the Annunzio-Wylie Anti-Money Laundering Act of 1992,the USA PATRIOT Act of 2001, and the AML Act expanded the scope and purposes of the BSA as mentioned above. Similarly, another type of financial institution— broker-dealers—are not required to file SARs when located abroad. This is a policy choice that FinCEN made for broker-dealers based on the relevant considerations for that sector and does not reflect an interpretation of FinCEN’s authority to require such reporting.171 Moreover, foreign-located investment advisers currently represent a significant proportion of the market and therefore account for significant illicit finance risks as discussed above. FinCEN has also determined not to apply the language of its 2003 proposed rule for investment advisers and fully exempt all foreign-located RIAs and ERAs from the requirements of the proposed rule.172 The approach taken in the final rule is consistent with FinCEN’s 2015 proposed rule for investment advisers 173 and results from 168 Secretary of the Treasury, Money Laundering and the Bank Secrecy Act: The Question of Foreign Branches of Domestic Financial Institutions (Jul. 29, 1987). 169 See id. at 30–33. 170 The term ‘‘branch’’ is used in the final rule for its plain meaning rather than this specific concept in banking law. 171 67 FR 44048, 44052 (Jul. 1, 2002). 172 See FinCEN, Anti-Money Laundering Programs for Investment Advisers, Notice of Proposed Rulemaking, 68 FR 23646, 23652 (May 5, 2003). The 2003 proposed rule would have defined an investment adviser to be only persons ‘‘whose principal office and place of business is located in the United States.’’ 173 FinCEN, Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers, Notice of Proposed Rulemaking, 80 FR 52680, 52684 (Sept. 1, 2015). The 2015 proposed rule would have defined an investment adviser to be any person ‘‘who is E:\FR\FM\04SER2.SGM 04SER2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 the significant growth of foreign investment into the United States from offshore financial centers and identified misuse of the investment adviser sector by transnational illicit finance threats (as identified in the Risk Assessment) in the two decades since the 2003 proposed rule was issued. One commenter stated that foreignlocated advisers could face conflict of laws and compliance concerns due to local laws where they are based, particularly data protection laws that limit the transfer of personal data. The commenter does not cite any example of a law that would create such a conflict, and FinCEN has not encountered such a conflict in the course of regulating other financial institutions located outside the United States. FinCEN expects investment advisers, like other BSA-defined financial institutions, to comply with their obligations under the BSA, and further believes foreign jurisdictions are unlikely to interpret their laws to conflict with or otherwise impede the final rule because the rule is consistent with FATF standards and the global interest in reducing illicit finance.174 Nonetheless, while FinCEN expects financial institutions to comply with obligations under the BSA as a matter of course, financial institutions seeking guidance on this rule may submit requests for guidance to FinCEN if they encounter unexpected difficulties in doing so.175 Although one commenter said that regulating foreign-located advisers would ‘‘deprive’’ investors that are U.S. persons of their skills through higher costs and incentivize foreign-located advisers to avoid U.S. ties, FinCEN does not believe that this is the case. The United States is the world’s largest and most competitive financial market and the requirements of this rule with respect to foreign-located investment advisers are substantially similar to the BSA requirements applicable to other non-U.S.-based financial institutions, which have not unduly impeded access registered or required to register with the SEC under section 203 of the Investment Advisers Act of 1940’’ and, accordingly, would have applied to foreignlocated investment advisers. 174 See, e.g., FATF, International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation, the FATF Recommendations (Updated November 2023), at 10, available at www.fatf-gafi.org/en/publications/ Fatfrecommendations/Fatf-recommendations.html, (FATF Recommendation 2, stating that national AML/CFT policies and procedures should ‘‘ensure the compatibility of AML/CFT/CPF requirements with Data Protection and Privacy rules and other similar provisions’’). 175 For questions regarding the BSA and FinCEN’s implementing regulations, investment advisers may contact FinCEN’s Regulatory Support Section at 1– 800–767–2825 or email frc@fincen.gov. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 by investors that are U.S. persons to financial institutions located abroad or inhibited foreign financial institutions from developing ties to the United States. And even if there are some effects along these lines, this would be outweighed by the increased protection of the U.S. financial system and U.S. national security due to the scope of the final rule. These benefits also outweigh the remaining concerns raised by commenters about covering foreignlocated advisers. Commenters argued that foreign-located advisers located in FATF-compliant jurisdictions, or certain similar AML/CFT regimes such as in the United Kingdom and the European Union, should be exempt from the requirements of the final rule. While a jurisdiction’s compliance with FATF standards is helpful to the international effort against illicit finance, it is not a replacement for U.S. regulation where the institutions have significant links to the U.S. financial system. For instance, without a SAR filing obligation, under certain circumstances U.S. law enforcement would have to rely on information from foreign authorities to detect U.S.-based illicit activity involving foreign-located investment advisers. Another commenter raised concerns about foreign-located subadvisers’ ability to comply with the requirements of the final rule. FinCEN addresses the application of the final rule to subadvisers (both U.S. and foreign-located) below. If such a foreignlocated investment adviser cannot exclude subadvisory activity from its AML/CFT program, it may work with the primary adviser and others to address these issues. FinCEN believes that concerns raised by commenters are not sufficient to justify reducing the scope of the final rule to exclude foreign-located investment advisers or to re-issue the rule to seek further comment on this issue. As described above with respect to RIAs and ERAs generally, FinCEN has considered potential AUM thresholds, including a $100 million U.S. AUM threshold for foreign-located ERAs, and appreciates commenters’ concerns about the potential burden on relatively smaller entities to comply with the rule. Indeed, FinCEN has excluded from the final rule certain smaller and mid-sized RIAs. FinCEN similarly has considered comments encouraging FinCEN to focus on U.S. AUM and U.S. activities and operations, which informed FinCEN’s determination to limit the scope of foreign-located advisers’ advisory activities subject to the rule and to exclude foreign private advisers. However, as described above with PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 72177 respect to ERAs generally and as reflected in the Risk Assessment, FinCEN has determined that smaller ERAs present generally higher illicit finance risks than RIAs that do not advise private funds, especially those RIAs with lower or zero AUM excluded from the scope of this rule. Moreover, for ERAs, lower gross asset value of private funds advised in many cases does not correspond to lower illicit finance risk. FinCEN is concerned that an AUM threshold for smaller ERAs, including smaller foreign-located ERAs, would also be challenging to administer, for similar reasons described above.176 5. State-Registered Investment Advisers Proposed Rule: FinCEN did not include State-registered investment advisers in the scope of the proposed rule but requested comment on the illicit finance risk for State-registered investment advisers and whether they should be included in the scope of the final rule. Comments Received: Some commenters questioned FinCEN’s exclusion of State-registered investment advisers from the expanded application of the rule. Three commenters requested that State-registered investment advisers be added to the definition of ‘‘investment adviser’’ in the proposed rule. The commenters claimed that excluding State-registered investment advisers from the requirements of the proposed rule may permit bad actors to exploit inadequate technology or perceived weaknesses in the oversight or regulation of State-registered investment advisers to circumvent AML/CFT controls at financial institutions. One commenter noted that certain state financial institutions have already emerged as hotspots for those who wish to hide their assets and minimize their tax burdens, especially through trusts. One commenter also recommended that, despite increased costs, State-registered investment advisers be subject to the proposed rule and be required to register with the SEC, and asserted that increasing costs may be ‘‘partly offset by taxes on money that may have been laundered.’’ Two commenters also suggested that FinCEN assess illicit finance activity involving investment advisers linked to Tribal activity. Two commenters agreed with FinCEN’s approach to not apply the proposed rule to State-registered investment advisers, but advised that FinCEN continue to monitor Stateregistered investment advisers for illicit finance risks. One commenter stated 176 See E:\FR\FM\04SER2.SGM supra Section III.B.3. 04SER2 72178 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 that money laundering risk posed by State-registered advisers should be lower than for RIAs and ERAs as Stateregistered advisers have lower AUM than RIAs. This commenter also stated that State-registered advisers are often comprised of a single person and thus know their customers personally. Final Rule: In the final rule, FinCEN is not including State-registered investment advisers in the definition of ‘‘investment adviser.’’ FinCEN notes that while State-registered investment advisers may be misused to facilitate illicit finance activity, FinCEN continues to assess they are at lower risk for such activity than RIAs or ERAs. As noted by one commenter, Stateregistered advisers are smaller, in terms of customers, and tend to be localized. In addition, Treasury’s Risk Assessment found few examples of State-registered investment advisers being used to move illicit proceeds or facilitate other illicit finance activity. Furthermore, including State-registered investment advisers within the scope of the definition of ‘‘investment adviser’’ would create significant challenges in monitoring compliance with AML/CFT requirements, as the SEC currently has no authority to examine them for compliance with the Advisers Act or the rules thereunder. Given State-registered advisers’ lower risk and the potentially disproportionate cost of imposing AML/CFT requirements on such advisers, FinCEN assesses that the final rule is less likely to achieve the same degree of benefits as for RIAs and ERAs. However, FinCEN will continue to monitor activity involving State-registered investment advisers for indicia of money laundering, terrorist financing, or other illicit finance activities and may consider regulatory measures if appropriate. 6. Foreign Private Advisers and Family Offices Proposed Rule: FinCEN’s proposed regulation did not apply to foreign private advisers or family offices because such entities are not RIAs or ERAs pursuant to the Advisers Act and its implementing regulations. FinCEN sought comment on whether any excluded entities, in particular family offices, should be included in the scope of the proposed rule. Comments Received: Five commenters opposed the exclusion of foreign private advisers and family offices from the scope of the proposed regulation, arguing that the definitions under the Advisers Act that exclude foreign private advisers and family offices from SEC regulation bear little VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 relevance to FinCEN’s mandate to reduce illicit finance risks and the purposes of the proposed regulation. These commenters expressed concern that excluding foreign private advisers and family offices would simply lead some entities, including those engaged in illicit activity, to ‘‘re-classify’’ as family offices or foreign private advisers, thereby reducing the regulation’s utility. Other commenters noted the growth of the family office sector, noting one study of global family offices that found the average AUM for family offices was $900 million, and that these family offices had approximately half of their investments in North America. Another commenter cited cases demonstrating illicit finance risks involving family offices. Regarding foreign private advisers, one commenter noted that in 2022, foreign private advisers reported that roughly 40 percent of clients and 28 percent of assets were reportedly sourced outside the United States. On this basis, these commenters proposed that FinCEN amend the proposed regulation to include such entities, despite the scope of the Advisers Act and the SEC’s current examination authority. Final Rule: FinCEN recognizes that foreign private advisers and family offices may face illicit finance risks that could be mitigated through their inclusion in the rule. However, the risks are not identical to those posed by other investment advisers. For example, family offices, as defined pursuant to regulations issued under the Advisers Act, cannot have advisory clients outside of family members and certain additional ‘‘family clients.’’ 177 This makes it easier to ascertain the source of funds for such customers and less attractive for those seeking to obscure their identity or their source of funds. Foreign private advisers, to qualify for the exclusion from SEC registration, have fewer U.S. clients and fewer ties to the U.S. financial system than RIAs and ERAs.178 Both types of entities are statutorily exempted from the requirements of the Advisers Act and its implementing regulations.179 Including them within the scope of the definition of ‘‘investment adviser’’ would therefore create challenges in monitoring compliance with AML/CFT requirements, primarily because the 177 17 CFR 275.202(a)(11)(G)–1. 15 U.S.C. 80b–2(a)(30), 80b–3(b)(3); see also supra note 34. 179 See 15 U.S.C. 80b–2(a)(11)(G) (excluding family offices as defined by the SEC from the Advisers Act definition of ‘‘investment adviser’’); 15 U.S.C. 80b–3(b)(3) (exempting foreign private advisers from registration with the SEC). 178 See PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 SEC currently has no authority to examine them. In regard to family offices specifically, FinCEN notes that other jurisdictions with economies and AML/CFT regimes similar to the United States have also excluded family offices or similar entities from the scope of AML/CFT regulations impacting entities providing investment adviser-like advisory services.180 This exclusion is also consistent with international AML/ CFT standards set by the FATF, which do not require such entities be subject to AML/CFT requirements. FinCEN will continue to monitor activity involving foreign private advisers and family offices for indicia of the risks of money laundering, terrorist financing, or other illicit finance activities and may take regulatory action if appropriate. 7. Other Comments Related to the Definition of ‘‘Financial Institution’’ and ‘‘Investment Adviser’’ One individual commenter suggested Treasury change regulations applying to certain state-chartered banks as part of the final rule. The commenter claimed that ‘‘some states may have inadequate oversight regulations (sometimes intentional) that will allow local banks to skirt more strict oversight’’ and serve as an entry point for private equity funds seeking to move funds through the international financial system, as these banks may offer investment management services similar to investment advisers. The commenter recommended that state-chartered banks be required to be federally chartered to operate across state lines, and that a state-chartered bank must clear through a Federal Reserve Bank any funds that are received from or sent to a foreign jurisdiction. Two commenters suggested that FinCEN explicitly include real estatefocused investment funds in the scope of the proposed regulation. These commenters claimed that while real estate funds are generally not covered by the Advisers Act because real estate held in fee simple ownership is not considered a ‘‘security’’ by the SEC, pooled real estate investment vehicles 180 For example, in Germany, the Money Laundering Act refers to the Banking Act for definitions of obliged entities, and the Banking Act does not require licensing for single-family offices. Hinweise zur Erlaubnispflicht gemä+ KWG und KAGB von Family Offices, sec. 4(c), BaFin (updated Jul. 12, 2018), https://www.bafin.de/SharedDocs/ Veroeffentlichungen/DE/Merkblatt/mb_140514_ familyoffices.html. Hong Kong exempts most singlefamily offices from licensing requirements. Family Offices FAQ, Securities and Futures Commission of Hong Kong (last updated Sep. 8. 2020), available at https://www.sfc.hk/en/faqs/intermediaries/ licensing/Family-Offices. E:\FR\FM\04SER2.SGM 04SER2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 are structured similarly to other private funds and can pose illicit finance risks, including money laundering, public corruption, and potential national security risks. Another commenter noting the preamble discussion on AML/CFT requirements applicable to dual registrants and affiliates and wishing to avoid duplication of resources and jurisdictional conflicts between the SEC and other federal functional regulators, suggested modifying the definition of ‘‘investment adviser’’ to exclude ‘‘persons that are subject to enterprisewide BSA regulation at a depository institution or trust company.’’ Regarding regulatory changes to statechartered banks, FinCEN notes that state-chartered banks are subject to comprehensive supervision, including for AML/CFT requirements.181 This mitigates the need to include statechartered banks within the final rule, and making the suggested change would involve considerations beyond their potential investment management activities, as well as consultations with other state and Federal regulators. As such, FinCEN declines to pursue that recommendation as part of this rulemaking. Regarding real estate-focused funds, FinCEN notes that it has focused AML/ CFT regulatory efforts at the level of the adviser rather than any specific customer or service. To the extent real estate investment funds are advised by an investment adviser or an investment adviser is otherwise involved in their operation, there will be a BSA-defined financial institution involved in their operation. Separately, FinCEN has also proposed a rule to require the reporting of buyer and seller information for certain residential real estate transactions.182 Both factors are likely to reduce the risks associated with real estate-focused funds. Therefore, FinCEN declines to explicitly focus this final rule on any real estate-focused investment activity. FinCEN also declines the suggestion to modify the definition of ‘‘investment adviser’’ to exclude ‘‘persons that are subject to enterprise-wide AML/CFT regulation at a depository institution or trust company.’’ Doing so would remove a significant group of covered advisers 181 See, e.g., FDIC, The Bank Secrecy Act: A Supervisory Update (Jun. 2017, last updated Apr. 6, 2023), at 23, n. 5–6, available at https:// www.fdic.gov/regulations/examinations/ supervisory/insights/sisum17/sisummer2017article02.html. 182 See FinCEN, Anti-Money Laundering Regulations for Residential Real Estate Transfers, Notice of Proposed Rulemaking, 89 FR 12424 (Feb. 16, 2024). VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 from SEC examination 183 and limit the ability of the SEC, as the federal functional regulator for investment advisers, to identify and mitigate potential systemic illicit finance risks that might arise in the sector. FinCEN noted in the IA AML NPRM and reiterates below, a depository institution or trust company with an investment adviser subsidiary or affiliate is not required to develop a separate AML/ CFT program for its adviser subsidiary or affiliate if the depository institution or trust company’s existing program addresses the identified money laundering, terrorist financing, and other illicit finance risks for the adviser. FinCEN believes this flexibility appropriately balances the benefits to having cost-effective enterprise-wide AML/CFT programs with ensuring that all relevant Federal functional regulators have the appropriate authority to supervise institutions conducting activities within their supervisory mandate. C. Recordkeeping and Travel Rules and Currency Transaction Reports Proposed Rule: FinCEN proposed to apply to investment advisers certain BSA recordkeeping regulations that apply broadly to financial institutions, codified as 31 CFR part 1010, subpart D (sections 1010.400 through 1010.440). Subject to specified exceptions, such application would require investment advisers to comply with the Recordkeeping and Travel Rules, which are codified at 31 CFR 1010.410(e) and 31 CFR 1010.410(f), respectively, and require financial institutions to create and retain records for extensions of credit and cross-border transfers of currency, monetary instruments, checks, investment securities, and credit in amounts exceeding $3,000. The proposed rule would allow investment advisers to deem the requirements of these recordkeeping requirements satisfied with respect to any mutual fund that it advises. FinCEN also proposed that RIAs and ERAs be required to report transactions in currency over $10,000. Currently, all investment advisers report such transactions on Form 8300. Under the proposed rule, a CTR would replace Form 8300 for RIAs and ERAs. Comments Received: FinCEN received nine comments on the proposed requirement that investment advisers file CTRs and proposal to apply the Recordkeeping and Travel Rules to 183 According to a Treasury analysis of Form ADV data as of December 31, 2022, only four percent of RIAs reported being affiliated with a bank or trust company, but they held over 40 percent of total AUM reported on Form ADV. PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 72179 investment advisers. Two commenters stated their support for both FinCEN’s proposal to require investment advisers to file CTRs and comply with the Recordkeeping and Travel Rules requirements. A commenter asserted that while financial institutions such as banks associated with wealth management services already implement these rules, the rules are still necessary to close the potential gaps or loopholes for bad actors. The commenter also asserted that these Recordkeeping and Travel Rule requirements should be considered the bare minimum for investment advisers and that similar requirements are already in place for many RIAs and ERAs not domiciled in the U.S. Other commenters questioned whether many advisers can logistically comply with the CTR, Recordkeeping, and Travel Rule requirements in the proposed rule. Several commenters stated that advisers who do not manage customer assets typically do not touch currency or other funds outside of the advisory or subscription fees received for their services. One commenter asserted that such advisers have no visibility into their customers’ investment activities or their movement of funds and securities, all of which takes place through financial institutions such as banks or brokerdealers that are already subject to the CTR, Recordkeeping, and Travel Rules. In these commenters’ view, applying these requirements to investment advisers would be duplicative and provide no new information to law enforcement. One commenter claimed that while a customer may authorize a bank or broker-dealer to accept investment management or transactional instructions from an adviser in some cases, compared with other financial institutions involved in the funds transfer process, the adviser may not be as well-positioned to view how the client’s account is funded, where withdrawals from the account are sent, or whether there is unusual wire activity. One commenter called on FinCEN to either exempt advisers from this rule, or delay implementation until a new CIP requirement for investment advisers may be adopted, while another commenter claimed that other financial institutions subject to AML program requirements are exempt from the Recordkeeping and Travel Rules. Several commenters asked for additional clarification from FinCEN on the scope of the Recordkeeping and Travel Rules as applied to investment advisers. One commenter requested that FinCEN explain how it expects advisers to implement these rules, given that E:\FR\FM\04SER2.SGM 04SER2 72180 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 these advisers do not accept or hold investor funds, maintain accounts, or engage in transactions with clients or investors. Another commenter asked how these rules would impact private funds. Another requested that FinCEN confirm that it is not asking or requiring advisers to create or share records outside of the ordinary course of business, and that FinCEN is not asking advisers to collect or capture information not otherwise required by the adviser’s AML/CFT program. Final Rule: The final rule does not exempt RIAs and ERAs from the requirement to file CTRs or adhere to the Recordkeeping and Travel Rules. Accordingly, RIAs and ERAs will be required to file CTRs and create and retain records for transmittals of funds. Under the Recordkeeping and Travel Rules, financial institutions must create and retain records for transmittals of funds and ensure that certain information pertaining to the transmittal of funds ‘‘travels’’ with the transmittal to the next financial institution in the payment chain.184 When a financial institution accepts and processes a payment sent by or to its customer, then the financial institution would be the ‘‘transmittor’s financial institution’’ or the ‘‘recipient’s financial institution,’’ respectively. The transmittor’s financial institution must obtain and retain the name, address, and other information about the transmittor and the transaction.185 The Recordkeeping Rule also requires the recipient’s financial institution (and in certain instances, the transmittor’s financial institution) to obtain or retain identifying information on the recipient.186 The Recordkeeping and Travel Rules apply to transmittals of funds that equal or exceed $3,000. The term ‘‘transmittal of funds’’ includes funds transfers processed by banks, as well as similar payments where one or more of the financial institutions processing the payment (e.g., the transmittor’s financial institution, an intermediary financial institution, or the recipient’s financial institution) is not a bank.187 There are exceptions that are designed to exclude transmittals of funds from the 184 31 CFR 1010.410(e), (f); 31 CFR 1020.410(a). Financial institutions are also required to retain records for five years. See 31 CFR 1010.430(d). 185 31 CFR 1010.410(e)(1)(i), (e)(2). 186 31 CFR 1010.410(e)(1)(iii), (e)(3) (information that the recipient’s financial institution must obtain or retain). 187 See 31 CFR 1010.100(ddd) (defining ‘‘transmittal of funds’’); see also 31 CFR 1010.100(aa), (qq), (ggg) (defining ‘‘intermediary financial institution,’’ ‘‘recipient’s financial institution,’’ and ‘‘transmittor’s financial institution’’ to include both bank and nonbank financial institutions). VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 Recordkeeping and Travel Rules’ requirements when certain categories of financial institutions are the transmitter and recipient.188 The final rule will add investment advisers to the list of institutions among which transfers are excepted from the travel rule. This means that investment advisers will be treated in the same manner—and with the same exceptions for transfers to certain other financial institutions—as banks, broker-dealers, futures commission merchants, introducing brokers in commodities, and mutual funds. The primary requirements for investment advisers under the Recordkeeping and Travel Rules will be when they act as transmittor or recipient in transactions other than these excepted transfers. While many RIAs and ERAs do not engage in the type of transactional activity covered by these requirements, this is not uniform among all RIAs and ERAs. For instance, one commenter identified that there is significant variation among RIAs and ERAs with regard to their visibility into, and involvement in, funding and other cash transactions related to their clients’ accounts, noting that advisers to retail clients may be more actively involved in facilitating the account opening and funding process for their clients, including forwarding wire instructions from the client to the custodian, while this may be less common among advisers to institutional clients. FinCEN agrees with the commenters who noted that these similar requirements are already in place for many RIAs and ERAs who are not domiciled in the U.S. due to the requirements of foreign laws.189 Further, as noted by 188 See 31 CFR 1010.410(e)(6), (f)(4); 31 CFR 1020.410(a)(6). As relevant here, section 1010.410(e)(6)(i) excludes from the requirements of the Recordkeeping Rule ‘‘[t]ransmittals of funds where the transmitter and the recipient’’ are certain types of listed financial institutions. Section 1010.410(f)(4) excludes these same transmittals from the Travel Rule. This rule amends section 1010.410(e)(6) to add ‘‘investment adviser’’ to its list of financial institutions. 189 For example, a financial institution located in a foreign country may serve as a ‘‘qualified custodian,’’ 17 CFR 275.206(4)–2(d)(6)(iv), and most, if not, all, such foreign institutions would be subject to similar AML/CFT requirements under the laws and regulations of their home country jurisdiction. For instance, FATF Recommendation 11 requires financial institutions to maintain certain transactional and customer due diligence records for at least five years, while FATF Recommendation 16 requires originators and beneficiaries to maintain records of customer information for certain wire transfers. FATF, International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation, the FATF Recommendations (Updated November 2023), at 15, 17, available at www.fatf-gafi.org/en/publications/ Fatfrecommendations/Fatf-recommendations.html. Over 175 jurisdictions around the world have PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 commenters, investment advisers can meet this reporting requirement with minimal additional costs, while providing law enforcement with useful AML/CFT information.190 As requested by several commenters, FinCEN is providing some additional guidance on what information it expects advisers to collect to comply with the Recordkeeping and Travel Rules. First, FinCEN notes that in circumstances where an adviser’s customer has a direct account relationship with a qualified custodian that is subject to AML/CFT requirements, including the Recordkeeping and Travel Rules, such as a bank or broker-dealer, and requests that such qualified custodian initiate a funds transfer or transmittal of funds, the adviser would generally not be required to comply with the requirements of the Recordkeeping and Travel Rules. In this circumstance, the qualified custodian would have the obligation to comply with the Recordkeeping and Travel Rules as the entity that received the instruction and transmitted the funds. This would likely apply to many RIAs advising retail customers that custody customer assets with a qualified custodian. However, for RIAs advising private funds, as well as ERAs, their authority and discretion over the fund and customer assets in the fund may make them more likely to have to comply with the Recordkeeping and Travel Rules. In terms of the information that advisers may have, FinCEN notes that under 17 CFR 275.204–2 (the Books and Records Rule), RIAs are required to maintain ‘‘originals of all written communications received and copies of all written communications sent by such investment adviser relating to . . . Any receipt, disbursement or delivery of funds or securities.’’ 191 This requirement may assist RIAs in satisfying their obligations to identify relevant information that may be required to be collected under the Recordkeeping and Travel Rules in those circumstances where an RIA is a transmittor’s financial institution or recipient’s financial institution. Regarding CTRs, in instances where investment advisers are not involved in one or more related transactions in currency of more than $10,000, an implemented these requirements into domestic law or regulation. See FATF, Consolidated Assessment Ratings (Jul. 18, 2024), available at https://www.fatfgafi.org/en/publications/Mutualevaluations/ Assessment-ratings.html. 190 This is because, under 17 CFR 275.204–2, RIAs are already required to collect and maintain such information under the Books and Records Rule. 191 See 17 CFR 275–204–2(a)(7)(ii). E:\FR\FM\04SER2.SGM 04SER2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations investment adviser will generally not need to file CTRs.192 However, all investment advisers are currently required to file reports for the receipt of more than $10,000 in currency and certain negotiable instruments using joint FinCEN/Internal Revenue Service Form 8300.193 This means that many advisers likely have some procedure in place for recording information for transactions above this threshold. FinCEN also agrees with the commenter noting that a wide variety of U.S. financial institutions have been filing CTRs for decades and minimize the reporting burden through widely available automated software. In addition, FinCEN would like to clarify that an adviser is not required to purchase any software to file a CTR; CTR filing is available for free via the FinCEN BSA E-Filing System. ddrumheller on DSK120RN23PROD with RULES2 D. Applicability of AML/CFT Program Requirements As discussed above, the BSA authorizes Treasury—and thereby FinCEN—to prescribe minimum standards for AML/CFT programs.194 Section 5318(h)(2) of the BSA further provides that in prescribing these minimum standards, Treasury take into account, among other factors, that AML/ CFT programs should be reasonably designed to assure and monitor compliance with the requirements of the BSA and regulations issued thereunder, as well as risk-based, including ensuring that more attention and resources of financial institutions should be directed towards higher-risk customers and activities, consistent with the financial 192 For purposes of 31 CFR 1010.311 and 1010.313, the term ‘‘transaction in currency’’ means a transaction involving the physical transfer of currency from one person to another. A transaction, which is a transfer of funds by means of bank check, bank draft, wire transfer, or other written order, and does not include the physical transfer of currency, is not a transaction in currency for this purpose. See 31 CFR 1010.100(bbb)(2). 193 31 CFR 1010.330; 26 CFR 1.6050I–1. ‘‘Currency’’ includes cashier’s checks, bank drafts, traveler’s checks, and money orders in face amounts of $10,000 or less, if the instrument is received in a ‘‘designated reporting transaction.’’ 31 CFR 1010.330(c)(1)(ii)(A). A ‘‘designated reporting transaction’’ is defined as the retail sale of a consumer durable, collectible, or travel or entertainment activity. 31 CFR 1010.330(c)(2). In addition, an investment adviser would need to treat the instruments as currency if the adviser knows that a customer is using the instruments to avoid the reporting of a transaction on Form 8300. 31 CFR 1010.330(c)(1)(ii)(B). 194 31 U.S.C. 5318(h)(1)–(2) (authorizing Treasury, after consultation with the appropriate Federal functional regulator (for investment advisers, the SEC), to prescribe minimum standards for AML/ CFT programs, and setting forth factors to be taken into account in doing so). In developing this final rule, FinCEN consulted and coordinated with SEC staff, including with respect to the statutorily specified factors set out in 31 U.S.C. 5318(h)(2)(B). VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 institution’s risk profile, rather than lower-risk customers and activities.195 In light of the BSA’s clear direction, FinCEN reiterates that the AML/CFT program requirement is not a one-sizefits-all requirement but is risk-based and must be reasonably designed. The riskbased and reasonably designed approach of the rule is intended to give investment advisers the flexibility to design their programs so that they are commensurate with the specific risks of the advisory services they provide and the customers they advise as described in section 5318(h)(2) of the BSA.151 For example, large firms may assign responsibilities to the individuals and departments carrying out each aspect of the AML/CFT program, such as AML/ CFT employee training, SAR filing, and CDD, while smaller firms would be expected to adopt procedures that are consistent with their (often) simpler, more centralized organizational structures (for instance integrating aspects of AML/CFT compliance with other compliance or monitoring functions). This flexibility is designed to ensure that all investment advisers subject to FinCEN’s AML/CFT program requirements, from the smallest to the largest, and the simplest to the most complex, have in place internal policies, procedures, and controls appropriate to their advisory business to prevent the investment adviser from being used to facilitate money laundering, terrorist financing, or other illicit finance activities and to achieve and monitor compliance with the applicable provisions of the BSA and FinCEN’s implementing regulations. Because investment advisers operate through a variety of different business models, one generic AML/CFT program for this industry is not possible; rather, each investment adviser must develop a program based upon its own business structure. This requires that each investment adviser identify its exposure to money laundering, terrorist financing, 195 31 U.S.C. 5318(h)(2). legislative history of the BSA reflects that Congress intended that each financial institution should have some flexibility to tailor its program to fit its business, considering factors such as size, location, activities, and risks or vulnerabilities to money laundering. This flexibility is designed to ensure that all firms, from the largest to the smallest, have in place policies and procedures appropriate to monitor for money laundering. See USA PATRIOT Act of 2001: Consideration of H.R. 3162 Before the Senate, 147 Cong. Rec. S11039– 11041 (Oct. 25, 2001) (statement of Sen. Sarbanes); Financial Anti-Terrorism Act of 2001: Consideration Under Suspension of Rules of H.R. 3004 Before the House of Representatives, 147 Cong. Rec. H6938–39 (Oct. 17, 2001) (statement of Rep. Kelly) (provisions of the Financial AntiTerrorism Act of 2001 were incorporated as Title III in the Act). 151 The PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 72181 and other illicit finance activity risks; understand the BSA requirements applicable to it; identify the risk factors relating to these requirements; design the internal policies, procedures and controls that will be required to reasonably assure compliance with these requirements; and periodically assess the effectiveness of the procedures and controls. An investment adviser (other than a foreign-located investment adviser) will be required to apply an AML/CFT program to all advisory services provided to all customers, other than with respect to mutual funds, collective investment funds, and other investment advisers subject to the rule. Advisory services subject to an AML/CFT program would include, for example, the management of customer assets and the submission of customer transactions for execution. The adviser will not be required to apply its AML/CFT program to non-advisory services. One example of non-advisory services would be in the context of private funds, including venture capital funds: an adviser’s personnel may play certain roles with respect to the portfolio companies in which its customer fund invests. Generally, activities undertaken in connection with those roles (e.g., making managerial/operational decisions about the activities of portfolio companies) would not be ‘‘advisory activities.’’ Moreover, in response to comments regarding an investment adviser’s obligation with regard to portfolio companies, as discussed further below, the objective standard that an investment adviser must file a SAR when it ‘‘knows, suspects, or has reason to suspect’’ certain suspicious transactions parallels the language of the rule for mutual funds, with which many investment advisers are familiar.196 As clarified in guidance for mutual funds, this standard should not require regulated entities to collect additional information beyond that available ‘‘through the account opening process and in the course of processing transactions, consistent with the mutual fund’s required anti-money laundering procedures.’’ 197 Similarly, an investment adviser therefore should be able to satisfy this requirement with regard to a portfolio company through the information available to it in the course of directing investments in the 196 31 CFR 1024.320(a)(2). Frequently Asked Questions Suspicious Activity Reporting Requirements for Mutual Funds (Oct 4, 2006), available at https:// www.fincen.gov/resources/statutes-regulations/ guidance/frequently-asked-questions-suspiciousactivity-reporting. 197 FinCEN, E:\FR\FM\04SER2.SGM 04SER2 72182 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 securities of a portfolio company, such as the due diligence it conducts before directing an investment, and the measures provided in its AML/CFT program regarding the adviser’s advisory activities. The final rule does not require an investment adviser to collect additional information from portfolio companies about their activities. But if the information the investment adviser already possesses or obtains as part of its processes for directing investment in the securities of a portfolio company or through its AML/CFT program means that the adviser ‘‘knows, suspects, or has reason to suspect’’ that there is suspicious activity occurring at a portfolio company, it is required to file a SAR. Under the risk-based approach, an investment adviser should tailor its AML/CFT program according to the specific risks presented by its various services and customers. Factors that may indicate a service or a customer is lower risk include the jurisdiction of registration of legal person customers, and whether the legal person customer is subject to other U.S. AML/CFT regulatory requirements. As described below and consistent with the risk-based approach, FinCEN will permit investment advisers to exclude mutual funds, collective investment funds, and other investment advisers that they advise that are also subject to the rule from their AML/CFT programs (and other requirements of the final rule) in light of existing AML/CFT program requirements under the BSA. FinCEN declines to further limit the scope of AML/CFT requirements for other wrap-fee programs and separately managed accounts, but notes that the flexibility in the risk-based approach can allow an investment adviser that is a portfolio manager in a wrap-fee program or provides advisory services to a separately managed account to appropriately adjust its application of AML/CFT measures based on the presented risk. 1. Mutual Funds and Collective Investment Funds Proposed Rule: FinCEN proposed to exclude activities of investment advisers in advising mutual funds from the rule’s AML/CFT program requirements. Specifically, FinCEN proposed to exempt advisers from having to include mutual funds customers in their AML/ CFT programs, and by extension the reporting and recordkeeping requirements of part 1032, subparts C and D. FinCEN, however, did not propose to allow investment advisers to exclude mutual fund customers from the information sharing, due diligence, VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 and special measures requirements of part 1032, subparts E and F. Moreover, the proposed exclusion applied only to mutual funds that ‘‘developed and implemented an AML/CFT program compliant with the AML/CFT program requirements applicable to mutual funds under another provision of this subpart.’’ As explained in the IA AML NPRM, FinCEN proposed the AML/CFT program exclusion to recognize that mutual funds ‘‘typically do not have their own independent operations,’’ and ‘‘are entirely operated, and compliance with their legal obligations is undertaken, by their service provider entities, foremost among them their investment advisers.’’ 198 FinCEN also stated that ‘‘including a mutual fund within its investment adviser’s AML/ CFT program would be redundant.’’ 199 FinCEN did not explicitly address the status of collective investment funds, which are sometimes also referred to as collective investment trusts, in the IA AML NPRM. Comments Received: Three commenters supported the proposed rule’s exclusion of mutual funds, including open-end exchange-traded funds (ETFs), from the scope of an investment adviser’s AML/CFT program. These comments noted that mutual funds, including open-end ETFs that are open-end management investment companies, are already subject to similar AML/CFT requirements, and concurred with FinCEN’s reasoning for the proposed exclusion. One of these three commenters supported the intent of the proposed exclusion—noting that mutual funds have already been subject to similar AML/CFT program requirements—but took issue with the scoping and structure of this proposed exclusion. This commenter expressed that, as written, this proposal would make the investment adviser responsible for ensuring that the mutual funds it advises are compliant with their AML/ CFT program obligations, and suggested that an investment adviser should not have to ensure the extent of a mutual fund’s compliance with mutual fund AML/CFT program obligations as a basis for exempting them from the investment 198 89 FR at 12123. at 12123–24 (‘‘In particular, we expect that the investment adviser to a mutual fund will have both (1) access to the exact same information concerning the mutual fund or its investors that is available to the mutual fund, in part in connection with its AML/CFT obligations and (2) a significant role generally in the operations of the mutual fund’s regulatory responsibilities, including its AML/CFT program.’’). 199 Id. PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 adviser’s AML/CFT program. As an alternative, the commenter recommended that FinCEN adopt the exemptive language from the 2003 proposal, which provided that ‘‘an investment adviser ‘‘may exclude from its anti-money laundering program any pooled investment vehicle it advises that is subject to an anti-money laundering program requirement under another provision of this subpart.’’ One individual commenter recommended bringing mutual funds under these provisions as well, but did not acknowledge the long-standing application of AML/CFT program obligations to mutual funds. Two commenters also suggested that FinCEN exclude bank-sponsored collective investment trusts from the scope of the proposed rule because collective investment trusts are subject to the AML/CFT reporting obligations of a collective investment trust’s bank sponsor and are available only to/ through institutional retirement plans, making them inherently low-risk from an AML/CFT perspective. Final Rule: FinCEN agrees with commenters who support the proposed exclusion of mutual funds from the requirements of an investment adviser’s AML/CFT program, given that mutual funds have long had their own AML/ CFT program requirements. Accordingly, the final rule maintains an exclusion of mutual funds from the requirements of an investment adviser’s AML/CFT program requirements. This exclusion is permissive and not mandatory; an investment adviser could decide to include the mutual funds it advises in complying with any aspect of the final rule. An adviser could also integrate its overall AML/CFT program and any mutual fund specific program if doing so is risk-based and reasonable manner. FinCEN also recognizes that, as drafted in the IA AML NPRM, the proposed regulation text may have limited the practical utility of the exclusion by making the investment adviser responsible for ensuring that the mutual funds it advises have ‘‘implemented’’ their AML/CFT programs in a ‘‘compliant’’ manner. The exclusion was not intended to require an investment adviser to separately ensure a mutual fund’s AML/CFT program is in compliance with the fund’s AML/CFT program rule requirements for mutual funds in order to exempt the fund from the investment adviser’s AML/CFT program. FinCEN has therefore decided to modify the text of the regulation to categorically permit an investment adviser to exclude any mutual fund from its AML/CFT program E:\FR\FM\04SER2.SGM 04SER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations without the adviser having to verify that such a mutual fund has implemented an AML/CFT program. The modified text is reflected at section 1032.210(a)(2). Regarding collective investment funds, FinCEN notes that collective investment funds are investment vehicles administered by a bank or trust company that hold commingled assets.200 Each collective investment fund is established under a plan that details the terms under which the bank or trust company manages and administers the fund’s assets. The bank or trust company acts as a fiduciary for the collective investment fund and holds legal title to the fund’s assets as trustee. However, in some cases an RIA may be hired to provide advisory services to the collective investment fund. Participants in a collective investment fund are the beneficial owners of the fund’s assets. As noted by commenters, the banks and trust companies that sponsor and serve as trustees of a collective investment fund are already subject to AML/CFT reporting obligations under the BSA, and are the entities best situated to identify and assess risk associated with the participants in a collective investment fund, report suspicious activity, and implement other AML/CFT requirements. Commenters also noted that collective investment funds themselves are available only to institutional retirement plans or to other eligible discretionary fiduciary accounts of the bank, making them inherently low risk from an AML/ CFT perspective. FinCEN agrees that applying the AML/CFT requirements of the proposed rule to collective investment funds would be duplicative of existing requirements applicable to bank and trust company sponsors of collective investment funds. These AML/CFT obligations would be applied by the bank or trust company to the collective investment fund and its underlying participants, and would assess and mitigate any illicit finance risk arising from either the fund or its underlying customers. While collective investment funds, unlike mutual funds, are not separate legal entities, they are fiduciary accounts that serve a very similar purpose and function and are only available to participants who meet specific criteria in OCC regulations and other applicable laws. Therefore, FinCEN is expanding the exclusion from the AML/CFT program requirement to include both mutual funds and collective investment funds sponsored by a bank or trust company subject to the BSA. FinCEN notes that collective investment funds can be sponsored not only by national banks, federal savings associations, and trust companies chartered by the OCC, but also by statechartered banks and trust companies that are supervised by the FRB, the FDIC, or state bank regulators. Collective investment funds established by national banks and federal savings associations 201 are subject to requirements for such collective investment funds detailed in OCC regulations at 12 CFR 9.18. While these regulations only apply to collective investment funds established by national banks and federal savings associations, they have served as a model for many state statutes governing collective investment funds, many of which cross-reference 12 CFR 9.18.202 In addition, collective investment funds of state-chartered banks and trust companies that seek tax-exempt status under IRC section 584 must comply with the OCC requirements in 12 CFR 9.18.203 Compliance with IRC section 584 is necessary for the fund to qualify for favorable tax treatment—namely, taxation only at the participant level and not at the fund level.204 Therefore, FinCEN has determined to define collective investment funds for the purposes of this exclusion by reference to OCC regulations at 12 CFR 9.18. FinCEN has also added in a reference to ‘‘other applicable law that incorporates the requirements of 12 CFR 9.18,’’ so that the exclusion includes collective investment funds formed pursuant to state law or regulation, or other applicable law such as ERISA, so long as those other applicable laws incorporate the requirements of 12 CFR 9.18. FinCEN expects, however, that almost all collective investment funds established by a national or state bank or trust company subject to the BSA would meet these requirements. This additional text is reflected at section 1032.210(a)(2). 200 See OCC, Comptroller’s Handbook (Collective Investment Funds) (May 2014), available at https:// www.occ.treas.gov/publications-and-resources/ publications/comptrollers-handbook/files/ collective-investment-funds/pub-ch-collectiveinvestment.pdf. Collective investment funds administered by national banks are governed by OCC regulations at 12 CFR 9.18. 201 Federal savings associations are subject to 12 CFR 150, which requires compliance with 12 CFR 9.18 if establishing and administering a collective investment fund under 12 CFR 150.260(b). 202 See Comptroller’s Handbook (Collective Investment Funds) at p.3. 203 See 26 U.S.C. 584(a)(2). 204 See 26 U.S.C. 584(b)–(d). VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 72183 2. Requests To Exempt Certain Customers and Activities Proposed Rule: FinCEN proposed to apply the requirements of the proposed rule to the full range of advisory services provided by an investment adviser, including advisory services that do not include the management of customer assets or knowledge of customers’ investment decisions, as well as when an investment adviser acts as a ‘‘subadviser’’ in certain advisory activities. FinCEN requested comment on whether specific services provided by investment advisers should be included or excluded from coverage of this proposed rule, as well as alternative approaches for addressing compliance with the proposed rule when advisers provide particular services, such as subadvisory services, as well as other similar services. Thirteen commenters provided views on a range of advisory activities and customers. These generally related to three issues: (1) the treatment of subadvisory services under the proposed rule, (2) the treatment of certain customers under the proposed rule, and (3) the treatment of certain advisory services provided by investment advisers that do not involve the management of customer assets. (a) Comments on Subadvisory Services, Wrap Fee Programs, and Separately Managed Accounts Comments Received: 11 commenters asserted that an investment adviser acting as subadviser should be able to exclude its subadvisory relationships from its AML/CFT program. As noted by one commenter, ‘‘Sub-Advisory Arrangements can exist in a number of formats, including managed account ‘platforms,’ wrap fee programs, separately managed accounts (SMAs), unified managed accounts (UMAs), other sub-advised accounts, and collective investment funds where a Primary Adviser sponsors the fund and retains Sub-Advisers to manage all or part of the fund’s accounts or investments.’’ Some commenters limited their comments to certain subadvisory relationships, such as separately managed accounts or wrap fee programs, while others referenced different types of subadvisory relationships. These commenters stated that requiring an investment adviser to apply its AML/CFT program to a subadvisory relationship with another investment adviser (the primary adviser) would be duplicative of the requirements applied by the primary adviser. In addition, several commenters indicated that when an investment adviser acts as E:\FR\FM\04SER2.SGM 04SER2 ddrumheller on DSK120RN23PROD with RULES2 72184 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations subadviser, it has limited or no access to information about the primary investment adviser’s underlying clients and does not have direct contact with those clients or account holders, and so would not be in a position to apply most aspects of its AML/CFT program to the subadvisory relationship and generally would be unable to monitor the relationship for suspicious activity. One commenter noted that in most subadvisory relationships, the primary adviser possesses the authority pursuant to a written agreement to appoint and replace each subadviser, which functions solely as a service provider to the primary adviser. Two commenters both noted the considerable challenges for non-U.S. subadvisers that manage foreign asset classes, as well as for U.S. subadvisers for non-U.S. accounts or fund structures, in implementing the proposed requirements. These commenters generally stated that FinCEN should exclude subadvisory activities from the scope of the proposed rule, and that responsibility for applying AML/CFT requirements should be with the primary adviser. Commenters also recommended how FinCEN should treat subadvisory relationships if it decides not to exclude them from an investment adviser’s AML/CFT program. Three commenters suggested FinCEN permit primary advisers and subadvisers to allocate applicable AML/CFT program and SAR reporting obligations to the primary adviser or sponsor, and that FinCEN should confirm that subadvisers would not be required to obtain any additional information about clients enrolled in managed account programs in order to discharge their AML/CFT program or SAR reporting obligations. Two commenters recommended that the final rule should cover all of the advisory services provided, whether in a primary or subadvisory role. One commenter argued that in the private funds context, exempting subadvisers, who often make managerial and operational decisions for private funds, could encourage complex contractual arrangements to enable investment advisers to circumvent their AML/CFT obligations, and that subadvisers are treated as investment advisers under the Advisers Act. Both commenters also noted that including advisory activities may be especially important for digital advice platforms, as they are increasingly incorporated into services offered by larger investment advisers and for RIAs domiciled in other countries. Final Rule: FinCEN recognizes the potential for duplication, which may also occur with other BSA-defined VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 financial institutions that provide similar services to the same customers. FinCEN notes that subadvisory services, wrap-fee programs, and separately managed accounts can vary in structure and the allocation of services among participating financial institutions (depending on how these programs are structured and the role of other BSAdefined financial institutions). In addition, subadvisory services or wrapfee arrangements are not defined by regulation but are industry terms applied to a range of advisory relationships. Further, there are some investment advisers, such as Stateregistered investment advisers, that are not covered by this rule, and RIAs and ERAs may enter into subadvisory or similar relationships with such uncovered advisers. These factors make it challenging to apply a categorical exemption or treatment to a type of advisory relationship for the purposes of this rule. However, consistent with the exclusion for mutual funds and collective investment funds from an investment adviser’s AML/CFT program described above, FinCEN assesses that permitting investment advisers to exclude certain advisory customers rather than particular advisory services from their AML/CFT programs strikes the appropriate balance between avoiding unnecessary duplication and limiting illicit finance risk. This duplication of AML/CFT measures by an investment adviser is particularly salient when an investment adviser is advising another investment adviser subject to this rule, and lacks a direct relationship with the underlying customer of the investment adviser, such as in the context of certain subadvisory relationships. In these circumstances, any illicit finance risk or useful information for law enforcement would be addressed by the AML/CFT program and reporting and recordkeeping obligations of the other investment adviser. Therefore, FinCEN is permitting an investment adviser to exclude from its AML/CFT program any investment adviser that is advised by the adviser and that is subject to this rule. This additional text is reflected at section 1032.210(a)(1)(iii). As applied to subadvisers, this exclusion will permit an investment adviser (acting as subadviser) to exclude from its AML/CFT program another investment adviser (the primary adviser) to which it provides subadvisory services where the subadviser has a direct contractual relationship with the primary adviser and not with the underlying customer of that primary adviser. The investment adviser may PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 also be able to exclude wrap-fee programs, separately managed accounts, or other advisory relationships, so long as the customer is another investment adviser as defined at section 1010.100(nnn) and the adviser does not have a direct contractual relationship with the underlying customer of the other investment adviser. FinCEN recognizes that this exclusion would not permit an investment adviser to exclude from its AML/CFT program advisory customers who are BSA-defined financial institutions other than an investment adviser, such as a brokerdealer or bank, and so would not address all of the duplication described by commenters.205 For instance, an adviser would not be able to exclude from its AML/CFT program: (1) wrap-fee programs where a BSA-defined financial institution other than an investment adviser, such as a broker-dealer, is the sponsor; (2) any subadvisory relationships where the primary adviser is an investment adviser not covered by this rule, such as a State-registered adviser or exempt as a foreign private adviser; or (3) those customers with which the investment adviser has a direct contractual relationship governing the provision of advisory services, even if that contract calls for the investment adviser to act as a subadviser. In these circumstances, where the contractual relationship is with the underlying customer, an adviser acting as a subadviser would be better positioned to assess the risk of the customer and to request appropriate information from the customer. FinCEN therefore declines to exempt such activities from the final rule. For subadvisory relationships that are not subject to this exclusion, an investment adviser is required to include those activities in the scope of its AML/CFT program. FinCEN notes that there is inherent flexibility in the risk-based approach required by the BSA, and that such flexibility can allow an investment adviser to appropriately adjust its application of AML/CFT measures based on the presented risk. For instance, subject to the requirements discussed below regarding delegation, an adviser could contractually delegate certain AML/CFT measures to a brokerdealer in a wrap-fee program where it is more appropriate for the broker-dealer to implement those measures. As discussed below, delegation will require the investment adviser to remain fully 205 In the case of a dual registrant who is a customer of an investment adviser, the investment adviser could only exclude the dual registrant to the extent the dual registrant was acting as an investment adviser, and not as a broker-dealer. E:\FR\FM\04SER2.SGM 04SER2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 responsible and legally liable for, and need to demonstrate, compliance with AML/CFT requirements. Such delegation would not alleviate the obligation of the adviser to remain accountable for its own compliance with the BSA. In addition, some AML/CFT requirements in this rule, such as the reporting of suspicious activity, can be effectively implemented by an investment adviser even where the filing institution does not have a direct customer relationship with the subject of the SAR. FinCEN notes that it is common for two or more BSA-defined financial institutions to provide different services and establish different types of relationships with the same customer, and both entities can still effectively implement their own AML/ CFT requirements. At the same time, in establishing and implementing an AML/ CFT program that is risk-based and reasonably designed to address the specific risks of the advisory services it provides and the customers it advises, an investment adviser can incorporate into its program a consideration of the role played by other financial institutions with respect to those services and customers, and the AML/ CFT obligations of those financial institutions. (b) Certain Advisory Customers Comments Received: One individual commenter suggested FinCEN exclude investment advisers that sub-advise European SICAVs,206 which the commenter described as essentially foreign-located mutual funds, noting that these are subject to European Union (EU) AML/CFT regulations. Five commenters requested that either investment advisers providing advisory services to retirement plan participants, such as participants in participantdirected defined contribution retirement plans established under IRC Sections 401(k), 403(b), and 457, be exempt from the proposed rule or that such services be exempt from the requirements of the proposed rule. These commenters noted earlier guidance from Treasury that such plan participant accounts were lower risk for money laundering, and that advisers providing services to plan participants have no ability to monitor participant contributions or withdrawals. Commenters further stated that retirement plans necessarily require the involvement of other regulated entities that are independently subject to AML/CFT requirements, that those 206 SICAV (Société d’investissement à Capital Variable) is a type of collective investment fund commonly used in Europe. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 requirements would be applied to plan participants and their transactional activity, and that employer-sponsored retirement plans are also subject to other requirements under ERISA. One commenter suggested that the final rule make clear that participants in employer-sponsored retirement plans are not the ‘‘customer’’ and, for CIP and beneficial ownership requirements, make clear that the definition of ‘‘account’’ does not include an account opened for the purpose of participating in an employer-sponsored retirement plan, and that the requirements of the proposed rule should only apply at the plan level. Another commenter requested that exchange-traded closed-end funds be exempt from the final rule as relevant customer and transaction information is held by the transfer agent (and any broker-dealer used to purchase the shares) and not the RIA or ERA. One commenter suggested FinCEN explicitly recognize certain types of advisory customers who categorically present a lower risk of money laundering and exclude them from the AML/CFT program requirements. These include retirement plans; employee securities corporations; publicly-traded corporations; accounts of government entities, such as municipal or state agencies; governmental pension plans; non-profit organizations; higher education endowment funds; and multiemployer plans. The commenter reasoned that these accounts are held in custody by a financial institution that is already subject to AML/CFT requirements. As an alternative, the commenter suggested that FinCEN clarify that investment advisers’ AML/ CFT program requirements with respect to these entities would be minimal under a risk-based approach. Three commenters suggested that FinCEN exempt investment products offered by, or advisory services provided to, another financial institution subject to comprehensive AML/CFT requirements. These commenters argued that the rationale for exempting mutual funds from an investment adviser’s AML/CFT program extends to an investment adviser’s relationships with other financial institutions subject to an AML/CFT program obligation, which would also be consistent with FinCEN’s 2003 proposed rule. One of these commenters proposed that to the extent the investment products are covered in any AML/CFT program requirement, FinCEN should make clear that a sound AML/CFT program can, and is authorized to, rely on the diligence conducted by a regulated intermediary. PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 72185 Final Rule: Regarding European SICAVs or other pooled investment vehicles administered by foreign financial institutions, FinCEN declines to exempt such entities from the scope of the proposed rule. FinCEN acknowledges that such pooled investment vehicles may be subject to comparable AML/CFT regulation by foreign supervisory authorities, but that those regulations may not specifically address illicit finance risks to the U.S. financial system or provide relevant information directly to U.S. regulators or law enforcement. FinCEN notes that the application of foreign AML/CFT requirements to a pooled investment vehicle administered by a foreign financial institution can be a factor in determining risk associated with a particular type of foreign-located customer. Regarding retirement plans, FinCEN recognizes the point made by several commenters that such plans are subject to regulation and supervision under ERISA as well as other laws and regulations governing retirement plans, and are generally only available through a BSA-regulated financial institution or an entity regulated under another federal framework. FinCEN declines to categorically exclude such plans from coverage under the proposed rule, however, because doing so would leave a material gap in addressing illicit finance risks. Such plans may not be offered directly through a financial institution with AML/CFT program, SAR, and recordkeeping obligations under the BSA, and applying AML/CFT requirements to investment advisers to such plans, such as SAR filing requirements, may help identify illicit activity involving the theft or misappropriation of plan assets. Moreover, the potential for duplication and any accompanying burden is reduced by the exemption for advisers to such plans who register with the SEC only as ‘‘pension consultants’’ as discussed above. FinCEN declines to exempt the other types of advisory customers raised by commenters—such as employees’ securities companies and other BSAregulated financial institutions—for similar reasons. Advisory relationships with customers that are not themselves BSA-regulated financial institutions may not necessarily involve any institution other than the investment adviser with AML/CFT program and related obligations under the BSA. When there is another such institution—such as when investment advisers provide advisory services to another BSA-regulated financial institution—these institutions’ AML/ E:\FR\FM\04SER2.SGM 04SER2 72186 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 CFT programs may not be tailored to the specific risks posed by an advisory relationship and these institutions may lack the expertise of an investment adviser in monitoring the investment advisory relationship. Excluding such advisory customers would therefore leave a material gap in addressing illicit finance risks. However, investment advisers may take into account the nature of advisory relationships with such customers in determining the level of risk they pose, which, when the particular relationship is lower risk, will reduce the burden of including such customers in the investment advisers’ AML/CFT programs. Regarding exchange-listed registered closed-end funds, while they are not categorically excluded from an adviser’s AML/CFT program under the final rule, such funds are typically offered to retail investors through a broker-dealer, which performs customer identification and verification as well as CDD, with the investment adviser managing the investment portfolio of the fund. As described further below, FinCEN would expect that, absent actual indicia of high-risk activity tied to such funds in specific circumstances, an adviser could treat these funds as lower risk for purposes of its AML/CFT program. (c) Certain Advisory Activities Comments Received: Six commenters provided comments on how the requirements of the proposed rule should apply to advisory services that do not involve the management of customer assets. These commenters supported the proposed exclusion of non-advisory services from the proposed rule, and suggested that advisory activities that do not involve the management of customer assets, such as non-discretionary financial planning and publication of securitiesrelated newsletters, ‘‘model portfolios,’’ or research reports, should also be excluded, and that advisers that provide these only services would be exempt from the requirements of the proposed rule. One commenter noted that these activities are entirely outside of the ‘‘payment chain’’—the adviser neither manages, directly or indirectly, the customer’s assets nor participates in the transmittal of any customer funds to or from any recipient. The same commenter noted that many of these activities do not involve an advisory customer at all. Another commenter noted that advisers who do not manage customer assets are less likely to have information about customer specific activity that could facilitate SAR or CTR filings. Another commenter noted that VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 an adviser providing model portfolio services to a financial services provider has no legal, advisory, or fiduciary relationship with the financial services provider’s own customers or any information regarding the customers themselves, and so that adviser is in no position to fulfill the AML/CFT requirements that are outlined in the IA AML NPRM. Two other commenters requested further examples and clarification regarding which non-advisory activities would not be covered, including clarifying that investment activities conducted on behalf of a fund would be considered non-advisory. Two commenters requested that non-U.S. activities of U.S. firms should be excluded from the final rule. The commenters noted that inclusion of a U.S. investment adviser’s non-U.S. activities in the final rule could lead to conflict of laws and compliance challenges. One of the commenters requested that FinCEN clarify that U.S. firms are not required to apply the requirements of the proposed rule to non-U.S. activities if compliance would cause these firms to violate other laws in the jurisdictions in which they operate. Final Rule: FinCEN agrees with the view of commenters that advisers that provide only services that do not involve the management of customer assets (and so report no AUM on Form ADV) are unlikely to have any relevant information on illicit finance risk or suspicious activity involving their customers. In addition, there is a lower risk that these advisers will be used as an entry point into the U.S. financial system for illicit proceeds. For the reasons described above, FinCEN has decided to exempt such RIAs from the definition of ‘‘investment adviser’’ in the final rule and therefore from the broader AML/CFT requirements of the final rule. However, when an RIA both manages client assets and provides other advisory services that do not involve the management of client assets, FinCEN declines to exclude the ‘‘nonmanagement’’ services from coverage of the rule’s requirements. FinCEN notes that when provided along with the management of a customer’s assets, these services may lead to an adviser learning relevant information about a customer for purposes of understanding customer risk or identifying suspicious activity. Further, there is the risk that exempting non-management services from the requirements of the final rule for RIAs that also manage client assets could potentially encourage some advisers to attempt to evade the PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 requirements of the rule by re-branding certain activities as non-management activities. For example, customers that would prefer increased anonymity or want to directly avoid being subject to AML/CFT requirements could request such a re-branding for activities on their behalf. FinCEN would expect that in most circumstances, non-management services would be lower risk for money laundering, terrorist financing, or other illicit finance activity, and accordingly, an investment adviser could treat as lower risk its customers that receive only these services. FinCEN does not believe that further clarification of the concept of nonmanagement services is necessary. The methodology for determining when an RIA has regulatory AUM for purposes of Form ADV is well-developed under SEC regulations and RIAs are familiar with it in that context.207 An investment adviser can use this methodology to help determine its ‘‘non-management’’ services. FinCEN also does not believe that further clarification of the concept of non-advisory activities is required. Advisers have been required to determine when they provide services that require registration or other regulatory compliance measures since the passage of the Advisers Act in 1940.208 With respect to private funds, FinCEN does not believe that all investment activities on behalf of a fund are necessarily non-advisory. When such activities involve directing investment, they pose substantially similar risks to other advisory activities. FinCEN therefore declines to clarify that such investment activities on behalf of funds are non-advisory. 3. Dual Registrants and Affiliates Proposed Rule: FinCEN proposed that an investment adviser also registered as a broker-dealer or a bank (i.e., a dual registrant), or who is an operating subsidiary of a bank, would be included in the scope of the proposed regulation and subject to SEC examination for compliance with the regulation. However, in the IA AML NPRM, FinCEN clarified that it would not 207 See Instructions to Item 5.F of Form ADV (17 CFR 279.1). 208 Existing judicial precedent interprets whether a person is advising others (or acting as an ‘‘investment adviser’’ under the Advisers Act), and the SEC and SEC staff have issued guidance on what services qualify. See, e.g., Abrahamson v. Fleischner, 568 F.2d 862, 869–72 (2d Cir. 1977), cert. denied, 436 U.S. 913 (1978); Applicability of the Investment Advisers Act to Financial Planners, Pension Consultants, and other Persons Who Provide Investment Advisory Services as a Component of Other Financial Services, SEC Statement of Staff Interpretation, Advisers Act Release No. 1092 (Oct. 8, 1987). E:\FR\FM\04SER2.SGM 04SER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations require such investment advisers to establish multiple or separate AML/CFT programs so long as a comprehensive AML/CFT program covers all of the investment adviser’s applicable legal and regulatory obligations. Comments Received: Commenters generally supported the language of the proposed rule that an investment adviser that is dually registered as a broker-dealer or is a bank (or is a bank subsidiary) does not need to establish multiple or separate AML/CFT programs so long as a comprehensive AML/CFT program covers all of the entity’s relevant business and activities that are subject to BSA requirements. Similarly, commenters also generally agreed that an investment adviser affiliated with, or that is a subsidiary of, another entity required to establish an AML/CFT program in another capacity should not be required to implement multiple or separate programs. However, some expressed concern that FinCEN’s proposal to delegate examination authority to the SEC for investment advisers would create duplication given the existing examination obligations on dual registrants. One commenter, while supporting the proposed rule, requested that the final rule text should specifically afford investment advisers affiliated with a bank or bank holding company flexibility to leverage any aspect of the bank or bank holding company’s AML/ CFT program. The commenter argued that stating this in the rule text would require relevant supervisory agencies and staff to adhere to this approach. The commenter noted that failure to do so could result in costly inefficiencies and additional operational risk in being unable to achieve a cohesive, enterprisewide approach to AML/CFT compliance. One commenter stated that requiring separate programs may increase the compliance and operational burden but could result in less useful information because of overlapping and duplicate reports that could be filed. One commenter recommended that supervision for a dual registrant’s AML/ CFT program remain with the firm’s prudential regulator. Another commenter recommended that the SEC examination staff should leverage AML/ CFT examinations conducted by other functional regulators, as well as FINRA and the New York Department of Financial Services. The commenter claimed this approach would align with the expectations of Congress, Treasury, and FinCEN in achieving objectives while efficiently allocating resources and lower the risk of conflicting VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 examination results, expectations and findings. Final Rule: FinCEN is implementing this requirement without change from the proposed rule. Accordingly, any investment adviser is subject to the requirements of the final rule, even if it is dually registered as a broker-dealer or is a bank (or is a bank subsidiary). As explained in the IA AML NPRM, such an adviser does not need to establish a separate AML/CFT program so long as a comprehensive AML/CFT program covers all of the investment adviser’s relevant activities. Such a comprehensive program should be designed to address the different money laundering, terrorist financing, or other illicit finance activity risks posed by the different aspects of the overall business’s activities and accordingly satisfy each of the risk-based AML/CFT program requirements to which it is subject in its capacity as both an investment adviser and broker-dealer or bank. In addition, an investment adviser affiliated with, or a subsidiary of, another entity required to establish an AML/CFT program will not be required to implement multiple or separate programs and instead may elect to extend a single program to all affiliated entities that are subject to the BSA, so long as such AML/CFT program is designed to identify and mitigate the different money laundering, terrorist financing, and other illicit finance activity risks posed by the different aspects of each affiliate’s (or subsidiary’s) business(es) and satisfies each of the risk-based AML/CFT program and other BSA requirements to which the entities are is subject in all of their BSA-regulated capacities, as for example an investment adviser and a bank or insurance company.209 FinCEN does not believe that further clarification of the AML/CFT program 209 FinCEN notes that certain insurance companies are required to establish and implement AML programs and report suspicious activity. See 31 U.S.C. 5312(a)(2)(M); 31 CFR part 1025. However, the term ‘‘insurance company’’ is not included within the general definition of financial institution under FinCEN’s regulations. See 31 CFR 1010.100(t). Therefore, such insurance companies are not required to file CTRs with FinCEN or comply with certain recordkeeping requirements. Accordingly, FinCEN would not expect an insurance company that is affiliated with or owns an investment adviser to design an enterprise-wide AML/CFT compliance program that would subject the insurance company to AML/CFT requirements not otherwise required by FinCEN’s regulations. Conversely, FinCEN would expect a bank, which is subject to the full panoply of FinCEN’s regulations implementing the BSA, to design an enterprisewide AML/CFT compliance program that would subject an affiliated or controlled investment adviser to the AML/CFT requirements required by the final rule. PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 72187 requirements for dual registrants, or how supervisors will conduct examination of the final rule, is currently necessary. The final rule provides adequate flexibility for investment advisers to incorporate its requirements into existing AML/CFT programs at an enterprise level and to tailor their programs to their circumstances in a risk-based manner. Financial institutions involved in multiple lines of business have long been subject to regulation by multiple agencies and FinCEN has worked with other agencies in regulatory and supervisory contexts. Based on this experience, FinCEN does not believe special instructions to examiners to coordinate their examinations touching on the final rule is necessary or appropriate. FinCEN anticipates working with SEC staff to communicate with relevant regulatory agencies that currently supervise relevant entities about the requirements of the final rule. 4. Delegation of AML/CFT Requirements Proposed Rule: FinCEN proposed to permit an investment adviser to delegate contractually the implementation and operation of certain aspects of its AML/ CFT program. However, the investment adviser would remain fully responsible and legally liable for the program’s compliance with the proposed rule. The investment adviser also would be required to ensure that FinCEN and the SEC are able to obtain information and records relating to the AML/CFT program. The proposed rule noted that, because investment advisers operate through a variety of different business models, each investment adviser may decide which aspects (if any) of its AML/CFT program are appropriate to delegate. FinCEN requested comment on the practical effect of permitting an investment adviser to delegate some or all of the requirements in the proposed rule, as well as comment on various aspects of how foreign-located fund administrators may implement these requirements. (a) General Comments on Delegation Comments Received: Seven commenters expressed views on the delegation of AML/CFT activities to third party service providers, including fund administrators. In general, these commenters suggested that FinCEN recognize that many investment advisers delegate administrative and compliance responsibilities to third parties, and that such delegation for AML/CFT responsibilities should be permissible under the proposed rule. E:\FR\FM\04SER2.SGM 04SER2 ddrumheller on DSK120RN23PROD with RULES2 72188 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations Some commenters stated that, given a proposed SEC rule to apply minimum requirements to the outsourcing of services (including for compliance), FinCEN should be cautious about additional guidance on delegation prior to the SEC issuing a final rule. One commenter requested that FinCEN include a safe harbor for investment advisers whose client utilizes a single qualified custodian to hold the client’s advised assets, and allow the investment adviser to rely on the qualified custodian that is performing all AML/CFT obligations with respect to any client assets the custodian has in its custody. The commenter added that this would leverage the existing AML/CFT requirements for banks and brokerdealers while avoiding unnecessary duplication. The same commenter also requested that investment advisers be permitted to rely on a service provider’s certification of AML/CFT compliance so long as the investment adviser performs and documents periodic oversight of the service provider’s operations at least annually. One commenter requested that FinCEN expressly permit an investment adviser’s AML/CFT program to contractually rely on diligence conducted by another covered financial institution or, perhaps, even other noncovered financial institutions or entities that are working on behalf of, and under the control and supervision of, the adviser. Another commenter asserted that the proposed rule rejected the suggestion that investment advisers should be able to rely upon the AML/ CFT efforts of intermediaries, and requested FinCEN permit investment advisers to rely on the AML/CFT controls of intermediaries. The commenter added that such reliance is consistent with current best practices. Another commenter requested that FinCEN clarify in the rule text that delegation of AML/CFT requirements is expressly permitted. One commenter suggested FinCEN clarify that, while advisers are responsible for developing the firm’s AML/CFT compliance program, the full scope of the implementation and operation of the AML/CFT program may be delegated to service providers, including to offshore fund administrators. The commenter requested that this could include the responsibility to respond to 314(a) requests and to monitor for, prepare, and file SARs, to the extent that such administrator has the relevant information. Two commenters stated that FinCEN should not prescribe additional VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 standards or requirements with respect to such permissible delegation, as such additional requirements could conflict with the SEC’s proposed rule on Outsourcing by Investment Advisers (Outsourcing Rule), which, would impose minimum due diligence and outsourcing requirements with regard to service providers.210 These commenters recommended FinCEN wait for the Outsourcing Rule process to finalize before mandating any requirements for delegation of AML functions. One commenter stated that if FinCEN chooses not to allow delegation of all AML/CFT responsibilities, then FinCEN should clarify which aspects of an AML/CFT program may be delegated to third parties. The commenter also requested that FinCEN provide guidance on measures advisers should take to ensure effective delegation of an AML/ CFT program to a third party. The commenter recommended that such measures could include having the adviser conduct due diligence on the third party’s AML/CFT policies and determining whether they meet the adviser’s standards; a written agreement with the third party containing appropriate representations and covenants, including that the third party will maintain and adhere to effective AML/CFT policies, procedures and controls and update the adviser if there are any deficiencies identified in the third-party’s audit; and having the adviser’s periodically monitor compliance with such requirements. As FinCEN noted in the IA AML NPRM, it is common in the advisory business for an investment adviser to delegate a range of compliance, administrative, and other activities to third-party providers. FinCEN also notes that other BSA-defined financial institutions routinely delegate, subject to relevant BSA and non-BSA regulatory requirements governing the delegation of activities to service providers, aspects of their AML/CFT compliance programs to third parties. Therefore, FinCEN will permit an investment adviser to delegate contractually the implementation and operation of some or all aspects of its AML/CFT program to a third-party provider, including a fund administrator. Because investment advisers operate through a variety of different business models, each investment adviser must decide which aspects of its AML program are appropriate to delegate. Based on current practice within the investment 210 See SEC, Outsourcing by Investment Advisers, Notice of Proposed Rulemaking, Advisers Act Release No. 6176 (Oct. 26, 2022), 87 FR 68816 (Nov. 16, 2022). PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 adviser sector for both AML/CFT and other regulatory requirements, and how other financial institutions delegate AML/CFT responsibilities, FinCEN believes it is unnecessary to include rule text explicitly permitting such delegation. However, if an investment adviser delegates the implementation and operation of any aspects of its AML/CFT program, the investment adviser will remain fully responsible and legally liable for, and be required to demonstrate to examiners, the program’s compliance with AML/CFT requirements and FinCEN’s implementing regulations. The investment adviser also will be required to ensure that FinCEN and the SEC are able to obtain information and records relating to the AML/CFT program. The investment adviser would still be required to identify and document the procedures appropriate to address its vulnerability to money laundering and terrorist financing, and then undertake reasonable steps to assess whether the service provider would carry out such procedures effectively. For example, it would not be sufficient to simply obtain a certification from a service provider that the service provider ‘‘has a satisfactory anti-money laundering program.’’ However, an investment adviser could take into account such a certification as part of the investment adviser’s periodic oversight of the service provider’s operations with respect to the delegated obligations. The appropriate frequency of that oversight would depend on the adviser’s overall risk profile for money laundering, terrorist financing, or other illicit finance activities, and the types of AML/CFT responsibilities delegated to the service provider. Such oversight measures could include, for example, having the adviser conduct due diligence on the third party’s AML/CFT policies and determining whether they meet the adviser’s standards; a written agreement with the third party containing appropriate representations and covenants, including that the third party will maintain and adhere to riskbased and reasonably designed AML/ CFT policies, procedures and controls and update the adviser if there are any deficiencies identified in the thirdparty’s audit (if any); and/or having the adviser periodically monitor compliance with such requirements. FinCEN would like to note that this list of examples is illustrative based on information provided by commenters, and other measures could be used to conduct oversight of a service provider. E:\FR\FM\04SER2.SGM 04SER2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations Regarding the SEC’s proposed Outsourcing Rule,211 FinCEN notes that the Outsourcing Rule would impose certain minimum requirements on an RIA’s oversight of service providers to that RIA. However, given that the rule has not yet been finalized and would also only apply only to RIAs, FinCEN does not believe that delaying this aspect of the final rule is appropriate and FinCEN is providing the guidance above on how advisers may monitor their service providers’ implementation of AML/CFT requirements contained in the final rule. Regarding certain suggestions that FinCEN permit advisers to expressly rely on diligence or AML/CFT measures by other financial institutions, service providers, or other intermediaries, FinCEN declines to do so.212 When the adviser is outsourcing AML/CFT compliance responsibilities with respect to its own customers and advisory activities, the adviser will be best positioned to assess illicit finance risks and identify and report suspicious activity, and design and oversee an AML/CFT program that can do so. Therefore, when the adviser delegates the implementation and operation of some or all aspects of its AML/CFT program to a service provider, the adviser will remain responsible for overall compliance with these requirements. ddrumheller on DSK120RN23PROD with RULES2 (b) Comments on Delegation to ForeignLocated Service Providers Comments Received: Seven commenters specifically addressed the issue of delegation to foreign-located service providers, including foreignlocated fund administrators. All seven indicated that the IA AML NPRM had a negative view of how foreign-located fund administrators may apply AML/ CFT requirements, and that view was inconsistent with their experience in working with foreign-located fund administrators. These commenters generally agreed that investment advisers should be able to delegate AML/CFT compliance measures to foreign-located fund administrators, so long as the investment adviser maintained responsibility for oversight of the AML/CFT program. Several commenters also requested that FinCEN expressly clarify that delegation of AML/CFT responsibilities to foreignlocated fund administrators is permissible. 211 Id. 212 FinCEN interprets these suggestions to mean that express reliance would remove the investment adviser’s liability for compliance with the obligation. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 One investment adviser noted that they delegate AML compliance responsibilities to foreign-located service providers, and that these service providers are subject to supervision and oversight of a U.S.-based financial crimes compliance team. The adviser requested explicit guidance clarifying that it is permissible to rely on AML/ CFT programs developed, implemented, and maintained by offshore fund administrators when such reliance is subject to contractual agreements and a risk-based approach to oversight. Another commenter noted that foreignlocated RIAs and ERAs commonly delegate AML/CFT compliance to administrators in their local jurisdictions, and these advisers would face significant operational and implementation challenges if the final rule permits the delegation of only certain elements to offshore administrators. Another commenter claimed that the SEC does not require a U.S. entity to be appointed to ensure that other rules implementing Federal securities laws are met, and that AML/CFT programs could easily, and should, be treated in the same way. The commenter noted requiring foreign-located advisers to outsource AML/CFT compliance to a U.S.-based entity would create additional risks, especially where robust internal functions designed to comply with the requirements of other FATFcompliant jurisdictions are already in place. Three commenters noted that many foreign-located fund administrators are familiar with what is needed to execute a successful AML/CFT program, and in jurisdictions such as Ireland, Luxembourg, and the Cayman Islands, have been subject to longstanding AML requirements. Regarding the Cayman Islands in particular, the commenter noted that while the Cayman Islands has been criticized for weaknesses in AML/ CFT supervision, it has made substantial strides to address these deficiencies.213 Three commenters requested FinCEN clarify how various compliance obligations can be met by the use of offshore administrators, including permitting onshore or offshore administrators, agents and service providers to engage in suspicious 213 In October 2023, the FATF announced that the Cayman Islands would no longer be subject to increased monitoring by the FATF (a process that is externally referred to as the ‘‘grey list’’). See FATF, Jurisdictions Under Increased Monitoring (Oct. 27, 2023), available at https://www.fatfgafi.org/en/publications/High-risk-and-othermonitored-jurisdictions/Increased-monitoringoctober-2023.html. PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 72189 activity clearing, early alert reviews and other elements of the SAR process. Another commenter requested that FinCEN clarify if there were jurisdictions where delegation would not be permitted. FinCEN appreciates the detailed information provided by commenters on how foreign-located service providers, including offshore administrators, can effectively implement the AML/CFT requirements contained in the proposed rule. Commenters generally noted that foreign-located service providers have implemented these requirements on behalf of investment advisers and other financial institutions for years, and that these service providers are routinely subject to U.S.-based supervision and oversight. FinCEN would like to clarify that it is permissible for an RIA or ERA to delegate the implementation and operation of some or all aspects of its AML/CFT program and other AML/CFT measures to foreign-located service providers, including fund administrators.214 As with any delegation to a service provider (whether located in the United States or outside the United States), the delegation must be subject to contractual agreements and a risk-based approach to oversight described above, the RIA or ERA must remain responsible for overall implementation and ensure that FinCEN and the SEC are able to obtain information and records relating to the AML/CFT program. E. Minimum AML/CFT Program Requirements As mentioned above, the BSA provides that Treasury may prescribe minimum standards for AML/CFT programs that include, at a minimum, (1) the development of internal policies, procedures, and controls; (2) the designation of a compliance officer; (3) an ongoing employee training program; and (4) an independent audit function to test the programs.215 FinCEN accordingly is adopting the requirement that investment advisers establish an AML/CFT program that meets certain minimum requirements as provided in section 5318(h) of the BSA. Section 214 FinCEN recognizes that in certain circumstances an offshore fund administrator may be in the best position to perform certain aspects of an investment adviser’s AML/CFT program requirements, including monitoring for suspicious activity. Accordingly, an investment adviser may delegate contractually to an offshore fund administrator to monitor for suspicious activity, provide the details of such activity to the investment adviser, and file SARs on behalf of the adviser. However, the adviser remains fully responsible and legally liable for compliance with AML/CFT requirements. 215 31 U.S.C. 5318(h)(1)–(2). E:\FR\FM\04SER2.SGM 04SER2 72190 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 1032.210(a)(1) of the final rule will require each RIA and ERA to develop and implement a written AML/CFT program that is risk-based and reasonably designed to prevent the investment adviser from being used for money laundering, terrorist financing, or other illicit finance activities. Each RIA and ERA will also be required to make its AML/CFT program available for inspection by FinCEN and the SEC. The minimum requirements for the AML/CFT program are set forth in section 1032.210(b) of the final rule and discussed in greater detail below. 1. General Comments Comments Received: One commenter wrote that it served as a qualified custodian for customer accounts managed by RIAs and required customers of RIAs to establish brokerage accounts (thus making the RIA customers their direct customers). The commenter wrote that these accounts (and the account holders) are subject to and covered by its AML policies and procedures. The commenter also stated that it was unclear why, in its view, a duplicative process at the RIA would provide additional protection against illicit finance activity. Another commenter agreed with FinCEN that advisers’ AML/CFT programs should be risk-based and that the final rule should provide maximum flexibility to advisers to accommodate their varied business models and risk profiles. One commenter noted that the requirements in the proposed rule do not duplicate existing requirements under the Advisers Act. The commenter wrote that the requirements serve different purposes and the information gathered to carry out each set of objectives is not necessarily comparable. For example, the commenter stated that regulations issued pursuant to Federal securities laws and the Advisers Act define beneficial ownership differently than the BSA and require collection of different data.216 In addition, the resulting information collected under such regulations is not necessarily accessible to the same regulators or law enforcement personnel. One commenter wrote that while the AML/CFT program must be risk-based and tailored to the adviser’s business, the five minimum requirements (four of which are required by statute) for AML/ CFT programs are highly prescriptive, making it difficult, in the commenter’s view, for RIAs and ERAs to adopt a tailored, risk-based program. 216 See, e.g., 17 CFR 240.13d–3 (governing determination of beneficial ownership pursuant to the Securities Exchange Act of 1934). VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 One commenter agreed that AML/CFT programs should be risk-based and that risk-based programs may rely on appropriate vetting of intermediaries and other funds (and not require a ‘‘look through’’ to underlying investors), and requested that the final rule permit existing practices undertaken by advisers with regards to intermediaries acting for underlying investors, for an adviser to a private fund to be compliant with the risk-based AML/CFT program requirements. One commenter requested that the final rule explicitly clarify that, in instances where an investment adviser has no direct customer relationship, AML risks inherently are lower and investment advisers should have significant latitude to apply the riskbased approach. For example, the commenter suggested that advisers, which provide ‘‘non-advisory’’ products and services to other advisers, with no direct relationship to the investors, should have the discretion to exclude such products and services from the definition of ‘‘account’’ or ‘‘customer.’’ Final Rule: The application of the risk-based approach means that an adviser may focus aspects of its AML/ CFT program on activities or customers that it considers higher risk, and may comply with the BSA by applying more limited measures to those customers or activities that it identifies as lower risk. Regarding the five components of an AML/CFT program specified in section 1032.210(b) of the final rule, FinCEN disagrees that these are highly prescriptive, as each can be adjusted to address the specific risks and advisory activities of the adviser. For example, an adviser that services specific types of institutional customers (such as university endowments or municipal accounts) may have more tailored employee training than an adviser that has a broader customer base composed of both retail and institutional customers. FinCEN also reiterates the discussion in both the IA AML NPRM and Risk Assessment regarding the limited overlap between AML/CFT regulations and the requirements of the Advisers Act. The Advisers Act and its implementing regulations are not designed to explicitly address the risk that an RIA or ERA may be used to move proceeds or funds tied to money laundering, terrorist financing, or other illicit activity; they are instead designed to protect customers against fraud, misappropriation, or other illegal conduct by an investment adviser.217 217 See 89 FR at 12113; Risk Assessment, supra note 2, at 29–30. PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 The diversity of customer relationships covered by the final rule can be addressed through a risk-based framework rooted in the risks posed by the adviser’s business and FinCEN addresses some specific customer relationships and their risk throughout this document. 2. Internal Policies, Procedures, and Controls Proposed Rule: Proposed section 1032.210(b)(1) would have required an investment adviser to establish and implement internal policies, procedures, and controls reasonably designed to prevent the investment adviser from being used for money laundering, terrorist financing or other illicit finance activities. The proposed rule noted that some types of customers or customer activities would pose greater risks for these money laundering, terrorist financing, or other illicit finance activities than others. Generally, under the proposed rule, an investment adviser would have been required to review, among other things, the types of advisory services that it provides and the nature of the customers that it advises to identify the investment adviser’s vulnerabilities to money laundering, terrorist financing, and other illicit finance activities. It would also have needed to review investment products offered, distribution channels, intermediaries that it may operate through, and geographic locations of customers and advisory activities. The proposed rule also discussed how an investment adviser’s AML/CFT program may address the money laundering, terrorist financing, or other illicit finance risks that may be presented by certain specific types of advisory customers, as well as how an adviser’s program may address the risks presented by certain specific advisory services provided to those customers. Comments Received: Two commenters asked for additional clarity regarding the application of the adviser’s AML/CFT program to private fund customers. One commenter asked for confirmation that an adviser only needs to assess money laundering risks for underlying investors in a private fund when that adviser is the primary adviser to a private fund and has access to the relevant information about the underlying investors, and not when acting as a subadviser. The commenter stated that an adviser serving as the primary adviser or sponsor to a private fund will likely, but not necessarily, have information about that private fund’s underlying investors in the ordinary course. The commenter E:\FR\FM\04SER2.SGM 04SER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations claimed that the adviser would not have that information, for example, in an unaffiliated ‘‘fund-of-funds’’ structure. In those instances, the commenter suggested that the investee fund in the structure should not be required to ‘‘look through’’ and assess the risks presented by the underlying investors in an investing fund, unless the adviser is also the primary adviser to the investing fund and has access to information about underlying investors in the ordinary course. The second commenter asked for clarity on how an adviser may meet its AML/CFT program requirements for (1) a fund that restricts its investors from redeeming any part of their interests in the fund within two years after that interest was initially purchased; and (2) an investment adviser that advises only such funds. A third commenter suggested FinCEN to provide further clarity on those types of pooled investment vehicles that present lower risks for purposes of an investment adviser’s AML/CFT program. Final Rule: The final rule maintains the proposed requirement that an investment adviser establish and implement internal policies, procedures, and controls reasonably designed to prevent the investment adviser from being used for money laundering, terrorist financing, or other illicit finance activities and to achieve compliance with the applicable provisions of the BSA and implementing regulations. FinCEN is making a technical edit to the regulatory text at 1032.210(b)(1) to add the term ‘‘internal’’ to the ‘‘policies, procedures, and controls’’ so that the regulatory and statutory text for this requirement is consistent.218 FinCEN notes this edit is not intended to affect the substance of the requirement.219 In establishing such internal policies, procedures, and controls, an investment adviser will be required to review, among other things, the types of advisory services that it provides and the nature of the customers that it advises to identify the investment adviser’s vulnerabilities to being used for money laundering, terrorist financing, and other illicit finance activities. It will also need to review investment products offered, investment recommendations, distribution channels, intermediaries that it operates 218 See 31 U.S.C. 5318(h)(1)(A) (stating that AML/ CFT programs should include, at a minimum, ‘‘the development of internal policies, procedures, and controls’’ (emphasis added)). 219 For example, an enterprise-wide AML/CFT program’s policies, procedures, and controls would still be ‘‘internal’’ with respect to the investment adviser. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 through, and geographic locations of customers and advisory activities. Accordingly, an investment adviser’s assessment of the risks presented by the different types of advisory services that it provides to such customers would need to, among other factors, consider the types of accounts offered (e.g., managed accounts), the channel(s) through which such accounts are opened, and the types of customers opening such accounts and related information about such customers, including their geographic location, sources of wealth, and investment objective. The following paragraphs discuss the final rule’s treatment of internal policies, procedures, and controls as relating to registered closedend funds and private funds. Registered Closed-End Funds. As contemplated in the IA AML NPRM, FinCEN is not categorically exempting registered closed-end companies (‘‘registered closed-end funds’’) from the AML/CFT requirements in the final rule.220 Accordingly, an investment adviser’s AML/CFT program will have to take into account any registered closed-end funds advised by the investment adviser. FinCEN notes that, absent other indicators of high-risk activity, an investment adviser may treat exchange-listed, registered closed-end funds as lower risk for purposes of their AML/CFT programs. An exchange-listed registered closed-end fund may be treated as lower risk given that exchange-listed closed-end funds generally (a) do not offer their shares continuously or redeem their shares on demand; (b) issue a fixed number of shares, which typically trade at negotiated prices on a stock exchange or in the over-the-counter market; (c) typically do not have an account relationship with their investors; and (d) have shares that are purchased and sold through broker-dealers or banks, which are already subject to AML/CFT requirements under the BSA (including the performance of CIP and CDD on their customers that purchase shares on exchanges). Private Funds. As noted in the IA AML NPRM, the money laundering, terrorist financing, or illicit finance activity risks for private funds may vary by the individual fund’s investment strategy, targeted investors, jurisdiction, and other characteristics. When determining its risk profile, an investment adviser may wish to consider, with respect to any private 220 A closed-end company is a management company other than an open-end company, see 15 U.S.C. 80a–5(a)(2), and includes interval funds that rely on rule 23c–3 under the Company Act. PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 72191 fund that it advises, among other things, minimum subscription amounts, restrictions on the type of investors, restrictions on redemptions or withdrawals, and the types of currency transactions conducted with investors. For advisers who exclusively advise funds with restrictions on redemptions or withdrawals, FinCEN does not assess that such funds can be categorically treated as lower risk, as there are other factors regarding the fund and its underlying investors that are relevant to illicit finance risk, which may vary significantly for each adviser or fund. FinCEN expects an investment adviser that is the primary adviser to a private fund or other unregistered pooled investment vehicle to make a risk-based assessment of the money laundering, terrorist financing, and illicit finance activity risks presented by the investors in such investment vehicles by considering the same types of relevant factors, as appropriate, as the adviser would consider for customers for whom the adviser manages assets directly. As noted above, the risk-based approach of the rule is intended to give investment advisers the flexibility to design their programs to meet the specific risks presented by their customers, including any funds they advise. In assessing the potential risk of a private fund under the rule, investment advisers generally should gather pertinent facts about the structure or ownership of the fund, including the extent to which the adviser is provided with relevant information about the investors in that private fund, who may or may not themselves also be customers of the investment adviser, and the nature of such investor-related information that they investment adviser receives. Where an investment adviser attempts to and is unable to obtain identifying information about the investors in a private fund as part of its risk-based evaluation of the private fund, the adviser may determine that such private fund poses a higher risk for money laundering, terrorist financing, or other illicit finance activity. When a private fund’s potential vulnerability to such money laundering, terrorist financing, or other illicit finance activity is high, the adviser’s procedures would need to take reasonable steps to address these higher risks to prevent the investment adviser from being used for money laundering, the financing of terrorist activities, or other illicit activity, and to achieve and monitor compliance with the BSA (including to obtain sufficient information to monitor and report suspicious activity). E:\FR\FM\04SER2.SGM 04SER2 72192 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 FinCEN recognizes that certain private funds and other unregistered pooled investment vehicles may present lower risks for money laundering or terrorist financing than others. Consequently, FinCEN would not expect an investment adviser to risk-rate the advisory services that it provides to a pooled investment vehicle that presents a lower risk in the same way it might rate the advisory services that it provides to other types of pooled investment vehicles that may present higher risks for attracting money launderers, terrorist financers, or other illicit actors. 3. Independent Testing Proposed Rule: Proposed section 1032.210(b)(2) would have required that an investment adviser provide for independent testing of the AML/CFT program by the adviser’s personnel or a qualified outside party. As explained in the IA AML NPRM, the independent testing, as proposed, could be conducted by employees of the investment adviser, its affiliates, or unaffiliated service providers, so long as those same employees are not involved in the operation and oversight of the AML/CFT program. The frequency of the independent testing would depend upon the money laundering, terrorist financing, and other illicit finance risks of the adviser and the adviser’s overall risk management strategy. Comments Received: One commenter expressed concern that the requirement for an independent audit of the AML/ CFT program would significantly burden investment advisers with few employees. The commenter stated that most of these advisers would have to hire an outside contractor to comply with this requirement. The commenter requested that FinCEN permit advisers with 100 or fewer employees to employ an internal testing program that may include employees involved in the AML/CFT program and/or ongoing AML/CFT compliance. The commenter indicated that without this modification, advisers would not be able to incorporate AML/CFT program requirements into their existing Federal securities compliance reviews, as staff who conduct these reviews would not be allowed to participate in the independent AML/CFT testing required by the proposed rule. Final Rule: FinCEN is implementing this requirement without change from the proposed rule. The final rule, like the proposed rule, permits independent testing to be conducted by the investment adviser’s personnel or a qualified outside party. FinCEN recognizes the potential burden from VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 using an external party to conduct the required independent testing. Although the final rule permits the use of an investment adviser’s personnel with certain restrictions, FinCEN declines to accept the recommendation that an individual involved in implementing the adviser’s AML/CFT program may participate in the independent testing of such a program. Doing so would undermine the very purpose of this requirement, which is to allow an independent party to verify whether the AML/CFT program is functioning effectively. While investment advisers may use trained internal staff who are not involved in the function being tested, the AML/CFT officer or any party who directly, and in some cases, indirectly reports to the AML/CFT officer, or an equivalent role, generally would not be considered sufficiently ‘‘independent’’ for these purposes.221 Any individual conducting the testing, whether internal or external, would be required to be independent of the function being tested in the investment adviser’s AML/CFT program, including its oversight. Investment advisers with less complex operations, and lower money laundering, terrorist financing, or other illicit finance activity risk profiles may consider utilizing a shared resource as part of a collaborative arrangement with similarly less complex and lower risk profile advisers to conduct testing, as long as the testing is independent.222 221 This is consistent with current 31 CFR 1022.210, which provides that independent review may be conducted by an officer or employee of an MSB so long as the tester is not the AML/CFT officer. Similarly, current 31 CFR 1025.210, 1029.210, and 1030.210 provide that independent testing at insurance companies, loan or finance companies, and housing government sponsored enterprises, respectively, may be conducted by a third party or by any officer or employee of the financial institution, other than the AML/CFT officer. Likewise, 31 CFR 1027.210 and 1028.210 provide that independent testing of a dealer in precious metals, precious stones, or jewels or an operator of a credit card system, respectively, can be conducted by an officer or employee of the institution, so long as the tester is not the AML/CFT officer or a person involved in the operation of the AML/CFT program. The criteria to meet the ‘‘independent requirement’’ for independent testing at U.S. operations of foreign financial institutions may include a review of the reporting arrangements between the party conducting the independent testing and the AML/CFT officer, or equivalent management function such as a head of business line or a general manager, to assess any conflicts of interests and the level of independence with the party conducting the independent testing. 222 See Interagency Statement on Sharing Bank Secrecy Act Resources (Oct. 3, 2018), available at https://www.fincen.gov/news/news-releases/ interagency-statement-sharing-bank-secrecy-actresources. PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 4. AML/CFT Officer Proposed Rule: Proposed section 1032.210(b)(3) would have required that an investment adviser designate a person or persons to be responsible for implementing and monitoring the operations and internal controls of the AML/CFT program. The IA AML NPRM explained that the designated person or persons should be knowledgeable and competent regarding AML/CFT requirements, the adviser’s relevant internal policies, procedures, and controls, as well as the adviser’s money laundering, terrorist financing, and other illicit finance risks. A person designated as a compliance officer should be an officer of the investment adviser (or individual of similar authority within the particular corporate structure of the investment adviser) and someone who has established channels of communication with senior management demonstrating sufficient independence and access to resources to implement a risk-based and reasonably designed AML/CFT program. Comments Received: Four commenters requested FinCEN modify this requirement to provide additional flexibility given the varying organizational structures of investment advisers. Three commenters requested that an investment adviser be able to designate an employee of the adviser’s affiliate as its AML/CFT officer, provided that the employee is sufficiently qualified to perform this role, including possessing the appropriate level of authority, independence, access to information, and resources to perform the responsibilities of compliance with BSA/AML regulatory obligations. Another commenter suggested that any sufficiently senior employee of the adviser (including its chief compliance officer)—or of any other affiliate or entity within the investment adviser’s organizational structure—be permitted to serve as the AML/CFT officer so long as (i) such employee meets the other requirements set forth in at 1032.210(b)(2); and (ii) is either a member of, or reports directly to, the advisers or its affiliate’s senior management. The reason for this suggestion was that investment advisers may not have formally designated corporate ‘‘officers’’ or have officers who are well-suited to serve as the adviser’s AML/CFT compliance officer. Another commenter echoed the recommendation but suggested that an adviser also be able to designate a thirdparty expert. Final Rule: FinCEN is implementing this requirement without change from E:\FR\FM\04SER2.SGM 04SER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations the proposed rule. The final rule, like the proposed rule, will require an investment adviser to designate a person or persons responsible for implementing and monitoring the internal policies, procedures, and controls of the adviser’s AML/CFT program. Inherent in the requirement that an investment adviser designate an AML/CFT officer is the expectation that the designated individual is qualified to oversee the investment adviser’s compliance with the BSA and FinCEN’s implementing regulations. Accordingly, for an AML/ CFT program to be risk-based and reasonably designed to achieve compliance with the BSA, the compliance officer must be sufficiently qualified. Whether an individual is sufficiently qualified as an AML/CFT officer will depend, in part, on the investment adviser’s risk profile. Among other criteria, a qualified AML/CFT officer must have the expertise and experience to adequately perform the duties of the position, including having sufficient knowledge and understanding of the investment adviser and the risks of its use for money laundering, terrorist financing, or other illicit finance activities, the BSA and its implementing regulations, and how those laws and regulations apply to the investment adviser and its activities. Additionally, the AML/CFT officer’s position in the financial institution’s organizational structure must enable the AML/CFT officer to effectively implement the adviser’s AML/CFT program. And, as explained in the proposed rule, an investment adviser may designate a single person or persons (including in a committee) to be responsible for compliance. Given these necessary qualifications and the comments received, FinCEN clarifies that for purposes of compliance with the final rule, the actual title of the individual responsible for day-to-day AML/CFT compliance is not determinative, and the AML/CFT officer for these purposes need not be an ‘‘officer’’ of the adviser. The individual’s authority, independence, and access to necessary AML/CFT compliance resources, however, are critical. Importantly, an AML/CFT officer should have decision-making capability regarding the AML/CFT program and sufficient stature within the organization to ensure that the program meets the applicable requirements of the BSA. The AML/CFT officer’s access to resources may include the following: adequate compliance funds and staffing with the skills and expertise appropriate to the investment adviser’s risk profile, size, and VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 complexity; an organizational structure that supports compliance and effectiveness; and sufficient technology and systems to support the timely identification, measurement, monitoring, reporting, and management of the investment adviser’s illicit finance activity risks. An AML/CFT officer that has multiple additional job duties or conflicting responsibilities that adversely impact the officer’s ability to effectively coordinate and monitor dayto-day AML/CFT compliance generally would not fulfill this requirement.165 FinCEN clarifies that, as noted by the comments received, so long as the AML/ CFT officer fulfils these qualifications and requirements, the officer may be an employee of the adviser’s affiliate, or of an entity within an adviser’s organizational structure. However, while an investment adviser may delegate the implementation and operation of certain aspects of its AML/ CFT program to a third party or outside consultant (as discussed above), that individual or group of individuals cannot serve as the adviser’s AML/CFT officer. Said differently, the designated AML/CFT officer must be an employee of the investment adviser or of its affiliate. This approach is consistent with FinCEN’s treatment of equivalent requirements for the designated officers of other financial institutions. 5. Employee Training Proposed Rule: Section 1032.210(b)(4) would have required that an investment adviser’s AML/CFT program provide ongoing training for appropriate persons. The IA AML NPRM explained that such training may be conducted through, among other things, outside or in-house seminars, and may include computer-based or virtual training. The nature, scope, and frequency of the investment adviser’s training program would be determined by the responsibilities of the employees and the extent to which their functions would bring them in contact with AML/ CFT requirements or possible money laundering, terrorist financing, or other illicit finance activity. Comments Received: No comments were received regarding employee training. Final Rule: FinCEN is implementing this requirement without change from the proposed rule. As noted in the proposed rule, to carry out their responsibilities effectively, employees 165An RIA that is subject to the SEC’s Compliance Rule (17 CFR 275.206(4)–7) could designate its chief compliance officer under the Compliance Rule to be responsible for this provision of this final rule. The final rule does not, however, require that an investment adviser designate the same person. PO 00000 Frm 00039 Fmt 4701 Sfmt 4700 72193 of an investment adviser (and of any agent or third-party service provider that is delegated with administering any portion of the investment adviser’s AML/CFT program) must be trained in AML/CFT requirements relevant to their functions and to recognize possible signs of money laundering, terrorist financing, and other illicit finance activity that could arise in the course of their duties. Such training may be conducted through, among other things, outside or in-house seminars, and may include computer-based or virtual training. The nature, scope, and frequency of the investment adviser’s training program should be determined by the responsibilities of the employees and the extent to which their functions would bring them in contact with AML/ CFT requirements or possible money laundering, terrorist financing, or other illicit finance activity. Consequently, the training program should provide a general awareness of overall AML/CFT requirements and money laundering, terrorist financing, and other illicit finance risks, as well as more jobspecific guidance tailored to particular employees’ roles and functions with respect to the entities’ particular AML/ CFT program.223 For those employees whose duties bring them in contact with AML/CFT requirements or possible money laundering, terrorist financing, or other illicit finance risks, the requisite training would have to occur when the employee assumes those duties. Moreover, these employees should receive periodic updates and refreshers regarding the AML/CFT program.224 6. Ongoing Customer Due Diligence Proposed Rule: Proposed section 1032.210(b)(5) would have required that an investment adviser implement appropriate risk-based procedures for conducting ongoing CDD that includes (i) understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile; and (ii) conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information. 223 See, e.g., DWS Investment Management Americas Inc., Investment Company Act Rel. No. 6431, ¶ 28 (Sept. 25, 2023) (noting DWS’ failure to conduct AML training that was specific to the DWS Mutual Funds or the risks applicable to mutual funds for those employees with mutual fund responsibilities). 224 The frequency of these periodic updates and refreshers would depend upon the money laundering, terrorist financing, and other illicit finance risks of the adviser and the adviser’s overall risk management strategy. E:\FR\FM\04SER2.SGM 04SER2 72194 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 As described in the IA AML NPRM, these are two of the four core elements of CDD. The other two elements of CDD are: (1) identifying and verifying the identity of customers; and (2) identifying and verifying the identity of the beneficial owners of legal entity customers opening accounts. As stated in the IA AML NPRM, FinCEN will address the customer identification and verification element of CDD in a separate joint rulemaking with the SEC. On May 21, 2024, FinCEN and the SEC issued the IA CIP NPRM to apply CIP requirements to investment advisers.225 Regarding the identification and verification of the identity of the beneficial owners of legal entity customers opening accounts, in the proposed rule FinCEN noted it would take the first step towards incorporating this element by including investment advisers in the definition of ‘‘covered financial institution’’ under 31 CFR 1010.605(e)(1). However, as discussed in the IA AML NPRM, given that FinCEN expects to revise the CDD Rule as mandated by the Corporate Transparency Act, investment advisers would not be required to apply the current requirements to identify and verify the beneficial owners of legal entity customer accounts until the effective date of the revised CDD Rule.226 FinCEN requested comment on various aspects of the CDD requirement in the proposed rule. Comments Received: Seven commenters provided comments on various aspects of the proposed CDD obligation. One commenter asked FinCEN to clarify that investment advisers are not required to adopt formal risk-rating models or methodologies and that advisers have discretion to apply risk factors as they deem appropriate and as suitable for their business activities and products. The commenter stated that advisers should be permitted to evaluate lower risk relationships through consideration of ‘‘inherent or selfevident information,’’ including the type of customer or type of account, service or product, without any requirement to obtain additional information regarding the customer or the relationship. That same commenter asked that FinCEN clarify its expectations for 225 See Customer Identification Programs for Registered Investment Advisers and Exempt Reporting Advisers, Notice of Proposed Rulemaking, 89 FR 44571 (May 21, 2024). 226 Customer Due Diligence Requirements for Financial Institutions, Final Rule, 81 FR 29398 (May 11, 2016); see also Revisions to Customer Due Diligence Requirements for Financial Institutions, available at https://www.reginfo.gov/public/do/ eAgendaViewRule?pubId=202404&RIN=1506-AB60. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 transaction monitoring, noting that the number of SARs used to help estimate certain costs related to transaction monitoring in the proposed rule may not accord with the business model of many investment advisers. The commenter requested that FinCEN clarify that (i) in the absence of transactional activity, advisers should not have to monitor media reports and similar external events that do not have direct bearing on their relationships with the clients; and (ii) advisers’ transaction monitoring systems need not be automated. Another commenter requested that CIP requirements and the requirement to identify the beneficial owners of legal entity customers either (i) not apply to subadvisers, particularly where the sponsor or primary adviser represents or confirms that it has independent CIP and CDD obligations under the BSA’s implementing regulations; or that (ii) FinCEN permit subadvisers to allocate CIP and CDD rule responsibilities to the sponsor. Another commenter requested that RIAs for employer-sponsored retirement plans be exempt from having to collect information or verify the beneficial ownership information relating to employer-sponsored retirement plans. Regarding the timing for implementing the various elements of CDD, three commenters indicated that the decision to split the timeline for implementation of these requirements could be problematic, particularly if there are delays in finalizing any related regulatory proposals. Two commenters requested that the CDD requirements in the proposed rule be deferred until a CIP Rule for investment advisers is finalized and the CDD Rule is revised. The commenter claimed that it would be difficult for advisers to conduct ongoing CDD without a CIP obligation and when the full scope of the CDD Rule has not been clarified, as well as costly if they have to implement and then alter a CDD program to align it with a CIP requirement and revised CDD Rules. Two commenters supported the timing for CDD obligations in the proposed rule. One commenter encouraged FinCEN to propose and finalize a joint CIP rule and the revised CDD Rule as soon as possible so investment advisers would be required to implement the other two core elements of the CDD Rule. Another commenter also strongly supported swiftly applying the requirement for investment advisers to obtain beneficial ownership information for legal entity customers. PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 Three commenters raised questions about applying CDD requirements in the context of private funds and other pooled investment vehicles. One of these three commenters stated that advisers do not usually carry out the investor onboarding functions that yield information relevant for customer risk, as these functions are typically carried out by the placement agent, who is already subject to AML requirements, or the administrator on behalf of the fund. The commenter asserted that this means advisers would not be best placed to identify activity that would potentially support filing a SAR. One commenter requested that FinCEN acknowledge certain existing due diligence practices—including with intermediaries in the private funds context—are appropriate in a risk-based AML/CFT program and to make clear that risk-based AML/CFT programs will not require investment advisers to conduct diligence on underlying investors or customers that are represented by intermediaries. Another commenter requested additional clarification on who would be the ‘‘customer’’ for an adviser when the adviser manages a pooled investment vehicle and has an advisory relationship with the pooled vehicle and not the investors in the vehicle, and how the adviser is expected to apply its due diligence procedures to the pooled vehicle and its investors where the adviser does not have a direct relationship with the investors. Final Rule: FinCEN is implementing this requirement without change from the proposed rule. Accordingly, an investment adviser’s AML/CFT program must implement appropriate risk-based procedures for conducting ongoing customer due diligence. In addition, ‘‘investment adviser’’ will be included in the definition of ‘‘covered financial institution’’ under 31 CFR 1010.605(e). FinCEN notes that this rule does not require the categorical collection of beneficial ownership information for legal entity customers of investment advisers. FinCEN may consider a subsequent rulemaking imposing such an obligation on investment advisers. Rather, an investment adviser should make a risk-based determination as to whether it needs to collect beneficial ownership information based on the customer’s risk profile. Regarding CIP, FinCEN will address issues related to the application of CIP requirements to certain advisory customers or activities in a CIP final rule for investment advisers, but reiterates that the IA CIP NPRM proposed a provision permitting investment advisers to rely on other financial institutions to perform CIP E:\FR\FM\04SER2.SGM 04SER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations subject to certain conditions, including when the financial institution is subject to a rule implementing the AML/CFT compliance program requirements of 31 U.S.C. 5318(h) and is regulated by a Federal functional regulator.227 FinCEN acknowledges the impact of a staggered implementation of the CDD requirements in this rule, the CIP requirements that would be applied in a final CIP Rule, and a potential future obligation to apply a requirement for investment advisers to collect the beneficial ownership information of legal entity customers. Recognizing the interrelationship of these rulemakings, FinCEN intends for this rule and a CIP final rule to have the same compliance date, and that any obligation for investment advisers to collect the beneficial ownership information of legal entity customers to not be effective until a CIP rule is finalized and until the CDD Rule applicable to covered financial institutions is revised. Understand the Nature and Purpose of Customer Relationships to Develop Customer Risk Profiles. As is the case for banks, broker-dealers, and mutual funds, the term ‘‘customer risk profile’’ for investment advisers refers to information gathered—typically at the time of account opening or, in the case of an RIA or ERA, at the onset of an advisory relationship—about a customer to develop the baseline against which customer activity is assessed for suspicious activity reporting and to develop appropriate risk-based procedures for conducting ongoing customer due diligence. Under the final rule, and as discussed below, investment advisers are obligated to report certain suspicious transactions by filing SARs. Suspicious transactions are those that, among other things, have no business or apparent lawful purpose or are not the sort in which the particular customers would normally be expected to engage. Fulfilling this proposed requirement will necessitate that an investment adviser gathers sufficient information to form an understanding of the nature and purpose of the customer relationship for the purpose of developing a customer risk profile, which informs the baseline against which the investment adviser can identify aberrant, suspicious transactions. In some circumstances, an understanding of the nature and purpose of a customer relationship can also be sufficiently developed by inherent or self-evident information about the product or customer type, such as the type of customer or the 227 89 FR at 44578–79 (discussing section 1032.220(a)(6) of the proposed CIP rule). VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 service or product offered, or other basic information about the customer, and such information may be sufficient to understand the nature and purpose of the relationship. This information may include the customer’s explanation about its initial decision to seek advisory services from the adviser and may be reflected in the particular type of advisory service the customer seeks, as well as information already collected by the investment adviser, such as investment objective, net worth, domicile, citizenship, or principal occupation or business. FinCEN is clarifying that, although investment advisers may determine that formal risk-rating models or methodologies assist them in complying with this requirement, advisers may comply with this requirement through other approaches and have discretion to apply risk factors appropriate for their business activities and products. These approaches should be informed by an investment adviser’s assessment of overall risk for its advisory business and should be sufficiently detailed to distinguish between significant variations in the illicit finance risks of its customers. FinCEN further notes that there are no required risk profile categories, and the number and detail of these risk characterizations will vary based on the adviser’s size and complexity. As explained above, FinCEN is also clarifying that, consistent with existing BSA regulatory guidance for other financial institutions, an investment adviser can evaluate certain lower risk relationships through consideration of ‘‘inherent or selfevident information,’’ including the type of customer or type of account, service or product.228 For investment advisers, the risks associated with a particular type of customer may vary significantly. For instance, key risk factors for a natural person customer may include the source of funds, the jurisdiction in which the customer resides, the customer’s country(ies) of citizenship, and the customer’s status as a PEP,229 among other things. For a legal entity customer, 228 See FIN–2020–G002, Frequently Asked Questions Regarding Customer Due Diligence (CDD) Requirements for Covered Financial Institutions (Aug. 3, 2020), https://www.fincen.gov/sites/ default/files/2020-08/FinCEN_Guidance_CDD_508_ FINAL.pdf; see also FFIEC BSA/AML Examination Manual, Customer Due Diligence -Overview https:// bsaaml.ffiec.gov/manual/AssessingComplianceWith BSARegulatoryRequirements/02. 229 See generally Joint Statement on Bank Secrecy Act Due Diligence Requirements for Customers Who May Be Considered Politically Exposed Persons (Aug. 21, 2020), https://www.fincen.gov/ sites/default/files/shared/ PEP%20Interagency%20Statement_ FINAL%20508.pdf. PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 72195 key risk factors an investment adviser may consider may include the type of entity (e.g., limited partnership, limited liability company, trust), the jurisdiction in which it is domiciled and located, and the statutory and regulatory regime of that jurisdiction with respect to corporate formation and other financial transparency requirements, if relevant. The investment adviser’s historical experience with the customer or entity and the references of other financial institutions may also be relevant factors. In understanding the nature and purpose of customers that are private funds, FinCEN notes that investment advisers can (1) create and administer a private fund; or (2) provide advice to a private fund that is created and administered by a third party—for example, a financial intermediary. While the particular role played by the investment adviser will affect the type of information the adviser reasonably can collect about the investors in such a fund, in either case the adviser should collect sufficient information to develop a customer baseline for suspicious activity reporting regarding the private fund. FinCEN expects advisers to subject non-intermediary legal entity customers that are not BSA-defined financial institutions with their own AML/CFT requirements to a different assessment than intermediary customers that are BSA-defined financial institutions in order to understand the nature and purpose of the customer relationship. For example, FinCEN expects that an investment adviser would assess the risks of a customer that is a registered broker-dealer, and therefore a financial institution, as different from the risks of an unregulated operating company or private holding company. The final rule’s requirement to assess customer risk must be understood in this context. FinCEN recognizes that certain information regarding underlying investors initially may not be collected by investment advisers to private funds, and that the investment adviser may not always have a direct relationship with the investors in its legal entity or private fund customers. Those investors may be introduced to the adviser by other entities who may or may not have their own AML/CFT obligations (such as a bank, broker-dealer, other investment adviser, or other intermediary). Even though investment advisers would not be required to collect beneficial ownership information on all legal entity customers, investment advisers should collect sufficient information such that they are able to detect and report suspicious activity associated E:\FR\FM\04SER2.SGM 04SER2 72196 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 with intermediaries or nominee holders representing underlying investors, as well as activity related to underlying investors.230 FinCEN acknowledges that advisers to private funds may already engage in AML/CFT due diligence practices, including diligence on intermediaries representing underlying investors in a fund. In some instances, depending on the risk associated with the private fund, an investment adviser may determine that it does not need to conduct additional diligence on underlying investors or customers that are represented by intermediaries. However, in other instances when an investment adviser assesses a private fund or its investors presents higher risk, the investment adviser may need to collect additional information about the underlying investors to develop a customer baseline for suspicious activity reporting regarding the private fund. Ongoing Monitoring to Identify Suspicious Transactions and Update Customer Information. Similar to the CDD obligations for mutual funds,231 under the proposed section1032.210(b)(5)(ii), investment advisers would have been required to implement appropriate risk-based procedures to conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information. FinCEN is implementing this requirement without change from the proposed rule. Accordingly, the final rule will require an investment adviser’s AML/CFT program to implement appropriate risk-based procedures for conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information. This element of CDD will oblige investment advisers to perform ongoing monitoring, drawing on customer information, as well as to file SARs in a timely manner in accordance with their reporting obligations.232 As proposed, the obligation to update customer information will generally only be triggered when the investment adviser becomes aware of information relevant to assessing the potential risk posed by a customer; it does not impose a categorical requirement to update 230 See Customer Due Diligence Requirements for Financial Institutions, Notice of Proposed Rulemaking, 79 FR 45141, 45161 (Aug. 4, 2014). 231 31 CFR 1024.210(b)(5)(ii); see also 81 FR at 29424. 232 The proposed SAR filing obligations being adopted for investment advisers are discussed below. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 customer information on a regularly occurring, pre-determined basis. Ongoing monitoring may be accomplished in several ways, any of which can be included in an investment adviser’s AML/CFT program. Customer information may be integrated into the investment adviser’s transaction monitoring system and may be used after a potentially suspicious transaction has been identified, as one means of determining whether the identified activity is suspicious. An investment adviser may also utilize the information sharing provisions under section 314(b) of the USA PATRIOT Act to request relevant information from other financial institutions that may hold relevant information, such as the qualified custodians of customer funds. FinCEN would also like to clarify, as discussed in detail in the Regulatory Analysis at Section V, that the estimated number of SARs to be filed by each investment adviser is intended to assist FinCEN in estimating the costs associated with identifying and reviewing alerts and cases that may eventually lead to a SAR filing. There is no regulatory expectation or obligation that an investment adviser file a certain minimum number of SARs to be in compliance with the requirements of the final rule. Regarding transaction monitoring, FinCEN is clarifying that investment advisers are not categorically required to perform media searches or particular screenings for all customers, but they should conduct risk-based monitoring of such reports and events.233 In circumstances where a customer presents certain risk indicators, an adviser may need to collect additional information to better understand the customer relationship and monitor for material changes based on external developments. For example, an investment adviser may need to do additional research, including opensource media searches, where a customer claims their funds are derived from a source of wealth that is inconsistent with the adviser’s understanding of the customer’s financial activities and sources of funds. 233 As stated in previous FinCEN guidance on the CDD Rule, compliance with the CDD Rule does not categorically require the performance of media searches or particular screenings. See FIN–2020– G002, Frequently Asked Questions Regarding Customer Due Diligence (CDD) Requirements for Covered Financial Institutions (Aug. 3, 2020). See also, FinCEN, Answers to Frequently Asked Questions Regarding Suspicious Activity Reporting and Other Anti-Money Laundering Considerations, (Jan. 19, 2021), available at https://www.fincen.gov/ sites/default/files/2021-01/ Joint%20SAR%20FAQs%20Final%20508.pdf, at questions 4 and 5. PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 Similarly, if an adviser knows, or reasonably should know, that a customer has ties to a jurisdiction, or legal or natural person, that is subject to OFAC sanctions, an adviser should regularly confirm that the customer themselves has not been designated or otherwise been made subject to OFAC sanctions. Regardless of the approach that an investment adviser follows with respect to media searches and similar screenings, the adviser should reassess and update customer risk profiles based on material information that personnel in customer-facing roles identify in the course of performing their duties or that the customer discloses as part of an ongoing customer relationship—even if not specifically undertaken to support the adviser’s AML/CFT program. FinCEN also notes that this rule does not require investment advisers to implement automated transaction monitoring systems. The type of transaction monitoring system used by an investment adviser should be commensurate with its risk profile; rather than any particular technology solution, the adviser should have reasonable internal policies, procedures, and controls to monitor and identify unusual activity, and adequate resources to identify, report, and monitor suspicious activity. RIAs, including smaller RIAs, whose customer funds are custodied with a qualified custodian that may employ its own transaction monitoring system, may not have a need for their own transaction monitoring systems, and so may delegate certain aspects of transaction monitoring to the qualified custodian, although such RIAs remain legally responsible for such transaction monitoring, and, if applicable, reporting to FinCEN on suspicious transactions identified through such monitoring. As FinCEN noted in the preamble to the CDD Rule, the ongoing monitoring obligation is intended to apply to ‘‘all transactions by, at, or through the financial institution,’’ 234 and not just those that are made by direct customers of the financial institution. Given that risks posed by each customer differ, FinCEN believes that the level of risk posed by a customer relationship with a legal entity customer that is a pooled investment vehicle should be a factor influencing the decision to request information regarding underlying investors, and if the legal entity customer does not provide such information, how the investment adviser should adjust the risk profile of that legal entity customer. 234 81 E:\FR\FM\04SER2.SGM FR at 29424. 04SER2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 7. AML/CFT Program Approval Proposed Rule: Proposed section 1032.210(a)(2) would require that each investment adviser’s AML/CFT program be approved in writing by its board of directors or trustees, or if it does not have a board, by its sole proprietor, general partner, trustee, or other persons that have functions similar to a board of directors. The proposed rule would require an investment adviser’s written program to be made available for inspection by FinCEN or the SEC. Comments Received: Three commenters asserted that, as owners and principals of advisers may not be most familiar with operational aspects of an adviser’s AML/CFT program, the final rule should permit approval by a member of senior management. The commenters noted this would be consistent with the corresponding rules for broker-dealers and with the integration of the AML program into the adviser’s existing compliance program. Final Rule: The final rule retains the proposed requirement without change. FinCEN recognizes that some investment advisers might have other individuals or groups with similar status or functions as a board of directors or trustees, including sole proprietor, general partner, trustee, or other persons that have functions similar to a board of directors and are able to approve the AML/CFT program. FinCEN agrees with the points raised by several commenters and notes that, in such circumstances (where an adviser does not have a board of directors or trustees but has individuals or groups with similar status or functions to such a board), other members of senior management may also be appropriately suited to approve the AML/CFT program. Such individuals may include the Chief Executive Officer, Chief Financial Officer, Chief Operations Officer, Chief Legal Officer, Chief Compliance Officer, Director, and other senior management with similar status or function. In addition, groups with oversight responsibilities may include board committees such as compliance or audit committees as well as a group of some, or all of these individuals with aforementioned titles, as senior management that can provide effective oversight of the AML/CFT program to comply with the rule. Accordingly, under the circumstances noted above, an investment adviser may comply with this provision of the final rule by having its program approved in writing by any of the foregoing persons or groups. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 8. Other Comments Regarding AML/ CFT Program Requirements One commenter suggested FinCEN expressly recognize that investment advisers are already subject to significant recordkeeping obligations and the intention of the AML/CFT program requirement is not to require advisers to create additional records outside of those that are created in the ordinary course. One commenter suggested that FinCEN create an AML examination team for activities or entities that may be subject to AML/CFT regulation but do not have a primary Federal regulator. The commenter suggested this could include family offices, real estate funds, title insurers, escrow agents, and money services businesses. The commenter stated that other AML conduct regulators around the world have similarly done so. The same commenter recommended that the SEC and CFIUS strengthen oversight of private funds, and that CFIUS should be reviewing more foreign investments in sensitive economic sectors, aided by the SEC. As FinCEN stated in the IA AML NPRM, investment advisers are subject to a range of reporting obligations under Federal securities laws.235 Those laws and regulations, however, only have limited overlap with the purposes and requirements of AML/CFT laws and regulations. FinCEN further acknowledges the suggestion to create an AML examination team for other types of activities (some of which may relate to investment advisers), but has determined that they apply to a broader set of activities beyond the scope of the proposed rule and declines to address them further at this time. Regarding the scope of CFIUS reviews and CFIUS oversight of private funds, FinCEN notes that this is outside the scope of the current rulemaking. 9. Duty Provision Proposed Rule: As noted in the IA AML NPRM, section 6101(b)(2)(C) of the AML Act, codified at 31 U.S.C. 5318(h)(5), provides that the duty to establish, maintain, and enforce a financial institution’s AML/CFT program shall remain the responsibility of, and be performed by, persons in the United States who are accessible to, and subject to oversight and supervision by, the Secretary of the Treasury and the appropriate Federal functional regulator (the ‘‘Duty Provision’’). Proposed section1032.210(d) would have incorporated this statutory requirement with respect to investment advisers’ AML/CFT programs by restating that the duty to establish, maintain, and enforce the AML/CFT program must remain the responsibility of, and be performed by, persons in the United States who are accessible to, and subject to oversight and supervision by, FinCEN and the financial institution’s appropriate Federal functional regulator (i.e., for investment advisers, the SEC). FinCEN requested comment on a variety of potential questions or challenges that may arise for financial institutions as they address this requirement and noted that it would consider whether additional interpretive language would be appropriate in a final rule. Comments Received: FinCEN received four comments on the proposal that an investment adviser’s AML/CFT program be based in the United States. Commenters questioned how foreign advisers without U.S.-based staff could implement the AML/CFT program located in the U.S. One commenter called for FinCEN to acknowledge that a foreign adviser could accomplish that requirement through retention of a U.S.based contractor or administrator or through other means. Another commenter called for FinCEN to exclude foreign-located investment advisers from the rule or eliminate the obligation of foreign-located investment advisers to have persons implementing the AML/CFT program located in the United States. A third commenter asked that FinCEN analyze the impacts on foreign-located advisers and extend the implementation period to allow sufficient time for foreign-located advisers to hire and train staff in the United States. Another commenter requested that the final rule expressly permit foreign-located persons to participate in AML/CFT compliance oversight. Final Rule: FinCEN has determined not to include this requirement in this final rule as discussed below. The statutory text of the Duty Provision 236 came into effect for all BSA-defined financial institutions on January 1, 2021, as part of the National Defense Authorization Act for Fiscal Year 2021.237 At the same time, the Duty Provision previously has not been incorporated into a FinCEN regulatory requirement. FinCEN acknowledges the comments seeking further guidance, an exemption from, or a delay in implementation for, foreign-located investment advisers regarding the Duty Provision, as well as the comment requesting use of a U.S.-based contractor or service provider to comply with this 236 31 235 89 PO 00000 FR at 12110–11. Frm 00043 Fmt 4701 U.S.C. 5318(h)(5). Law 116–283, Div F, Title LXI 6101(b). 237 Public Sfmt 4700 72197 E:\FR\FM\04SER2.SGM 04SER2 72198 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations requirements of the BSA and regulations promulgated under the BSA; and Æ risk-based, including ensuring that more attention and resources of financial institutions should be directed toward higher-risk customers and activities, consistent with the risk profile of a financial institution, rather than toward lower-risk customers and activities. FinCEN has considered these factors in section 5318(h)(2)(B) in the drafting of this final rule. In finalizing this rule, FinCEN has considered the fact that comprehensive AML/CFT requirements for investment advisers, which will require investment advisers to have effective AML/CFT programs and 10. Statutory Factors Considered in subject them to SAR reporting Applying AML/CFT Program requirements, will aid in preventing the Requirements flow of illicit funds in the U.S. financial The BSA authorizes FinCEN, after system and in assisting law enforcement consultation with the appropriate and national security agencies with the Federal functional regulator (for identification and prosecution of those investment advisers, the SEC), to who attempt to launder money and prescribe minimum standards for such undertake other illicit finance activity AML/CFT programs.239 In developing through the financial system. this final rule, FinCEN consulted and Additionally, FinCEN recognizes that coordinated with SEC staff, including AML/CFT programs at an investment with respect to the statutorily specified adviser should be reasonably designed factors set out in 31 U.S.C. and risk-based consistent with the 5318(h)(2)(B). These factors are: investment adviser’s respective risk • financial institutions are spending profile, and therefore is adopting an private compliance funds for a public and private benefit, including protecting AML/CFT program rule that requires internal policies, procedures, and the United States financial system from controls reasonably designed to prevent illicit finance risks; the investment adviser from being used • the extension of financial services for money laundering, terrorist to the underbanked and the facilitation financing, or other illicit finance of financial transactions, including activities, as well as risk-based remittances, coming from the United procedures that consider an investment States and abroad in ways that adviser’s risk profile. Further, as simultaneously prevent criminal persons from abusing formal or informal discussed in the Regulatory Impact financial services networks are key Analysis, FinCEN has analyzed the policy goals of the United States; financial costs to investment advisers in • effective anti-money laundering and imposing AML/CFT obligations, countering the financing of terrorism including AML/CFT program programs safeguard national security requirements and SAR filing and generate significant public benefits requirements, and has determined that by preventing the flow of illicit funds in the public and private benefit to this the financial system and by assisting proposed rule would outweigh the law enforcement and national security private compliance costs.240 agencies with the identification and prosecution of persons attempting to 240 Further discussion relevant to each factor may launder money and undertake other be found at: Factor (i): the regulatory impact illicit activity through the financial analysis at Section V and other discussions of the costs and benefits of the rule; Factor (ii): we believe system; that this factor is not relevant to the rule because • anti-money laundering and investment advisers generally do not provide countering the financing of terrorism services to the unbanked, process remittances, or programs should be— participate in informal financial networks. This may be inferred from the risk discussion at Section Æ reasonably designed to assure and II.C and accompanying discussions of the structure monitor compliance with the of the investment advisory industry; and Factor ddrumheller on DSK120RN23PROD with RULES2 requirement. FinCEN has recently sought comment on a proposed regulation incorporating the Duty Provision for existing BSA-defined financial institutions as a part of broader updates to the AML/CFT Program requirements issued on July 3, 2024 (July AML/CFT Program NPRM).238 In light of the comments seeking further guidance regarding the Duty Provision, as well as the July AML/CFT Program NPRM, FinCEN has determined not to include this requirement in this final rule. FinCEN continues to take the Duty Provision under advisement and may consider incorporating the Duty Provision in a subsequent rulemaking applicable to investment advisers. 238 Anti-Money Laundering and Countering the Financing of Terrorism Programs, Notice of Proposed Rulemaking, 89 FR 55428 (Jul. 3, 2024). 239 31 U.S.C. 5318(h)(2)(A). VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 (iii): the risk analysis at Section II.C; Factor (iv): the risk analysis at Section II.C and the discussion of building upon existing requirements and examination programs in this Section and at Section III.D. PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 F. Suspicious Activity Reporting The BSA authorizes Treasury—and thereby FinCEN—to require ‘‘any financial institution, and any director, officer, employee, or agent of any financial institution, to report any suspicious transaction relevant to a possible violation of law or regulation.’’ 241 Existing FinCEN regulations issued under this authority require banks, casinos, card clubs, money services businesses, brokerdealers in securities, mutual funds, insurance companies, futures commission merchants, introducing brokers in commodities, and loan or finance companies to report suspicious activity by submitting SARs to FinCEN.242 As discussed further below, in this final rule, FinCEN is subjecting covered investment advisers to suspicious activity reporting requirements similar to those previously issued by FinCEN. Proposed Rule: Proposed section 1032.320 would have required investment advisers to file SARs for any suspicious transaction relevant to a possible violation of law or regulation and as otherwise defined. Proposed section 1032.320(a) set forth the criteria for which an investment adviser would be obligated to report any suspicious transactions in line with those imposed on other financial institutions. Under this proposal, filing a report of a suspicious transaction would not relieve an investment adviser from the responsibility of complying with any other reporting requirement imposed by the SEC. Proposed section 1032.320(a)(1) contained the general statement of the obligation to file reports of suspicious transactions. The obligation would have extended to transactions conducted or attempted by, at, or through an investment adviser. Proposed section 1032.320(a)(2) would have required the reporting of any suspicious activity transaction that involves or aggregates at least $5,000 in funds or other assets. Furthermore, proposed section 1032.320(a)(1) would have permitted an investment adviser to report voluntarily any transaction the investment adviser believes is relevant to the possible violation of any law or regulation but that is not otherwise required to be reported by this proposed rule. As proposed, such voluntary reporting would be subject to the same protection from liability as mandatory reporting pursuant to 31 U.S.C. 5318(g)(3). 241 31 U.S.C. 5318(g)(1). 31 CFR 1020.320, 1021.320, 1022.320, 1023.320, 1024.320, 1025.320, 1026.320, and 1029.320. 242 See E:\FR\FM\04SER2.SGM 04SER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations Proposed section 1032.320(a)(2)(i) through (iv) would have specified that an investment adviser would be required to report a transaction if it knows, suspects, or has reason to suspect that the transaction (or a pattern of transactions of which the transaction is a part): (i) involves funds derived from illegal activity or is intended or conducted to hide or disguise funds or assets derived from illegal activity as a part of a plan to violate or evade any Federal law or regulation or to avoid any transaction reporting requirement under Federal law or regulation; (ii) is designed, whether through structuring or other means, to evade the requirements of the BSA; (iii) has no business or apparent lawful purpose, and the investment adviser knows of no reasonable explanation for the transaction after examining the available facts; or (iv) involves the use of the investment adviser to facilitate criminal activity. Proposed section 1032.320(a)(3) would have provided that where more than one investment adviser, or another financial institution with a separate suspicious activity reporting obligation,243 is involved in the same transaction, only one report jointly filed on behalf of all involved financial institutions would be required. Comments Received: 11 commenters commented on the requirement for investment advisers to file SARs. Commenters generally supported applying the SAR filing requirement and the safe harbor from liability, but requested clarification on how the SAR filing obligation would apply to advisory activities in general and in certain circumstances, noting the difference between advisers’ role in funds transfers and those of other financial institutions. Some commenters supported the proposed obligation as an important way to prevent abuse of the investment adviser sector and to provide law enforcement with useful information to combat illicit finance. Regarding the proposal to allow for joint filing of SARs, a number of commenters suggested that the regulation require specifically that the SAR narrative describe the respective roles and involvement of each financial institution with respect to the reported transaction. However, other commenters expressed skepticism about the utility of this obligation given the limited information available to some investment advisers considering their 243 Other BSA-defined financial institutions, such as broker-dealers in securities, mutual funds, and banks have separate reporting obligations that may involve the same suspicious activity. See 31 CFR 1023.320, 1024.320, 1020.320. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 access to the information necessary to file SARs and the low number of reported SARs involving investment advisers to date. One commenter requested that FinCEN clarify its expectations of investment advisers regarding the volume of SARs to be filed. Finally, several commenters noted the importance of clarifying that foreignlocated investment advisers should not be required to file SARs where doing so creates a conflict of law with the law of the jurisdiction in which the entity is located. The subsections below address some of the specific issues raised by commenters related to the SAR filing obligation as well as the other provisions in the SAR filing requirement. 1. Scope of the SAR Filing Obligation Comments Received: One commenter requested that FinCEN revise the SAR threshold upwards from $5,000 to $25,000. One commenter requested FinCEN clarify that the requirement to file SARs applies to transactions initiated after the specified compliance date for the AML/CFT program, so there is no confusion regarding whether SARs must be filed as an adviser begins to implement and test its AML program. One commenter suggested that the proposed rule sought to transform the SAR requirement into a tool to assist CFIUS efforts and asked FinCEN to confirm that the SAR filing obligation require reports where the adviser knows, suspects, or has reason to suspect that the activity or transaction in question involves a violation of law. FinCEN is implementing this requirement without change from the proposed rule. FinCEN declines to revise the SAR threshold for this specific requirement as applied to investment advisers. FinCEN is currently reviewing the threshold for SARs and other applicable BSA reports for all covered financial institutions, as required by sections 6204 and 6205 of the AML Act, and will consider potential changes in the context of that review, as appropriate. FinCEN is also clarifying in this final rule that while investment advisers are not required to file SARs until after the compliance date of the final rule, some SAR filings triggered by activity after the compliance date may implicate transactions that occur on behalf of a customer prior to the compliance date. In this circumstance, an adviser should not exclude relevant information from a SAR filing even where the information is about activity that occurred prior to the compliance date. However, FinCEN does not expect investment advisers to look back through activity prior to the PO 00000 Frm 00045 Fmt 4701 Sfmt 4700 72199 compliance date to identify conduct that may warrant filing a SAR. As set out in 1032.320, the SAR filing obligation requires reporting where the adviser knows, suspects, or has reason to suspect a possible violation of law or regulation. Contrary to one commenter’s suggestion, FinCEN does not seek to transform or change SAR filing obligations in order to assist the CFIUS process. Rather, as discussed further below, FinCEN is adopting SAR filing obligations for advisers similar to existing SAR regulations. 2. Transactions ‘‘By, At, or Through’’ Investment Advisers Proposed Rule: Section 1032.320(a)(1) of the proposed rule stated that a transaction ‘‘requires reporting if it is conducted or attempted by, at, or through an investment adviser.’’ Comments Received: Seven commenters requested clarification about the language ‘‘by, at, or through’’ investment advisers in section 1032.320(a)(1), claiming it was a broad and ambiguous definition, and that it did not correspond with the role played by investment advisers in the management of funds or processing of transactions. Commenters believed that this language was more appropriate for banks or other financial institutions that directly hold funds or process transactions. Commenters also expressed concern about the prospect of being required to file SARs in relation to the underlying changes in a fund’s portfolio or for the portfolio companies in which their funds are invested. One commenter suggested narrowing the reporting obligation to transactions by, at, or through a pooled investment vehicle or account for which an investment adviser acts as adviser given an investment adviser would be better able to file a SAR in relation to transactions involving these customers. Two commenters requested FinCEN clarify that for an adviser advising a fund serviced by a foreign-located fund administrator that is subject to SAR filing or similar obligations under their home country AML/CFT regulations is not required to file a SAR in the United States, which could otherwise raise data privacy and conflicts of laws issues. Final Rule: FinCEN is implementing this requirement without significant change from the proposed rule. FinCEN has added ‘‘Advisers Act’’ to this provision to clarify that filing a SAR does not relieve an investment adviser from the responsibility of complying with any other reporting requirements that may be imposed directly by the Advisers Act, as well as SEC rules and regulations that implement the Advisers E:\FR\FM\04SER2.SGM 04SER2 72200 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 Act or other Federal securities laws. FinCEN clarifies that section 1032.320(a)(1) contains the general statement of the obligation to file reports of suspicious transactions, and the obligation extends to transactions conducted or attempted by, at, or through an investment adviser. FinCEN interprets ‘‘transactions conducted or attempted by, at, or through’’ to encompass an investment adviser’s advisory activities on behalf of its clients. In response to comments that the rule text for the SAR filing obligation is more appropriate for banks or other financial institutions, FinCEN is providing additional detail below on suspicious transactions that may occur by, at, or through an investment adviser, as well as suspicious transactions involving a portfolio company in which an advised fund is invested. The requirement to file SARs for transactions conducted or attempted by, at, or through an investment adviser parallels the language of the BSA regulations for money service businesses, broker-dealers, and mutual funds.244 Investment advisers may be familiar with applying this requirement if they are affiliated with a broker-dealer or otherwise transact through them, or in the context of mutual funds they advise.245 Examples of activities occurring by, at, or through an investment adviser include: when an investment adviser’s customer provides an instruction to an investment adviser for the investment adviser to pass on to 244 See 31 CFR 1022.230(a)(2) (money service businesses); 31 CFR 1023.320(a)(2) (broker-dealers); 31 CFR 1024.320(a)(2) (mutual funds). 245 For instance, pursuant to the Securities Industry and Financial Markets Association (SIFMA) No-Action Letter under which the staff of the SEC’s Division of Trading and Markets stated that it would not recommend enforcement action against broker-dealers, an investment adviser must promptly disclose to the broker-dealer potentially suspicious or unusual activity detected as part of the CIP and/or beneficial ownership procedures being performed on the broker-dealer’s behalf in order to enable the broker-dealer to file a suspicious activity report, as appropriate based on the brokerdealer’s judgment. See SEC, Letter to Mr. Bernard V. Canepa, Associate General Counsel, Securities Industry and Financial Markets Association (SIFMA), Request for No-Action Relief Under Broker-Dealer Customer Identification Program Rule (31 CFR 1023.220) and Beneficial Ownership Requirements for Legal Entity Customers (31 CFR 1010.230) (Dec. 9, 2022), https://www.sec.gov/files/ nal-sifma-120922.pdf [hereinafter SIFMA NoAction Letter]. This request for No-Action Relief was originally issued in 2004 and has been periodically reissued and remains effective. Any SEC staff statements cited represent the views of the SEC staff. They are not a rule, regulation, or statement of the SEC. Furthermore, the SEC has neither approved nor disapproved their content. These SEC staff statements, like all SEC staff statements, have no legal force or effect: they do not alter or amend applicable law; and they create no new or additional obligations for any person. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 the custodian (e.g., an instruction to withdraw assets, to liquidate particular securities, or a suggestion that the adviser purchase certain securities for the customer’s account) or an adviser instructs a custodian to execute transactions on behalf of its client. However, an adviser’s obligation to file a SAR does not extend to activity that is outside the scope of their AML/CFT program. Because investment advisers are already subject to the anti-fraud and anti-manipulation provisions of the Advisers Act and other Federal securities laws, they should already have in place policies and procedures to prevent and detect fraud by the investment adviser or its supervised persons, including the identification of suspicious activities that may be conducted by employees of an investment adviser as it they relate to discretionary client or proprietary investment decisions made by an investment adviser’s employees. In either case, the investment adviser should ensure it has systems in place to determine if suspicious transactions are being conducted ‘‘by’’ an investment adviser via client or proprietary investments. Some of the types of suspicious activity transactions an investment adviser may identify and report are transactions designed to hide the source or destination of funds and fraudulent activity. Other suspicious activity tied to private funds, particularly venture capital funds, could, for example, involve an investor in such a fund requesting access to detailed non-public technical information about a portfolio company the fund is invested in that is inconsistent with a professed focus on economic return, in a potential case of illicit technology transfer in violation of sanctions, export controls, or other applicable law. As such, the activity would be eligible for reporting in a SAR. A money launderer also could engage in placement and layering by funding a managed account or investing in a private fund by using multiple wire transfers from different accounts maintained at different financial institutions or requesting that a transaction be processed in a manner to avoid funds being transmitted through certain jurisdictions. Suspicious activity could also include other unusual wire activity that does not correlate with a customer’s stated investment objectives; transferring funds or other assets involving the accounts of third parties with no plausible relationship to the customer, transfers of funds or assets involving suspicious counterparties— such as those subject to adverse media, PO 00000 Frm 00046 Fmt 4701 Sfmt 4700 exhibiting shell company characteristics, or located in jurisdictions with which the customer has no apparent nexus; the customer behaving in a manner that suggests that the customer is acting as a ‘‘proxy’’ to manage the assets of a third party; or an unusual withdrawal request by a customer with ties to activity or individuals subject to U.S sanctions following or shortly prior to news of a potential sanctions listing. Additionally, suspicious activity could include potential fraud and manipulation of customer funds directed by the investment adviser. These typologies can consist of insider trading, market manipulation, or an unusual wire transfer request by an investment adviser from a private fund’s account held for the fund’s benefit at a qualified custodian. FinCEN notes, however, that the techniques of money laundering, terrorist financing, and other illicit finance activity are continually evolving, and there is no way to provide a definitive list of suspicious transactions. A determination to file a SAR should be based on all the facts and circumstances relating to the transaction and the customer in question. FinCEN recognizes that an investment adviser’s own proprietary investments may be lower risk in comparison to discretionary investment decisions made on behalf of clients. However, FinCEN further clarifies that it is the investment adviser’s responsibility to assess the risk of its own proprietary investment activity and determine the level of monitoring necessary to be commensurate with the investment adviser’s assessment of the risks associated with its proprietary investments. For foreign-located investment advisers (as defined in the final rule), the SAR filing requirements would apply to advisory activities covered by this rule, which are advisory activities that (i) take place within the United States, including through involvement of U.S. personnel of the investment adviser, such as the involvement of an agency, branch, or office within the United States, or (ii) provide advisory services to a U.S. person or a foreignlocated private fund with an investor that is a U.S. person. In these circumstances, regardless of whether AML/CFT, administrative, or other advisory services are delegated to a nonU.S. fund administrator by the adviser, a foreign-located investment adviser would be subject to the SAR filing requirement with respect to activities covered by the final rule—including the E:\FR\FM\04SER2.SGM 04SER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations reporting of suspicious transactions involving a foreign-located private fund with an investor that is a U.S. person. FinCEN would also note that while commenters reported potential data privacy or conflicts of laws issues, no specific jurisdictions or statutes were identified where this is a significant challenge. Additionally, private fund advisers may have limited involvement in and visibility into the operation of their portfolio companies, including ‘‘material non-public technical information.’’ However, there are times when an adviser may be required to file a SAR on a portfolio company, such as where the adviser: (i) is approached by a limited partner or other investor in a fund about unusual access to particular technology or processes being developed by a portfolio company, (ii) becomes aware that such a limited partner or investor has reached out to a portfolio company for such information, or (iii) is asked to obscure participation by an investor in a particular transaction to avoid notification to government authorities; FinCEN would consider such activity to be potentially relevant to a possible violation of law or regulation or otherwise indicative of suspicious activity, and an adviser should consider filing a SAR. The preceding examples are not an exhaustive list and are provided for illustrative purposes only, and private fund advisers’ determinations to file a SAR should be based on all the facts and circumstances relating to the transaction and the customer in question. FinCEN acknowledges the comments regarding investment advisers’ potentially limited visibility into the portfolios of funds that they do not advise (such as funds of funds) and the activities of portfolio companies. In response to these comments, FinCEN has decided to clarify the extent of SAR obligations in these contexts. The requirement for reporting of suspicious transactions by, at, or through an investment adviser focuses on the activities of the adviser, and as discussed above, the SAR filing obligation does not extend to activities outside the scope of an adviser’s AML/ CFT program. This excludes nonadvisory activities such as staff of the adviser occupying management roles at portfolio companies. In addition, section 1024.320(a)(2) of the final rule limits the SAR filing obligation to transactions where the adviser ‘‘knows, suspects, or has to reason to suspect’’ enumerated types of illicit activity. This is an objective standard that focuses on the evidence available to an adviser in VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 the particular facts and circumstances of a transaction. FinCEN applies the same standards in existing SAR regulations, such as those for broker-dealers and mutual funds.246 The release adopting the broker-dealer rule states that ‘‘this is a flexible standard that adequately takes into account the differences in operating realities among various types of brokerdealers,’’ some of which, such as clearing brokers, may have less information about their customers.247 Similarly, FinCEN has issued guidance stating that ‘‘mutual funds should be able to meet the ‘knows, suspects, or has reason to suspect’ standard . . . based on information available to the mutual fund that was obtained through the account opening process and in the course of processing transactions, consistent with the mutual fund’s required anti-money laundering procedures.’’ 248 Thus, the standard takes into account both the operational realities of different kinds of financial institutions and the information that they typically collect, including through their AML/CFT procedures. FinCEN intends the SAR filing requirement to function in a similar fashion with regard to investment advisers. The information that an investment adviser has access to depends upon the operational realities of an adviser in its portion of the market, which includes whether it advises the fund at issue and whether it has portfolio companies over which it exercises significant influence. The standard is not intended to require investment advisers to gather additional information beyond what an adviser in their position would normally possess and what is required by their AML/CFT program. The information such an adviser would have is based upon the due diligence and other information they obtain as an adviser. As discussed above, non-advisory activities—such as having common employees with a portfolio company—are not covered by the SAR filing obligation. FinCEN emphasizes that this does not mean that investment advisers may disregard indications of suspicious transactions by, at, or through the adviser because they involve funds that the adviser does not advise (such as funds of funds) or portfolio companies. As FinCEN has stated with regard to 246 31 CFR 1023.230; 31 CFR 1024.320. FR 44048, 44053–54 (Jul. 1, 2002). 248 FinCEN, Frequently Asked Questions Suspicious Activity Reporting Requirements for Mutual Funds (Oct. 4, 2006), available at https:// www.fincen.gov/sites/default/files/shared/ guidance_faqs_sar_10042006.pdf (internal citation omitted). 247 67 PO 00000 Frm 00047 Fmt 4701 Sfmt 4700 72201 mutual funds, even if personnel of another entity are better positioned to file a SAR under certain circumstances, a financial institution remains responsible for meeting its SAR obligations.249 Thus, if under the relevant facts and circumstances, the investment adviser has information causing it to know, suspect, or have to reason to suspect suspicious transactions by, at, or through the investment adviser that involve funds it does not advise or portfolio companies, it is required to file a SAR. 3. Filing and Notification Procedures Proposed Rule: Section 1032.320(b)(1) through (4) of the proposed rule sets forth the filing and notification procedures investment advisers would need to follow to make reports of suspicious transactions. Within 30 days of initial detection by the investment adviser of facts that may constitute a basis for filing a SAR, the adviser would have needed to report the transaction by completing and filing a SAR with FinCEN in accordance with all form instructions and applicable guidance. The investment adviser would have also needed to collect and maintain supporting documentation relating to each SAR separately and make such documentation available to (1) FinCEN, (2) any Federal, State, or local law enforcement agency, and (3); or any Federal regulatory authority, such as the SEC, that examines the investment adviser for compliance with the BSA under the proposed rule, upon request of that agency or authority. If no suspect is identified on the date of such initial detection, an investment adviser may delay filing a SAR for an additional 30 calendar days to identify a suspect, but in no case shall reporting be delayed more than 60 calendar days after the date of such initial detection. Under the proposed rule with respect to SAR filing obligations for investment advisers, which are in line with existing SAR regulations for other BSA-defined financial institutions, any supporting documents filed with the SAR would have needed to be disclosed to those authorities or agencies to whom a SAR may be disclosed. For situations requiring immediate attention, such as suspected terrorist financing or ongoing money laundering schemes, investment advisers would have been required under section 1032.320(b)(4) to notify immediately by telephone the 249 Amendment to the Bank Secrecy ActRequirement that Mutual Funds Report Suspicious Transactions, Final Rule, 71 FR 26213, 26216 (May 4, 2006). E:\FR\FM\04SER2.SGM 04SER2 72202 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations appropriate law enforcement authority in addition to filing a timely SAR. Comments Received: No comments were received on this issue. Final Rule: FinCEN is adopting the requirements regarding SAR filing and notification as proposed. ddrumheller on DSK120RN23PROD with RULES2 4. Retention of Records Proposed Rule: Section 1032.320(c) would have required that investment advisers maintain copies of filed SARs and the underlying related documentation for a period of five years from the date of filing. Supporting documentation would have needed to be made available to FinCEN and the prescribed law enforcement and regulatory authorities, upon request. Comments Received: No comments were received on this issue. Final Rule: FinCEN is adopting the requirements regarding SAR filing and retention of records as proposed. 5. SAR Sharing and Confidentiality Proposed Rule: Section 1032.320(d) would have required that a SAR and any information that would reveal the existence of a SAR are confidential and shall not be disclosed except as authorized in section 1032.320(d)(1)(ii). Section 1032.320(d)(1)(i) generally would have provided that no investment adviser, and no current or former director, officer, employee, or agent of any investment adviser, shall disclose a SAR or any information that would reveal the existence of a SAR. This provision of the proposed rule would have further provided that any investment adviser and any current or former director, officer, employee, or agent of any investment adviser that is subpoenaed or otherwise requested to disclose a SAR or any information that would reveal the existence of a SAR, would decline to produce the SAR or such information and would be required to notify FinCEN of such a request and any response thereto. Investment advisers would be prohibited from disclosing voluntary as well as required SARs. Section 1032.320(d)(1)(ii) of the proposed rule would have provided three rules of construction that clarify the scope of the prohibition against the disclosure of a SAR by an investment adviser and closely parallel the rules of construction in the suspicious activity reporting rules for other financial institutions. The proposed rules of construction would have primarily described situations that are not covered by the prohibition against the disclosure of a SAR or information that would reveal the existence of a SAR contained in section 1032.320(d)(1). The rules of VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 construction proposed would have remained qualified by, and subordinate to, the statutory mandate that revealing to one or more subjects of a SAR of the SAR’s existence would remain a crime. The first rule of construction, in section 1032.320(d)(1)(ii)(A)(1), would have authorized an investment adviser, or any director, officer, employee or agent of an investment adviser, to disclose a SAR, or any information that would reveal the existence of a SAR, to various authorities—FinCEN; any Federal, State or local law enforcement agency; or a Federal regulatory authority that examines the investment adviser for compliance with the BSA—provided that no person involved in the reported transaction is notified that the transaction has been reported. As discussed above, FinCEN is proposing to delegate its examination authority for compliance by investment advisers with FinCEN’s rules implementing the BSA to the SEC. The second rule of construction, in section 1032.320(d)(1)(ii)(A)(2), would have provided two instances where disclosures of underlying facts, transactions, and documents upon which a SAR was based would be permissible: in connection with (i) preparation of a joint SAR or (ii) certain employment references or termination notices.250 This would enable an investment adviser to share the underlying facts, transactions, and documents upon which a SAR is based with certain entities consistent with existing FinCEN guidance where the investment adviser and the recipient entity or entities are jointly filing a SAR. Similarly, an investment adviser, or any current or former director, officer, employee, or agent of an investment adviser would not be prohibited from disclosing the underlying facts, transactions, and documents upon which a SAR is based in connection with certain employment references or termination notices, to the full extent authorized in 31 U.S.C. 5318(g)(2)(B). The third rule of construction, in section 1032.320(d)(1)(ii)(B), would authorize sharing of a SAR within an investment adviser’s corporate organizational structure for purposes consistent with the BSA as determined by regulation or in guidance. Section 1032.320(d)(2) would also incorporate the statutory prohibition against disclosure of SAR information by government authorities that have access to SARs other than in fulfillment of their official duties consistent with 250 To the extent permitted by existing FinCEN regulations and guidance, this would include nonU.S. financial institutions. PO 00000 Frm 00048 Fmt 4701 Sfmt 4700 the BSA.251 The paragraph would clarify that official duties do not include the disclosure of SAR information in response to a request by a nongovernmental entity for non-public information 252 or for use in a private legal proceeding, including a request under 31 CFR 1.11.253 Accordingly, the provision would not permit such disclosure by government users in response to these requests or uses. Comments Received: Four commenters stated that advisers should be able to share SARs with affiliates, noting the benefits to industry-wide efforts to identify and reduce illicit finance risks. Two of the four commenters recommended that advisers be permitted to share SARs with (1) affiliates; (2) the directors and officers of the funds managed by the adviser; and (3) the funds’ administrator(s). One commenter requested that FinCEN authorize advisers to share SARs with service providers that may need to be informed of SAR filings for compliance monitoring and other purposes. One commenter requested FinCEN clarify how an RIA would oversee compliance with a qualified custodian that it had delegated responsibility for SAR filing to if any SAR the third-party files is by definition kept confidential from the adviser. Final Rule: FinCEN is implementing this requirement without change from the proposed rule.254 FinCEN understands that investment advisers may find it necessary to share SARs within their organizational structures to fulfill reporting obligations under the BSA, and to facilitate more effective enterprise-wide BSA compliance. FinCEN will consider issuing additional guidance, consistent with SAR sharing guidance finalized in 2010 and applicable to other BSA-defined financial institutions, that would permit investment advisers to share SARs with certain U.S. affiliates, provided the affiliate is subject to a regulation providing for the confidentiality of SARs issued by FinCEN or by the affiliate’s Federal functional regulator.255 251 31 U.S.C. 5318(g)(2)(ii). purposes of this rulemaking, ‘‘non-public information’’ refers to information that is exempt from disclosure under the Freedom of Information Act. 253 31 CFR 1.11 is Treasury’s regulation governing demands for testimony or the production of records of Treasury employees and former employes in a court or other proceeding. 254 This provision as proposed, and as set out in the final rule, is consistent with the notification prohibitions for suspicious activity reporting provided in the BSA. 31 U.S.C. 5318(g)(2). 255 See, e.g., FIN–2010–G005, Sharing Suspicious Activity Reports by Securities Broker-Dealers, 252 For E:\FR\FM\04SER2.SGM 04SER2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 FinCEN would like to reiterate that, as outlined in section 1032.320(d)(1)(ii)(A)(2) of the final rule, an investment adviser, or any director, officer, employee, or agent of an investment adviser, is not prohibited from disclosing the underlying facts, transactions, and documents upon which a SAR is based, including but not limited to, disclosures of such information to another financial institution or any director, officer, employee, or agent of a financial institution, for the preparation of a joint SAR, provided that no person involved in the reported transaction is notified that the transaction has been reported. For example, this would permit a qualified custodian engaging in transaction monitoring on behalf of an investment adviser to share any underlying information with an investment adviser for activity involving both institutions, so long as the SAR did not involve suspected misconduct by the adviser or its employees. (a) Sharing With Other Regulators Comments Received: One commenter requested that proposed section 1032.320(c)(2) be revised to clarify that government authorities’ official duties may include disclosing a SAR to an SRO, consistent with the SRO’s existing access to SARs. The commenter noted that, unlike existing rules addressing the confidentiality of SARs for other types of financial institutions, the proposal inserts the phrase ‘‘to a nongovernmental entity’’ before ‘‘in response to a request for disclosure of non-public information.’’ The commenter was concerned that this insertion could be misread as restricting the SRO’s access to SARs, because SROs are not governmental entities. The commenter also noted that it may be important for SROs to have access to SARs filed by financial institutions for oversight of broker dealers’ compliance with BSA requirements and the identification of areas of potential AML/ CFT risk. Final Rule: FinCEN is implementing this requirement with one change to the proposed rule, in response to comments. FinCEN does not intend that the requirements of this rule interfere with any existing access to BSA information. This includes access to BSA information for SROs that may have delegated authority to examine other BSA-defined financial institutions, including brokerMutual Funds, Futures Commission Merchants, and Introducing Brokers in Commodities with Certain U.S. Affiliates (Nov. 23, 2010); FIN–2010–G006, Sharing Suspicious Activity Reports by Depository Institutions with Certain U.S. Affiliates (Nov. 23, 2010). VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 dealers and future commission merchants. Therefore, FinCEN has removed the words ‘‘to a nongovernmental entity’’ in the regulatory text.256 (b) Filings by More Than One Financial Institution Proposed Rule: Section 1032.320(a)(3) would have provided that more than one investment adviser may have an obligation to report the same suspicious transaction and that other financial institutions may have separate obligations to report suspicious activity with respect to the same transaction pursuant to other provisions in the BSA. The provision would clarify that no more than one report would be required to be filed by all financial institutions (including investment advisers) involved in the transaction, under specified conditions. Comments Received: Three commenters commented on SAR filing obligations when more than one financial institution is associated with the same suspicious activity. Two commenters asked for clarification on how advisers should manage SAR filings obligations for custodians of client accounts, as well as with fund administrators, service providers, and other third parties. One commenter agreed that SARs filed jointly with investment advisers should specifically include the name of each financial institution involved in the transaction and the words ‘‘joint filing’’ in the narrative section, and that FinCEN should also consider requiring specifically that the SAR narrative describe the respective roles and involvement of each financial institution with respect to the transaction. Final Rule: FinCEN is implementing this requirement without change from the proposed rule. FinCEN would like to clarify that section 1032.320(a)(3) of the final rule provides that the obligation to identify and report a suspicious transaction rests with the investment adviser ‘‘by, at, or through’’ which the transaction occurs. However, where more than one investment adviser, or another financial institution with a separate SAR obligation, is involved in the same transaction, only one report is required to be filed. FinCEN recognizes that other financial institutions, such as broker-dealers in securities, mutual funds, and banks have separate reporting obligations that may involve 256 For the avoidance of doubt, the final rule is not intended to change SROs’ confidentiality obligations pursuant to 31 U.S.C. 5318(g) or pursuant to other provisions of this chapter. PO 00000 Frm 00049 Fmt 4701 Sfmt 4700 72203 the same suspicious transaction.257 Therefore, in those instances, when an investment adviser and another financial institution, such as a brokerdealer, are involved in the same transaction, only one report for the transaction is required to be filed. It is permissible for either the investment adviser or the other financial institution to file a single joint report provided it contains all relevant facts and that each institution maintains a copy of the report and any supporting documentation. In filing a joint SAR, the filing entities should include the name of each financial institution involved in the transaction, their role in the transactions, and the words ‘‘joint filing’’ in the narrative. A single jointly filed SAR will satisfy both financial institutions’ independent filing obligations so long as each institution maintains a copy of the SAR filed, along with any supporting documentation. Although financial institutions are permitted to file a joint SAR, they may also choose to file their own individual SARs instead. (c) Sharing With Other Government Agencies In the IA AML NPRM, FinCEN stated that SAR filing requirements for investment advisers, particularly venture capital advisers, may help CFIUS agencies identify certain transactions that could pose national security risks. One commenter stated that mandating SAR filing to support CFIUS efforts would be a major departure from standard practice under the BSA. The commenter indicated that requiring venture capital advisers to submit SARs filings to supplement CFIUS reviews would impose a significant burden, and FinCEN should consider more targeted regulatory options besides AML/CFT requirements. FinCEN notes that CFIUS member agencies may already have access to BSA information as part of their normal duties. FinCEN is also clarifying that it is not requesting venture capital advisers file SARs for the purpose of supplementing notices or declarations submitted to CFIUS. Rather, and as explained elsewhere in this document, an adviser’s SAR filing obligations may provide information that is relevant for CFIUS, specifically in the case of technology transfers. In identifying the potential relevance of information in filings related to technology transfers, FinCEN is simply providing more targeted guidance to such advisers as to circumstances specific to venture 257 See E:\FR\FM\04SER2.SGM 31 CFR 1023.320, 1024.320, and 1020.320. 04SER2 72204 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations capital activity where a SAR filing may be required. 6. Limitation of Liability Section 1032.320(e) of the proposed rule will would have provided protection from liability, also known as a safe harbor, for making either required or voluntary reports of suspicious transactions, or for failures to provide notice of such disclosure to any person identified in the disclosure to the full extent provided by 31 U.S.C. 5318(g)(3).258 This protection would extend to an investment adviser and any current or former director, officer, employee, or agent of an investment adviser under the conditions of this regulation. Comments Received: No comments were received on this issue. Final Rule: FinCEN is adopting the requirements regarding limitations of liability for SAR filing as proposed. 7. Compliance Under section 1032.320(f) of the proposed rule, FinCEN or its delegates would have examined compliance by investment advisers with the obligation to report suspicious transactions. The section also would provide that failure to comply with the proposed rule may constitute a violation of the BSA and FinCEN’s regulations. As discussed above, pursuant to 31 CFR 1010.810(a), FinCEN has overall authority for enforcement and compliance with its regulations, including coordination and direction of procedures and activities of all other agencies exercising delegated authority. Further, pursuant to section 1010.810(d), FinCEN has the authority to impose civil penalties for violations of the BSA and its regulations. Comments Received: No comments were received on this issue. Final Rule: FinCEN is adopting the requirements regarding compliance by investment advisers with the obligation to report suspicious transactions as proposed. ddrumheller on DSK120RN23PROD with RULES2 8. Consultation With Federal and State Authorities Under section 6202 of the AML Act (codified at 31 U.S.C. 5318(g)(5)), in 258 To encourage the reporting of possible violations of law or regulation and the filing of SARs, the BSA contains a safe harbor provision that shields financial institutions making such reports from civil liability. In 2001, the USA PATRIOT Act clarified that the safe harbor also covers voluntary disclosure of possible violations of law and regulations to a government agency and expanded the scope of the safe harbor to cover any civil liability which may exist under any contract or other legally enforceable agreement (including any arbitration agreement). See USA PATRIOT Act, sec. 351(a). Public Law 107–56, Title III, 351, 115 Stat. 272, 321 (2001); 31 U.S.C. 5318(g)(3). VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 imposing any requirement to report any suspicious transaction under this subsection, the Secretary of the Treasury, in consultation with the Attorney General, appropriate representatives of State bank supervisors, State credit union supervisors, and the Federal functional regulators, shall consider items that include— • the national priorities established by the Secretary; • the purposes described in section 5311 of the BSA; and • the means by or form in which the Secretary shall receive such reporting, including the burdens imposed by such means or form of reporting on persons required to provide such reporting, the efficiency of the means or form, and the benefits derived by the means or form of reporting by Federal law enforcement agencies and the intelligence community in countering financial crime, including money laundering and the financing of terrorism.259 These items have been considered by the Treasury as described elsewhere in this final rule.260 The AML/CFT National Priorities include, among other considerations, combating corruption, fraud, and transnational crime.261 For example, as discussed above and in the Risk Assessment, the absence of AML/ CFT requirements for investment advisers, including SAR filing requirements, enables criminals to gain access to the U.S. financial system for purposes of fraud, laundering the proceeds of corruption, and other forms of transnational crime. For these reasons, and the risk of foreign adversaries using investment advisers to gain access to U.S. technology, requiring investment advisers to file SARs will be highly useful for criminal and regulatory investigations and intelligence or counterintelligence activities to combat terrorism, and are otherwise consistent with the purposes set forth in section 5311 of the BSA. During the drafting of the IA AML NPRM, the comment period for that NPRM, and this final rule, Treasury has consulted with the relevant State and Federal regulators. The IA AML NPRM and final rule were sent to the Department of Justice and to the staff of the SEC as the Federal functional regulator for investment advisers for interagency consultation. Federal 259 31 U.S.C. 5318(g)(5). supra Section III.A and infra Section 260 See IV.A.4. 261 See FinCEN, Anti-Money Laundering and Countering the Financing of Terrorism National Priorities (Jun. 30, 2021), https://www.fincen.gov/ sites/default/files/shared/AML_ CFTPriorities(June30%2C2021).pdf. PO 00000 Frm 00050 Fmt 4701 Sfmt 4700 banking regulators were also invited to comment on all aspects of this proposed rule. Treasury also reached out to the Conference of State Banking Supervisors as a representative of State banking and credit union supervisors and the North American Securities Administrators Association (NASAA) as a representative of state securities regulators. G. Information Sharing, Special Due Diligence, and Special Measures 1. Sections 314(a) and 314(b) Proposed Rule: Proposed sections 1032.500, 1032.520, and 1032.540 would expressly subject investment advisers to FinCEN’s rules implementing the special informationsharing procedures to detect money laundering or terrorist activity of sections 314(a) and 314(b) of the USA PATRIOT Act.262 These provisions generally would require an investment adviser, upon request from FinCEN, to expeditiously search its records for specified information to determine whether the investment adviser maintains or has maintained any account for, or has engaged in any transaction with, an individual, entity, or organization named in FinCEN’s request. An investment adviser would then be required to report any such identified information to FinCEN. Further, investment advisers would be able to participate in voluntary section 314(b) information sharing arrangements, through which they would be able to gather additional information from other financial institutions. Comments Received on Section 314(a): Three commenters were supportive of applying these requirements, as the requirements had been applied by other BSA-defined financial institutions for the past twenty years and doing so with investment advisers would ensure consistent and effective implementation across the U.S. financial sector. Five commenters opposed applying section 314(a) requirements, stating that advisers do not maintain accounts or engage in transactions with the investors or clients, and that custodians and other financial institutions involved in the activity already have to comply with section 314(a) information requests, and would have any relevant transactional information. One commenter asserted that RIAs and ERAs lack insight into client account information, while another commenter indicated that requiring RIAs and ERAs 262 See 31 CFR part 1010, subpart E, including 31 CFR 1010.520 and 1010.540. E:\FR\FM\04SER2.SGM 04SER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations to respond to bi-weekly section 314(a) requests would be duplicative and impose a significant administrative burden without a corresponding benefit. Another commenter requested that, as information collected under the CDD Rule is relevant for complying with section 314(a) requests, FinCEN wait to apply this requirement to investment advisers until the CDD Rule is revised so parties may comment on how that revision will impact 314(a) requests. Three commenters requested that if these requirements are applied to RIAs and ERAs, that FinCEN offer guidance on how advisers should comply with 314(a) requests, such as for specific requirements related to funds transfer information. Two commenters requested confirmation that section 314(a) requests can be delegated to offshore fund administrators and other service providers. Regarding private funds, one commenter requested that an adviser not be directly responsible for reviewing underlying investors in funds because the adviser has effectively delegated this function to the administrator, while two commenters requested that an RIA or ERA be exempt from applying 314(a) requests to underlying investors in foreign-located funds because such investors are not clients of the adviser, are located outside of the United States, and may have no U.S. touchpoints. These commenters also asked for clarification on how the requirements would apply to foreign-located advisers and their foreign-located customers. Comments Received on Section 314(b): FinCEN received five comments on permitting RIAs and ERAs to enter into information sharing arrangements under section 314(b) of the USA PATRIOT Act. All five commenters supported allowing RIAs and ERAs to enter into information sharing arrangements under Section 314(b), noting that this would assist RIAs and ERAs in detecting and reporting suspicious activity. One commenter recommend that FinCEN provide a clear procedure for sharing relevant information under 314(b) in the final rule. Applicability to Mutual Funds: One commenter also requested that FinCEN exempt investment advisers from having to apply the information sharing, due diligence, and special measures requirements of part 1032, subparts E and F, to their mutual fund customers. The commenter noted that a mutual fund is highly unlikely to be named in a section 314(a) request, and that the shareholders of mutual fund accounts would be covered by section 314(a) obligations applicable to mutual funds. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 Regarding the due diligence and special measures requirements of subpart F, the commenter noted that as all mutual funds must be organized under U.S. law, mutual funds would never be a foreign institution subject to those requirements. Final Rule: FinCEN is implementing this requirement with one substantive change from the proposed rule in response to comments. Regarding section 314(a), FinCEN will include the proposed requirement in the final rule. FinCEN recognizes that implementing this will impose some burden on investment advisers to implement this requirement, but that given the binary nature of the response (yes or no as to whether the adviser has an account for the subject), FinCEN believes such a burden is manageable. In addition, the nature of the request is also something an adviser can answer with existing information. Further, while responding to a 314(a) request requires access to the FinCEN Secure Information Sharing System (SISS), this need not require the purchase of additional technology. FinCEN recognizes that investment advisers will not necessarily have, as a matter of course, all the information that is considered part of an account when reviewing relevant information to include as funds transfers records that may be maintained by a custodian in response to a section 314(a) request. However, certain information, such as instructions collected from customers or financial information collected to understand the customer’s investment objectives, may still be useful for a law enforcement investigation involving the subject of such a request. Additionally, FinCEN would like to clarify that, for purposes of section 314(a) requests, FinCEN would not expect investment advisers to have ‘‘accounts’’ for the underlying investors in a private fund unless the adviser has a separate advisory relationship with that underlying investor, and, as described above, an investment adviser is not at this time categorically required to collect beneficial ownership information for private funds. Therefore, when responding to a section 314(a) request for a private fund, an investment adviser would generally be expected to respond for the fund, and not for the underlying investors in the fund. Regarding section 314(b), FinCEN will include, at section 1032.540, a reference to 1010.540, which will permit investment advisers to enter into voluntary information sharing agreements under section 314(b). As described in the proposed rule, under the final rule, investment advisers will now be able to participate in voluntary PO 00000 Frm 00051 Fmt 4701 Sfmt 4700 72205 section 314(b) information sharing arrangements, through which they can gather additional information from other financial institutions, which would enable broader understanding of customer risk and filing of/or file more comprehensive SARs, for example.263 FinCEN will further consider whether existing guidance on section 314(b) information sharing arrangements is sufficient, or if investment advisers require additional guidance specific to their activities.264 Regarding mutual funds, FinCEN also agrees with the arguments raised by the commenter regarding the application of section 314(a) information requests and the implementation of special due diligence and special measures applicable under the sections 311 and 312 of the USA PATRIOT Act. FinCEN agrees with the commenter that a mutual fund is highly unlikely to be named in a section 314(a) request, and, as also noted by the commenter, a mutual fund covered by this exclusion generally could not be a ‘‘foreign financial institution’’ subject to the special due diligence and special measures under sections 311 and 312. Therefore, FinCEN has modified the proposed rule text to permit investment advisers to exclude mutual funds from these requirements at subpart E and subpart F, which is reflected at section 1032.500 and 1032.600, respectively. This exclusion will also apply to (a) collective investment funds sponsored by a bank or trust company subject to the BSA and (b) any other investment adviser subject to the final rule that is advised by the investment adviser. 2. Special Due Diligence and Special Measures Proposed Rule: FinCEN proposed to implement special due diligence requirements for correspondent and private banking accounts, as well as certain prohibitions on correspondent banking and special measures under section 311 of the USA PATRIOT Act and section 9714 of the Combating Russian Money Laundering Act,265 including by amending the definitions in 31 CFR 1010.605 for ‘‘account’’ and ‘‘covered financial institutions’’ so that these would apply to investment 263FinCEN, Section 314(b) Fact Sheet (Dec. 2020), available at https://www.fincen.gov/sites/default/ files/shared/314bfactsheet.pdf. 264Id. 265 FinCEN is clarifying that in addition to special measures under section 311 of the USA PATRIOT Act, investment advisers must also comply with actions taken under section 9714(a) of the Combating Russian Money Laundering Act, codified as a note to 31 U.S.C. 5318A, and section 7213A of the Fentanyl Sanctions Act, codified at 21 U.S.C. 2313a. E:\FR\FM\04SER2.SGM 04SER2 ddrumheller on DSK120RN23PROD with RULES2 72206 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations advisers. FinCEN proposed to add a general cross reference, proposed 1032.600, that would state that investment advisers are subject to the ‘‘special standards of due diligence; prohibitions; and special measures’’ already applicable to covered financial institutions, with no exclusion for business activities involving mutual funds advised by the investment adviser. Comments Received: FinCEN received a range of comments on these proposals. Some commenters supported the proposals without qualification, stating that imposing these requirements on investment advisers would help prevent abuse of the U.S. financial system from criminals and malign actors. One commenter also proposed that FinCEN consider including foreign investment advisers as ‘‘within the definition of foreign financial institutions that are subject to special due diligence programs’’ under 31 CFR 1010.610(a), noting that such foreign investment advisers may ‘‘present similar or more significant illicit finance risks than those presented by foreign banks and broker-dealers that are currently subject to those requirements.’’ However, one commenter suggested that these requirements should not apply to an adviser to, or sponsor of, a private fund, because private funds are not in a position to provide the information required by these requirements regarding details of transactions and the corresponding beneficiaries and originators, unlike a bank providing a correspondent account. Further, some commenters suggested that FinCEN exempt mutual funds from an investment adviser’s requirements to apply certain due diligence and special measures to relevant aspects of their business activities because sections 311 and 312 of the USA PATRIOT ACT (which supply the statutory authority for these requirements) apply only to relationships outside of the United States, while mutual funds are required to be organized under the laws of the United States or of a U.S. state. Final Rule: FinCEN is implementing this requirement with one substantive change from the proposed rule in response to comments. Under the final rule, investment advisers may exclude from these requirements mutual funds, collective investment funds, and other investment advisers they advise that are subject to this rule. Accordingly, investment advisers will be subject to the special standards of diligence, prohibitions, and special measures requirements with respect to their customers that are not mutual funds, or VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 collective investment funds, or other investment advisers that they advise. This approach will maintain the requirements in the proposed rule with regard to special due diligence and special measures requirements given the final rule’s intent to bring the investment advisers’ AML/CFT obligations on the investment adviser sector in line with those imposed on other comparable financial institutions.266 As discussed in the IA AML NPRM and in line with some comments received, applying these measures to investment advisers would assist RIAs and ERAs in managing risk and identifying illicit activity in certain intermediated advisory relationships. In response to the comment that certain private funds may not have the information necessary to conduct such due diligence, FinCEN recognizes the differing role that many investment advisers play in the movement and storage of funds relative to other financial service providers such as banks. Consistent with the approach taken in prior rules regarding special due diligence and special measure requirements, only covered investment advisers that offer accounts that provide financial institutions with a conduit for engaging in ongoing transactions in the U.S. financial system are subject to this requirement.267Accordingly, this requirement is intended to be limited to those types of relationships that provide ongoing services, excluding isolated or infrequent transactions.268 FinCEN will work with the SEC staff with respect to implementation and examination of this requirement and may issue guidance, if deemed necessary. With respect to the special due diligence requirements for private banking accounts, FinCEN would like to clarify that in the context of private funds, the term ‘‘minimum aggregate deposit of funds’’ would apply to the assets in the private fund, if held by the adviser. In other words, the rule applies where an investment adviser manages more than the minimum aggregate deposit of funds for a customer (which may be a private fund or another type of customer). Regarding the comment suggesting to include foreign ‘‘investment adviser’’ 266 See Special Due Diligence Programs for Certain Foreign Accounts, Final Rule, 71 FR 496 (Jan. 4, 2006), available at: https:// www.federalregister.gov/documents/2006/01/04/065/financial-crimes-enforcement-network-antimoney-laundering-programs-special-due-diligenceprograms. 267 Id. 268 Other requirements, such as suspicious activity reporting and recordkeeping, however, apply to such transactions as set out in this final rule. PO 00000 Frm 00052 Fmt 4701 Sfmt 4700 within the definition of ‘‘foreign financial institution’’ under 31 CFR 1010.610(a) in order to require that special due diligence program requirements apply to correspondent accounts that covered financial institutions open for foreign investment advisers, FinCEN declines to do so because it assesses at this time that illicit finance risks to the U.S. financial system are adequately addressed by the application of the final rule to the U.S. advisory activities of certain foreignlocated investment advisers, as described above. As a result a financial institution will not need to apply these requirements with respect to accounts for foreign investment advisers; instead, a financial institution (including an investment adviser under the final rule) will would still need to apply its overall AML/CFT program (regardless of special due diligence program requirements) to a foreign investment adviser, as it would any other customer covered by the AML/CFT program. H. Delegation of Examination Authority to the SEC Proposed Rule: FinCEN proposed to delegate its examination authority for investment advisers to the SEC given the SEC’s expertise in the regulation of investment advisers and the existing delegation to the SEC of authority to examine broker-dealers and mutual funds for compliance with FinCEN’s regulations implementing the BSA. Comments Received: FinCEN received four comments pertaining to the delegation of examination authority to the SEC. One commenter supported the delegation of authority. Two commenters called on FinCEN to require that the SEC publicly release a copy of its relevant AML examination manual as the FFIEC has done with its BSA/AML examination manual. A commenter recommended that the final rule expressly recognize that the SEC should not prioritize examination or enforcement activities with respect to investment advisers who work with fund clients that (1) predominantly engage in investment activities in the U.S. and (2) predominantly accept subscriptions from domestic sources or through unaffiliated U.S.-regulated financial institutions. Instead, the commenter asked FinCEN to make clear that investment advisers with a domestic focus in their operations will be selected for examination by the SEC only if additional risk factors (e.g., unusual transactions flagged by the banks) are present. One commenter called on FinCEN to ensure, to the fullest extent possible, that agencies avoid duplication of examination E:\FR\FM\04SER2.SGM 04SER2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations activities, reporting requirements, and requests for information, and called on the SEC as the functional regulator of investment advisers, to leverage the work of other BSA/AML examiners. Final Rule: FinCEN is implementing this provision without change from the proposed rule. The final rule maintains the proposed rule’s delegation of examination authority to the SEC over investment advisers’ compliance with the rule.269 This delegation reflects FinCEN’s recognition that the SEC is best equipped to handle such examinations given the existing SEC regulatory and examination apparatus with respect to investment advisers. FinCEN declines to expressly adopt the comments suggesting that the SEC should not prioritize its examination activities for those investment advisers ‘‘predominantly engaged in investment activities in the U.S. and predominantly accept subscriptions from domestic sources or through unaffiliated U.S.regulated financial institutions’’ absent other risk factors. In recognizing that the SEC is best equipped to handle such examinations, FinCEN has determined that the SEC is best able to determine its own examination procedures and priorities. FinCEN also declines to publish an AML/CFT examination manual for investment advisers. FinCEN notes that the SEC has not published an investment adviser examination manual. FinCEN does note that the SEC maintains a compilation of relevant resources on AML/CFT for both brokerdealers and mutual funds, and FinCEN will discuss with the SEC whether to prepare something similar for investment advisers.270 Regarding the commenter request that the SEC leverage the work of other BSA/AML examiners, FinCEN notes that, as with other types of entities that may have more than one Federal functional regulator, supervisory coordination with regard to investment advisers is important to maintain efficiencies and avoid duplication. ddrumheller on DSK120RN23PROD with RULES2 I. Compliance Date Proposed Rule: Proposed section 1032.210(c) would have required an investment adviser to develop and implement an AML/CFT program and 269 See also 31 CFR 1010.810(b)(6) (FinCEN’s delegation of examination to determine compliance with requirements of Chapter X for brokers and dealers in securities and investment companies to the Securities and Exchange Commission). 270 See SEC, Anti-Money Laundering (AML) Source Tool for Broker-Dealers, https:// www.sec.gov/about/offices/ocie/amlsourcetool and Anti-Money Laundering (AML) Source Tool for Mutual Funds, https://www.sec.gov/about/offices/ ocie/amlmfsourcetool. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 comply with the other AML/CFT requirements of the proposed rule on or before 12 months after the effective date of the regulation. Comments Received: Several commenters expressed concern about the proposed compliance date, stating that FinCEN had underestimated the overall impact of complying with the regulation. Several commenters requested that the compliance date be extended to 18 or 24 months (the majority of commenters recommended 24 months) from the effective date of the regulation to take into account the burden of complying with the regulation, with one also suggesting that this extended timeline would allow FinCEN to align the effective date of the proposed rule and the pending CIP rule. Some commenters noted that a 12month compliance date would have a disproportionate impact on smaller entities, with one suggesting that advisers with 100 or fewer staff be given 36 months to comply should they remain in scope of the final rule. Two commenters noted that many advisers may need to renegotiate or amend contracts with a range of banks and broker-dealers to whom investment advisers may need to delegate or with whom they may need to share compliance obligations. One commenter also noted that there exist relatively few custodians, prime brokers, trading counterparties, and fund administrators that are responsible for revising all of these agreements on behalf of the entire universe of RIAs. Final Rule: FinCEN will require that an investment adviser must be in compliance with the final rule on or before January 1, 2026. FinCEN recognizes that the final rule will create new burdens on investment advisers, that investment advisers have other new regulatory obligations in addition to existing regulatory obligations, and that some advisers may need to develop, build, and integrate technology solutions to comply with certain requirements of final rule. However, based on FinCEN’s experience issuing regulations for other financial institutions requiring them to meet similar requirements, FinCEN believes that a compliance date of January 1, 2026, provides an adequate amount of time to comply with the regulation. As noted by two commenters, FinCEN recognizes that advisers may need to renegotiate or amend contracts with a range of banks and broker-dealers, as well as fund administrators and other market participants, to whom investment advisers may need to delegate or with whom they may need to share PO 00000 Frm 00053 Fmt 4701 Sfmt 4700 72207 compliance obligations. Given that the effective dates of these agreements may vary throughout the industry, FinCEN wants to ensure advisers have at least a full calendar year to adjust any contractual arrangements with custodians, broker-dealers, fund administrators, or other service providers. J. Other Issues 1. Extend Comment Period FinCEN received one comment asking for an extended comment period, saying that the IA AML NPRM, by coming in the first quarter of the year (specifically, February) coincided with a time when RIAs are required to update Form ADV as well as oversee audited financials and the preparation of tax statements. FinCEN declines to re-open or otherwise extend the comment period, believing those options to be unnecessary, given the number of comments received, the wide array of content in the comments received, and the various types of advisers and organizations who submitted comments during this comment period. 2. Use of Legal Entity Identifiers One commenter suggested that FinCEN ‘‘leverage existing collection procedures from the SEC’’ to require investment advisers to collect the legal entity identifier (LEI) 271 of their legal entity customers as part of this rule. The commenter stated that the LEI is ‘‘an open and non-proprietary identifier [that] increases transparency and promotes information sharing among financial regulators’’ The commenter noted that the SEC had already included the LEI in other proposed rules applicable to investment advisers, including amending forms for required filings to include LEI. FinCEN recognizes that using uniform entity identifiers such as an LEI may assist investment advisers and law enforcement agencies in detecting illicit finance activity, such as by assisting in ongoing monitoring of legal entity customer activity. However, not all customers of investment advisers have an LEI. Moreover, FinCEN aims to offer investment advisers flexibility in implementing the proposed requirements while maintaining consistency with how AML/CFT requirements are applied to other financial institutions. Therefore, it will 271 The LEI is an identification number based on the International Organization for Standardization (‘‘ISO’’) 17442–1 standard that uniquely identifies a legal entity. As noted by the commenter, the SEC requires an adviser to provide an LEI, if it has one, on Item 1.P on Form ADV. E:\FR\FM\04SER2.SGM 04SER2 72208 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations not require investment advisers to collect the LEI of their legal entity customers. Notwithstanding the absence of an LEI requirement, advisers may still collect LEIs from customers or third party advisers if they believe it is helpful in assessing and mitigating illicit finance risk or complying with specific requirements in the proposed rule. ddrumheller on DSK120RN23PROD with RULES2 3. Use of Foreign Jurisdiction Compliance FinCEN received two comments calling on FinCEN to exempt from the final rule foreign-located advisers who are compliant with the AML/CFT laws of other jurisdictions. One comment noted that there is global acceptance of and adherence to FATF requirements, adding that the SEC and the Commodity Futures Trading Commission are signatories to the International Organization of Securities Commissions (IOSCO) Multilateral Memorandum of Understanding Concerning the Consultation and Cooperation and the Exchange of Information (MMoU).272 Another commenter stated that foreignlocated investment advisers based in the United Kingdom and EU are already subject to similar AML/CFT laws and regulations and the burden of applying the proposed rule to foreign-located investment advisers would be disproportionate and duplicative. FinCEN recognizes the importance of consistency and international coordination in applying and supervising for AML/CFT requirements on financial institutions active in multiple jurisdictions. As described above, the requirements of the final rule with respect to foreign-located investment advisers will apply only with respect to certain advisory activities with a nexus to the United States. This is consistent not only with the SEC’s own supervisory authority under the Advisers Act, but also with AML/CFT supervision of other types of financial institutions, including foreignlocated advisers, which are subject to AML/CFT supervision by regulators in multiple jurisdictions. Further, as noted by the commenters, supervisors are able to make use of established fora and mechanisms, such as IOSCO’s MMoU, to coordinate their activities and help 272 Per the IOSCO, the MMoU sets an international benchmark for cross-border cooperation among its signatories. Established in 2002, the MMoU provides securities regulators with the tools for combating cross-border fraud and misconduct. See IOSCO, Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (May 2002; rev’d May 2012), available at https:// www.iosco.org/library/pubdocs/pdf/ IOSCOPD386.pdf. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 minimize the burden on regulated entities. Therefore, FinCEN declines to exempt from the rule foreign-located advisers on the basis that they are compliant with the AML/CFT laws of other jurisdictions. 4. Interaction of Proposed Rule With Other Investment Adviser or AML/CFT Rulemakings Commenters raised several questions pertaining to the interaction of the proposed rule with other rulemakings. Several commenters discussed the plan to issue CIP requirements for investment advisers jointly with the SEC. Commenters noted confusion over the plan for the SEC to issue new CIP rules allowing for adherence to this rulemaking. Several comments called on FinCEN to reopen the comment period for this proposed rule if a joint CIP rule were proposed prior to this rule being finalized. One commenter also requested that FinCEN continue to coordinate with staff at the SEC, especially on rulemakings that are interrelated or will have significant implications for one another, including on the SEC’s proposed Outsourcing 273 and Safeguarding 274 rules. One commenter stated that given the overlap between CIP and some of the requirements in the proposed rule— such as the Recordkeeping and Travel Rules and Special Information Sharing Procedures FinCEN should not implement those requirements until the CIP rule is finalized. Another commenter raised concerns that if the CDD Rule is applied as currently written, many funds would potentially not have to report the identities of any of their beneficial owners as limited partner investors will be below the 25 percent ownership reporting threshold. One commenter also suggested that FinCEN consider requiring investment advisers to begin customer and beneficial ownership identification and verification within a set timeframe, not specifically linked to the CDD update. The commenter also noted that given some of the unique issues related to pooled investment vehicles, FinCEN should not rely solely on an updated CDD rule to implement these requirements for pooled investment vehicles. FinCEN recognizes and has considered the potential challenges that may arise with multiple rulemaking processes that could affect investment advisers’ AML/CFT requirements. As 273 Outsourcing by Investment Advisers, Proposed Rule, 87 FR 68816 (Nov. 16, 2022). 274 Safeguarding Advisory Client Assets, Proposed Rule, 88 FR 14672 (Mar. 9, 2023). PO 00000 Frm 00054 Fmt 4701 Sfmt 4700 such, FinCEN intends to carefully coordinate on these rulemakings to ensure consistency in how investment advisers, as well as other financial institutions, are treated under these rules. Regarding CIP, as noted above, FinCEN and the SEC intend to align the compliance dates for both AML/CFT Program and SAR Rule as well as a potential final CIP rule. Regarding the revisions to the CDD Rule, FinCEN is considering how any such revisions may impact investment advisers and, as required by the Corporate Transparency Act, intends to issue a notice of proposed rulemaking, which would be subject to public comment. FinCEN will continue to coordinate with the SEC on these and other rulemakings. IV. Severability In the IA AML NPRM, FinCEN proposed that if any provision of the final rule, or the application thereof to any person or circumstance, is held to be invalid, such invalidity shall not affect other provisions, or application of such provisions to other persons or circumstances, that can be given effect without the invalid provision or application. FinCEN did not receive any comments on this issue. FinCEN adopts this position without change and, separately, incorporates this position into the text of the rule at section 1032.112 for the avoidance of doubt. FinCEN also clarifies its intent regarding the severability of specific parts of the final rule. It is FinCEN’s position that if any of the provisions of this final rule, or the application thereof to any person or circumstance, is held to be invalid, such invalidity shall not affect other provisions, or application of such provisions to other persons or circumstances, that can be given effect without the invalid provision or application. Each provision of the final rule and application thereof serves an important, related, but distinct purpose; provides a distinct benefit separate from, and in addition to, the benefit provided by other provisions and applications; is supported by evidence and findings that stand independent of each other; and is capable of operating independently such that the invalidity of any particular provision or application would not undermine the operability or usefulness of other aspects of the final rules. Based on its analysis, FinCEN believes that although more limited application would change the magnitude of the overall benefit of the final rule, it would not undermine the important benefit of, and justification for, the final rule’s application to other persons or circumstances. The qualitative and E:\FR\FM\04SER2.SGM 04SER2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 quantitative benefits of the rule outweigh the costs for all persons and circumstances covered by the final rule. For example, but without limitation, if application of the final rule to any subcategory of investment advisers, such as foreign-located advisers, private fund advisers, or venture capital fund advisers, is held to be invalid, it is FinCEN’s intent that the final rule remain in effect as to all other subcategories of investment advisers. The purpose of the final rule is to reduce the risk that investment advisers may be misused by money launderers, terrorists, or other actors who seek access to the U.S. financial system for illicit purposes and who threaten U.S. national security; and it is consistent with this purpose to cover some, but not all, investment advisers as defined in the final rule if the application of the rule to a subcategory of investment advisers is held to be invalid. Furthermore, subcategories of investment advisers generally do not depend on each other to comply with the requirements of the final rule and may continue to reduce illicit finance risk even if another subcategory of advisers is no longer covered by the final rule. The substantive requirements of this final rule—the AML/CFT program, SAR filing, recordkeeping, special standards of diligence, and other requirements— are likewise severable. FinCEN intends for investment advisers to implement each requirement regardless of whether another requirement is held to be invalid, and if the application of a requirement is held to be invalid in certain circumstances, to continue to VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 apply a requirement to the extent it can be given effect in circumstances where it has not been held invalid. Many of the requirements are unaffected if another requirement is held to be invalid. While some substantive requirements facilitate compliance with another requirement of the final rule, no substantive requirement is unworkable if another requirement is invalidated or has its application limited. For example, but without limitation, an investment adviser may continue to maintain an AML/CFT program even if it is not obligated to file SARs or maintain special standards of diligence, which is already the case for certain categories of financial institutions under the BSA.275 Thus, although an AML/CFT program establishes a structure to facilitate SAR filing, an investment adviser may still report suspicious activity even if it is not required to have an AML/CFT program as set out under the final rule. FinCEN therefore intends for each substantive requirement of the rule to be severable from each of the others and to be applied to the extent possible if its application is limited. V. Regulatory Analysis In accordance with Executive Orders 12866, 13563, and 14094 (i.e., E.O. 12866 and its amendments), this regulatory impact analysis (Impact Analysis) is composed of assessments of the anticipated impacts of the final rule—in particular, the final rule’s expected costs and benefits to affected 275 See, e.g., 31 CFR part 1027 (dealers in precious metals, precious stones or jewels); 31 CFR 1023.230(a)(1) (foreign-located broker-dealers not required to file SARs). PO 00000 Frm 00055 Fmt 4701 Sfmt 4700 72209 parties. This analysis also includes assessments of the rule’s impact on small entities pursuant to the Regulatory Flexibility Act (RFA) and of its reporting and recordkeeping burdens under the Paperwork Reduction Act (PRA), as well as consideration of whether an assessment under the Unfunded Mandates Reform Act of 1995 (UMRA) is required and of the implications of the Congressional Review Act for the final rule. This Impact Analysis finds that the impact associated with the final rule would primarily affect investment advisers (specifically, covered RIAs and ERAs) and U.S. Federal agencies, and estimates that the total present value of costs of the final rule over a 10-year time horizon ranges from $4.3 billion to $8.7 billion, with a primary estimate of $7.4 billion, using a 2 percent discount rate. The annualized costs over a 10year time horizon range from $470 million to $950 million, with a primary estimate of $810 million, using a 2 percent discount rate.276 This final rule has been determined to be a ‘‘significant regulatory action’’ under section 3(f) of Executive Order 12866 and significant under section 3(f)(1) because it may have an annual effect on the economy of $200 million or greater. Table 1 summarizes the benefits and costs of the final rule. The potential benefits are difficult to quantify—and thus are unquantified in this Impact Analysis—but are reported alongside the monetized costs: 276 All aggregate figures are approximate and not precise estimates unless otherwise specified. E:\FR\FM\04SER2.SGM 04SER2 72210 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations Table 1. Summary of Benefits and Costs of the Final Rule NIA • • Unquantified Benefits • • • • Monetized Costs Unquantified Costs Effects on State, Local, or Tribal Governments Effects on Small Businesses Effects on Wages ddrumheller on DSK120RN23PROD with RULES2 Effects on Growth 23:30 Sep 03, 2024 NIA 2022 2% 10 years Increase access for law enforcement to relevant information for complex financial crime investigations and asset forfeiture. Enhance the ability of law enforcement to identify and prosecute money laundering and other financial crimes. Enhance interagency understanding of priority national security threats and their associated financial activity. Enhance the ability of national security personnel to protect against priority national security threats. Improve financial system transparency and integrity. Align with international financial standards to strengthen the U.S. financial s stem from abuse b illicit actors. $810 $470 $950 2022 2% 10 years NIA No estimated impact to State, local, or Tribal governments. Estimated annualized cost burden of $40,000 for small investment advisers, approximately 4.7 percent of average revenues or 0.8 percent of assets under mana ement. The final rule is not anticipated to have significant im acts on wa es. Investment advisers are likely to pass on the increased costs of managing accounts to clients through higher fees, which may reduce earnings on investments. FinCEN has chosen to issue the final rule applying AML/CFT requirements to RIAs and ERAs (with certain exemptions) instead of two regulatory alternatives: (1) applying AML/CFT requirements to RIAs, ERAs, and Stateregistered investment advisers, and (2) merely requiring private funds to collect beneficial ownership information on legal entity investors. The first alternative would expand the regulatory requirements of the BSA applied to VerDate Sep<11>2014 NIA Jkt 262001 nearly twice as many entities (as compared to the final rule) at a greater overall cost but provide a similar level of benefits (with only limited incremental benefits attributable to the inclusion of State-registered investment advisers in the definition of financial institution). The second alternative would reduce the costs of the regulation (as compared to the final rule) while providing fewer benefits and only achieving a small proportion of the PO 00000 Frm 00056 Fmt 4701 Sfmt 4700 Annualized cost burden estimated over 10 years using a 2 percent discount rate. objectives of the BSA in the investment adviser industry. FinCEN has conducted a final regulatory flexibility analysis (FRFA) pursuant to the RFA. In response to the findings in the initial regulatory flexibility analysis and public comments on the IA AML NPRM, for the final rule FinCEN has specifically exempted RIAs that register with the SEC as mid-sized advisers to reduce the E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.000</GPH> Annualized Monetized Benefits Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations potential regulatory burden on small entities. As detailed in the PRA analysis, for the private sector, the final rule is estimated to result in a one-time, upfront information collection burden of 6.83 million hours and an average annual information collection burden of 4.86 million hours thereafter. The estimated one-time, upfront information collection cost is approximately $408 million, and the estimated average annual recurring information collection cost is approximately $278 million thereafter. These costs are included in the Impact Analysis. Pursuant to its UMRA-related analysis, FinCEN has not anticipated any expenditures for State, local, and Tribal governments. FinCEN anticipates expenditures by the private sector of more than $177 million, the current UMRA threshold.277 The UMRA-related analysis for private sector entities has been incorporated into this Impact Analysis. A. Executive Orders 12866, 13563, and 14094 ddrumheller on DSK120RN23PROD with RULES2 As detailed below, Treasury assesses that RIAs and ERAs pose a material risk of misuse for illicit finance. Including investment advisers as ‘‘financial institutions’’ under FinCEN regulations issued under the BSA and applying comprehensive AML/CFT measures to these investment advisers are likely to reduce this risk. Executive Order 12866, as amended by Executive Order 14094, directs agencies to assess costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, and public health and safety effects; distributive impacts; and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility. This final rule has 277 As explained below in the section V.D, the UMRA threshold is $100 million adjusted annually for inflation. The U.S. Bureau of Economic Analysis reported the annual value of the gross domestic product (GDP) deflator in 1995 (the year in which UMRA was enacted) as 71.823, and in 2022 as 127.215. See U.S. Bureau of Economic Analysis, Table 1.1.9, ‘‘Implicit Price Deflators for Gross Domestic Product,’’ available at https://apps.bea. gov/iTable/?reqid=19&step=2&isuri=1& categories=survey%23eyJhcHBpZCI6MTksInN0Z XBzIjpbMSwyLDMsM10sImRhdGEiOltbIkNhdGVnb 3JpZXMiLCJTdXJ2ZXkiXSxbIk5JUEFfVGFi bGVfTGlzdCIsIjEzIl0sWyJGaXJzdF9ZZWFyIiwi MTk5NSJdLFsiTGFzdF9ZZWFyIiwiMjAyMSJdL FsiU2NhbGUiLCIwIl0sWyJTZXJpZXMiLCJBIl1dfQ. Thus, the inflation adjusted estimate for $100 million is 127.215 divided by 71.823 and then multiplied by 100, or $177 million. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 been designated a ‘‘significant regulatory action’’ under section 3(f) of Executive Order 12866 and significant under section 3(f)(1). Accordingly, this final rule has been reviewed by the Office of Management and Budget (OMB). 1. Discussion of Comments to the Initial Impact Analysis Seven commenters commented on the initial impact analysis accompanying the proposed rule. Three of these seven commenters commented on the initial impact analysis’s cost estimates; all seven commented on the analysis’s estimated benefits; and two commented on the analysis’s estimates regarding the frequency of SAR filing. As explained below, in response to these comments, FinCEN increased its estimates of costs and expanded its discussion of benefits in the final Impact Analysis, but left the initial SAR estimates unchanged. (a) Comments Related to Costs Comments Received: Three commenters provided views on the estimated costs in the initial regulatory analysis. Two commenters argued that advisers would not be able to easily adapt existing policies and procedures to comply with the requirements of the proposed rule, suggesting that the initial impact analysis had thus underestimated the proposed rule’s costs by assuming that some such existing policies and procedures could be so adapted. The commenters stated that existing requirements are principles-based and designed to prevent violations of the Advisers Act, and that there is little overlap between those requirements and the purpose and substantive requirements of the BSA that the proposed rule would impose on investment advisers. One commenter also indicated that the annual reviews that investment advisers must conduct for compliance with the Advisers Act do not necessarily equip them to implement the independent testing under the AML/CFT program requirement that the proposed rule would impose. Regarding those AML/CFT programs that some investment advisers do already have, one commenter noted that even affiliated and dual registered advisers would need to update their compliance programs under the proposed rule. The commenter also noted that advisers with a voluntary AML/CFT program would still need to modify their program, as it is unlikely that their existing program (and systems developed to implement that program) would fully track the requirements in the proposed rule. PO 00000 Frm 00057 Fmt 4701 Sfmt 4700 72211 In addition, one commenter asserted that FinCEN had underestimated the costs for several specific requirements of the proposed rule, including the costs of implementing an AML/CFT program (particularly for unaffiliated RIAs with limited existing measures), training employees, and filing SARs. The commenter indicated these burdens may be particularly significant for small firms. The commenter also disagreed that a ‘‘risk-based’’ program will manage the costs of these requirements for investment advisers, as many financial institutions feel pressure to implement more extensive controls than strictly required to minimize potential regulatory risk. The commenter further reasoned that some firms may decide to not take on customers that may make compliance more difficult, and that this hesitancy may hinder innovation and competition in financial markets, a difficult-to-quantify cost. One commenter stated that FinCEN had failed to estimate the degree to which ERAs currently implement AML/ CFT requirements, which the commenter suggested compromises FinCEN’s ability to estimate the rule’s compliance costs for ERAs. The commenter believed that FinCEN’s failure to do so also would ‘‘inevitably affect’’ FinCEN’s ability to accurately estimate the compliance costs for many RIAs as well, but without explaining why this would be so. Two commenters indicated that the proposed rule would have costs on the broader venture capital ecosystem, as venture capital advisers would be forced to take time away from their work supporting businesses in which they invest to instead address compliance with the proposed rule. One commenter concluded that higher costs for smaller venture capital advisers would gradually price them out of the market, leaving only the large institutional advisers who already dominate most asset classes, and suggested that FinCEN consider not only the actual costs of implementation, but the consequences of these costs for investors and the overall innovation ecosystem. Final Impact Analysis: FinCEN recognizes that there are both substantive and procedural differences in the requirements under the Advisers Act and those being applied in this final rule. As such, FinCEN has not sought to discount or adjust the potential costs of the rule based on existing technology systems, staff, or processes designed to meet requirements of the Advisers Act or other Federal securities laws. Thus, because FinCEN’s initial estimates did not generally assume that investment advisers would be able to readily adapt E:\FR\FM\04SER2.SGM 04SER2 ddrumheller on DSK120RN23PROD with RULES2 72212 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations such existing Advisers Act programs to comply with the rule’s requirements, no broad change to these estimates is required. FinCEN would note, however, that having organizational experience with complying with certain requirements of the Advisers Act, such as those related to recordkeeping and anti-fraud measures, may help an adviser determine how to best apply similar customer-specific or enterprisewide recordkeeping or reporting obligations under the final rule. FinCEN agrees with commenters’ conclusion that even dual registrants or affiliates may incur additional costs in conforming their existing AML/CFT programs to the requirements of the rule, despite FinCEN’s initial assessment that a dual registrant or affiliate was highly likely to be already applying a significant number of AML/ CFT measures. Therefore, FinCEN has increased its estimate of the cost of the rule to these entities in this final Impact Analysis. FinCEN also agrees with commenters that advisers with a voluntary AML/CFT program may still need to adjust their voluntary programs to comply with the requirements of the final rule, but FinCEN assesses that these costs were already accounted for in FinCEN’s initial impact analysis, and thus that adjustment to this estimate is not required. Regarding comments that FinCEN is underestimating the cost of specific requirements and is unable to determine the degree to which ERAs already implement certain AML/CFT measures, FinCEN recognizes that there is some uncertainty about specific costs and about the number of entities already applying certain AML/CFT measures. All estimates of a rule’s potential impact, however, involve some level of uncertainty—indeed no commenter identified costs with certainty—and FinCEN’s uncertainty analysis in this final Impact Analysis is intended to help address those concerns. Moreover, the commenters who claimed FinCEN was underestimating the cost of these requirements did not provide an alternative estimate for those costs. Regarding concerns that investment advisers will minimize regulatory risk by implementing extensive measures to comply with this rule, FinCEN reiterates that the AML/CFT framework does not utilize a zero tolerance philosophy, and that any enforcement action taken is dependent on the facts and circumstances of each situation.278 278 See, e.g., Joint Fact Sheet on Foreign Correspondent Banking: Approach to BSA/AML and OFAC Sanctions Supervision and Enforcement (Aug. 30, 2016), available at https:// VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 FinCEN has also, in coordination with Federal functional regulators, continued to emphasize that financial institutions should manage customer relationships and mitigate risks based on customer relationships, rather than decline to provide financial services to entire categories of customers.279 In response to one commenter, FinCEN recognizes that there may be additional impact from this rule on general investment activities, including those associated with venture capital advisers, but notes that given the relatively small number of private funds that such exempt venture capital advisers service, such costs will not be significant for each individual adviser, and these requirements will be consistently applied for all investors seeking to invest in private funds advised by venture capital or other exempt reporting advisers. Thus, contrary to the fears raised by commenters, FinCEN does not expect that this rule’s costs will drive smaller investment advisers out of the market or fundamentally alter the broader venture capital ecosystem. (b) Comments Related to Benefits Comments Received: Seven commenters commented on the benefits of the proposed rule. Four commenters agreed with FinCEN’s initial assessment of these benefits. One commenter noted that adding regulations to financial advisors would make it harder for money laundering operations to operate, and thus reduce the lucrative nature of crime in general. Another commenter argued that the proposed rule could assist the IRS in addressing tax evasion through private funds, while another commenter noted that the proposed rule’s benefits would significantly outweigh the costs, especially considering the size of the investment advisory market and that some advisers already voluntarily implemented AML/ CFT requirements. An individual commenter also provided data from the U.S. Sentencing Commission indicating that over 1,000 people were charged with money laundering in fiscal year home.treasury.gov/system/files/136/archivedocuments/Foreign-Correspondent-Banking-FactSheet.pdf; see also Joint Statement on Enforcement of Bank Secrecy Act/Anti-Money Laundering Requirements (Aug. 13, 2020), available at https:// www.fdic.gov/sites/default/files/2024-03/ pr20091a.pdf. 279 See Joint Statement on the Risk-Based Approach to Assessing Customer Relationships and Conducting Customer Due Diligence (Jul. 6, 2022), available at https://www.fincen.gov/sites/default/ files/2022-07/Joint%20Statement%20on %20the%20Risk%20Based%20Approach%20to %20Assessing%20Customer %20Relationships%20and%20Conducting%20CDD %20FINAL.pdf. PO 00000 Frm 00058 Fmt 4701 Sfmt 4700 2022, and that the median offense was for over $300,000, to stress the importance of controlling money laundering through regulations like the proposed rule and the benefits that may be obtained by doing so. Several commenters, however, stated that the proposed rule had no quantifiable benefit despite imposing billions of dollars in costs on investment advisers. One commenter accordingly encouraged FinCEN to quantify the proposed rule’s benefits and to include a graph that visualizes a breakeven analysis of the rule. In addition, two commenters specifically disagreed with FinCEN’s assessment of benefits. These commenters argued that the proposed rule should consider only the incremental benefit to law enforcement from the application of the proposed rule to venture capital advisers, given the existing AML/CFT obligations to which financial institutions that interact with venture capital funds are already subject. One of those commenters also argued that the initial impact analysis’s explanation of benefits was broad and suffered from a lack of specificity, while the other commenter noted that transactional and customer information held by RIAs and ERAs is already available to law enforcement if a warrant has been obtained, or to regulators through their examination process, thereby suggesting that the proposed rule would not provide significant new information to law enforcement. Final Impact Analysis: In response to these comments on benefits, FinCEN has expanded the discussion on certain benefits in the final Impact Analysis and has added additional detail as to why FinCEN is choosing to not quantify the benefits of this final rule. In particular, FinCEN added additional discussion and detail on benefits associated with measures designed to combat crime, including money laundering, terrorist financing, and other types of illicit finance activity. FinCEN also expanded the Analysis’s discussion of benefits associated with international regulatory cooperation for AML/CFT, a type of benefit on which recently updated OMB guidance places an increased emphasis.280 In response to comments, FinCEN also provided additional discussion on some of the challenges with quantifying the benefits from AML/CFT regulations, such as the deterrent and detection effects of such rules. FinCEN added some additional guidance from OMB on difficulties in 280 See E:\FR\FM\04SER2.SGM OMB Circular No. A–4 (2023). 04SER2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 quantifying benefits in certain rulemakings as well. As further explained in the final Impact Analysis, however, the rule does have clearly identifiable benefits, even if those benefits cannot be readily quantified given their nature: difficulty quantifying a rule’s benefits does not indicate that the rule lacks benefits or that its benefits are unimportant. Moreover, the final Impact Analysis expressly acknowledges that existing legal requirements provide similar benefits to the rule in some circumstances, but also highlights significant gaps in the existing requirements, and explains how the rule will create new benefits by filling those gaps and more comprehensively promoting AML/CFT compliance in the investment adviser industry. (c) Estimate of Suspicious Activity Reports Comments Received: FinCEN’s initial impact analysis used the number of SARs currently filed by dual registrants to estimate the number of SARs that RIAs would submit under the proposed rule. One commenter claimed that, by doing so, FinCEN significantly overstated the frequency with which RIAs would submit SARs under the proposed rule, as the vast majority of RIAs do not execute transactions in the way that dual registrants do, but instead rely on custodians. Another commenter stated that the number of SARs that may be filed under the proposed rule should not be used as a proxy for effectiveness of the rule. Final Impact Analysis: In the final Impact Analysis, FinCEN continues to use the estimated number of SARs to be filed by each investment adviser to assist FinCEN in estimating the costs associated with identifying and reviewing alerts and cases that may eventually lead to a SAR filing, as well as the costs associated with investment advisers documenting cases where SARs are not filed. FinCEN agrees with the commenters that the frequency with which dual registrants file SARs may differ from the frequency with which all RIAs file SARs under the rule: for example, dual registrants may have significantly more transactional activity than entities that are solely investment advisers and may encounter suspicious activity that they would not if they were serving solely as an investment adviser. Thus, by relying on the frequency with which dual registrants file SARs, FinCEN’s Impact Analysis may overestimate the number of SARs that RIAs will file under the rule, and thus may overestimate the related costs that the rule would impose. Nonetheless, VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 FinCEN is keeping this estimate given the difficulty of otherwise reliably estimating the frequency of SAR filing and to avoid underestimating time and labor costs associated with the SAR filing process. FinCEN agrees that the number of SARs a financial institution files does not, in and of itself, necessarily indicate whether that institution has an effective AML/CFT program. FinCEN thus clarifies that there is no regulatory expectation that an investment adviser file a certain number of SARs to be in compliance with the requirements of the final rule. FinCEN recognizes that the amount of potentially suspicious transactions that occur by, at, or through an investment adviser will vary significantly with its AUM, advisory activities, and the risk profile associated with its customers. As such, some advisers may file several hundred SARs per year, while many other advisers, particularly smaller advisers who have fewer customers, may file few if any SARs in a given year. FinCEN also notes that in other sectors subject to SAR filing obligations, a small number of entities are responsible for a large number of total SAR filings for those institutions.281 2. Final Regulatory Impact Analysis In accordance with OMB guidance, this Impact Analysis contains, as follows: (1) a statement of the need for the regulatory action; (2) a clear identification of a range of regulatory approaches; and (3) an estimate of the benefits and costs—quantitative and qualitative—of the final regulatory action and its alternatives. (a) Statement of the Need for, and Objectives of, the Final Rule The primary purpose of the final rule is to address identified illicit finance risks among investment advisers (i.e., RIAs and ERAs). Currently, investment advisers are not required by regulation to apply measures designed to address money laundering, terrorist financing, and other illicit finance risks similar to those to which other financial institutions are subject. For example, investment advisers are generally not required to establish an AML/CFT program, to conduct customer due diligence, or to report suspicious customer activity to FinCEN. This means that tens of thousands of investment advisers overseeing the 281 See FinCEN, Year in Review for FY 2022 (Apr. 21, 2023), p.3 (noting that the top 10 SAR filers filed approximately 52 percent of all SARs in FY 2022), available at https://www.fincen.gov/sites/ default/files/shared/FinCEN_Infographic_Public_ 2023_April_21_FINAL.pdf. PO 00000 Frm 00059 Fmt 4701 Sfmt 4700 72213 investment of hundreds of trillions of dollars into the U.S. economy currently do not face regulatory sanction for failing to implement the abovementioned measures, creating a material weakness in the United States’s framework to combat illicit finance. As described in detail above, investment advisers work closely with and provide services that are similar or related to, services authorized to be provided by other BSA-defined financial institutions.282 While investment advisers do not usually custody customer assets, they generally must understand their customers’ financial background and investment goals to provide advisory services, and they direct banks and broker-dealers to execute transactions and disperse funds to support their customers’ investment objectives. Under the current AML/CFT regulatory framework applicable to investment advisory activities, the financial institutions that engage in trading or transactional activities on behalf of investment advisers or their customers, such as banks and brokerdealers, are subject to AML/CFT reporting and recordkeeping obligations. However, for many of these financial institutions, the investment adviser, and not the investment adviser’s customers, is their customer. Consequently, they may rely solely on an investment adviser’s instructions and lack independent knowledge of the adviser’s customers. In some cases, an investment adviser may be the only person or entity with a complete understanding of the source of a customer’s invested assets, background information regarding the customer, or the objectives for which the assets are invested. Additionally, an investment adviser may use multiple broker-dealers or banks for trading or custody services. As a result, one financial institution may not have the complete picture of an adviser’s activity or information regarding the identity and source of wealth of the advisers’ customers, and thus may not be well-positioned to assess whether funds managed by the adviser may be derived from illicit proceeds or associated with a criminal or other illicit finance activity. Without more complete information, such an institution may not have sufficient information to warrant filing a SAR, or may be required to file a SAR that only has limited information concerning the investment adviser’s transactions on behalf of a particular customer. This limits the ability of law enforcement to 282 See E:\FR\FM\04SER2.SGM supra Section II.B. 04SER2 72214 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 identify illicit activity that may be occurring through investment advisers. As discussed in the preamble, the final rule addresses this gap by requiring covered RIAs and ERAs to implement AML/CFT programs, which include risk-based procedures for conducting ongoing customer due diligence, and report suspicious activity to FinCEN, among other requirements. These RIAs and ERAs will be subject to examination for compliance with these requirements by the SEC. FinCEN expects this will reduce instances of investment advisers’ unwittingly laundering illicit proceeds on behalf of clients and increase the likelihood that authorities detect illicit activity occurring through unwitting investment advisers. It also allows law enforcement to better detect complicit investment advisers that knowingly facilitate money laundering, terrorist financing, or other illicit finance activity. The final rule will also bring the investment adviser industry more in line with its counterparts in the U.S. financial sector and around the world. (b) Summary of the Final Rule The final rule adds ‘‘investment adviser’’ to the definition of ‘‘financial institution’’ at 31 CFR 1010.100(t) and adds a new provision to section 1010.100 defining the term ‘‘investment adviser’’ to mean RIAs (except for those RIAs exempted as described below) and ERAs. The final rule also clarifies that for certain ‘‘foreign-located investment advisers’’ (RIAs and ERAs that have their principal office and place of business outside the United States), the requirements of the final rule only apply to certain advisory activities with a nexus to the United States. With these changes to 31 CFR 1010.100, the final rule then subjects such ‘‘investment advisers’’ to AML/ CFT requirements applied to financial institutions, including requiring them to: (i) develop and implement an AML/ CFT program; (ii) file SARs and CTRs; (iii) record originator and beneficiary information for transactions (Recordkeeping and Travel Rules); (iv) respond to section 314(a) requests; and (v) implement special due diligence measures for correspondent and private banking accounts. AML/CFT Program. These investment advisers are required to maintain an AML/CFT program under the final rule, including: (i) developing internal policies, procedures, and controls to comply with the requirements of the BSA and address money laundering, terrorist financing, and other illicit finance risks; (ii) designating an AML/ CFT compliance officer; (iii) instituting VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 an ongoing employee training program; (iv) soliciting an independent test of AML/CFT programs for compliance; and (v) implementing risk-based procedures for conducting ongoing customer due diligence. As discussed above, FinCEN has determined that investment advisers can exempt from their AML/CFT programs any (i) mutual fund, (ii) collective investment fund, or (iii) investment adviser that they advise and that is subject to the final rule. Also as noted above, FinCEN has determined to not include the Duty Provision in this final rule. File SARs and CTRs. Investment advisers are required to file a report of any suspicious transaction relevant to a possible violation of law or regulation with FinCEN. In addition, investment advisers are required to report transactions in currency over $10,000. Currently, all investment advisers report such transactions on Form 8300.Under the final rule, a CTR replaces Form 8300 for RIAs and ERAs meeting the rule’s definition of ‘‘investment adviser.’’ Recordkeeping and Travel Rules. Under the final rule, investment advisers are required to obtain and retain originator and beneficiary information for certain transactions and pass on this information to the next financial institution in certain funds transmittals involving more than one financial institution. Respond to Section 314(a) Requests. FinCEN’s regulations under section 314(a) enable law enforcement agencies, through FinCEN, to reach out to financial institutions to locate accounts and transactions of persons that may be involved in terrorism or money laundering. Requests contain subject and business names, addresses, and as much identifying data as possible to assist the financial industry in searching their records. The final rule allows these requests to be made to investment advisers. Special Due Diligence Measures for Correspondent and Private Banking Accounts. The final rule requires investment advisers to maintain due diligence measures that include policies, procedures, and controls that are reasonably designed to enable the investment adviser to detect and report, on an ongoing basis, any known or suspected money laundering or suspicious activity conducted through or involving any correspondent or private banking account that is established, maintained, administered, or managed in the United States for a foreign financial institution. PO 00000 Frm 00060 Fmt 4701 Sfmt 4700 (c) Discussion of Concurrent/ Overlapping/Conflicting Regulations There are no Federal rules that directly and fully duplicate, overlap, or conflict with the final rule. The majority of the investment adviser industry is not subject to any comprehensive AML/CFT requirements. FinCEN is aware that requirements within the Advisers Act and other Federal securities laws impose requirements upon investment advisers that in some instances are similar to the requirements in the final rule and perform similar roles (i.e., improving the integrity of the U.S. financial system and protecting customers). FinCEN also recognizes that the Advisers Act and its implementing regulations authorize the SEC to regulate the investment adviser industry for compliance with these requirements. However, while these existing requirements are important, and may provide a supporting framework for implementing certain obligations in the final rule, they do not impose the specific AML/CFT measures in the final rule in support of the BSA’s statutory purposes. Specifically, investment advisers are not required to develop internal policies, procedures, and controls to identify and mitigate the risk that the adviser might be used for money laundering, terrorist financing, or other illicit finance purposes. Currently, investment advisers are not required to appoint an AML/CFT officer or train their employees to comply with AML/CFT requirements. They are not required to report suspicious activity, maintain certain transaction records, or respond to section 314(a) requests for information on customer accounts or transactions. The existing rules and regulations under the Advisers Act are designed to prevent adviser fraud or theft of client assets and otherwise protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation. Preventing illicit actors from using the investment adviser industry to launder the proceeds of crime or finance terrorism is not contemplated in existing obligations on the industry. FinCEN recognizes that investment advisers that are dually registered as broker-dealers or are chartered as banks (and bank subsidiaries) are already subject to AML/CFT requirements. As noted above, FinCEN is not requiring such entities to establish multiple or separate AML/CFT programs so long as a comprehensive AML/CFT program covers all of the entity’s applicable legal and regulatory obligations. The program should be designed to address the different money laundering, terrorist E:\FR\FM\04SER2.SGM 04SER2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 financing, or other illicit finance activity risks posed by the different aspects of the overall business’s activities and satisfy each of the risk-based AML/CFT program requirements to which it is subject in its capacity as both an investment adviser and a broker-dealer or bank. Similarly, an investment adviser that is affiliated with, or a subsidiary of, another entity required to establish an AML/CFT program in another capacity is not required to implement multiple or separate programs and instead may elect to extend a single program to all affiliated entities that are subject to the BSA, so long as it is designed to identify and mitigate the different money laundering, terrorist financing, and other illicit finance activity risks posed by the different aspects of each affiliate’s (or subsidiary’s) business(es) and satisfies each of the risk-based AML/CFT program and other BSA requirements to which the entities are subject in all of their regulated capacities. FinCEN is likewise aware that investment advisers serve as advisers to mutual funds, which have their own AML/CFT program requirements, and bank-and trust-company sponsored collective investment funds, as well as to other investment advisers covered by the final rule (including as subadvisers). For the reasons described above, FinCEN is mandating under the final rule that an RIA advising a mutual fund or collective investment fund may deem satisfied its AML/CFT program requirements with respect to such mutual fund, collective investment fund, or another investment adviser the adviser advises so long as the mutual fund, collective investment fund, or investment adviser is subject to an AML/CFT program requirement applicable under another provision of 31 CFR chapter X. FinCEN is also aware that the SEC already examines certain investment advisers for compliance with the Advisers Act and implementing regulations. FinCEN anticipates that the SEC’s examination of RIA and ERA compliance with the final rule’s new requirements will be incorporated into its risk-based examination program. (d) Report Organization This Impact Analysis is structured as follows. Section 3 assesses the nature and characteristics of the entities and their business that will be affected by the final rule. Section 4 then identifies the expected benefits of the final rule, and section 5 then assesses the expected costs of the final rule to both the private sector and government and explains the methodology for doing so. Finally, VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 Section 6 assesses potential regulatory alternatives to issuing the final rule. Following the Impact Analysis are the regulatory analyses required by the RFA, PRA, and UMRA. These analyses rely on certain calculations in the Impact Analysis. 3. Affected Entities This section identifies and characterizes the population of investment advisers that are likely to be impacted by the final rule. The final rule covers both RIAs (with certain exemptions) and ERAs. These groups generally may vary in terms of their business structure, AUM, number of employees, and number of client relationships. As explained below, these differences affect the estimated burden of the final rule, in part, because depending on their business structure, some RIAs and ERAs may already be implementing AML/CFT measures to some degree. To establish a pre-regulation baseline, this section provides a profile of investment advisers likely to be affected by the final rule. First, it describes which investment advisers will be affected by the final rule and on what basis. Next, it describes how RIAs and ERAs are categorized based on business structure, in ways that align with the expected costs of the final rule. Next, it describes the baseline level of economic activity for each type of entity. Finally, it describes other characteristics of the regulated population, including the number of small businesses. (a) Universe of Investment Advisers Impacted by the Final Rule The Advisers Act defines an investment adviser as a person or firm that, for compensation, is engaged in the business of providing advice to others or issuing reports or analyses regarding securities.283 The final rule would cover two subsets of such investment advisers: RIAs, who register or are required to register with the SEC (with certain exemptions); and ERAs, who are exempt from registration but must report certain information to the SEC. Each RIA and ERA must submit the Uniform Application for Investment Adviser Registration (commonly known as Form ADV) and update it on an annual basis with the SEC.284 Form ADV is an SEC283 See 15 U.S.C. 80b–2(a)(11) for this definition of ‘‘investment adviser.’’ The statute excludes some persons and firms, such as certain banks, certain professionals, certain broker-dealers, publishers, statistical ratings agencies, and family offices. See 15 U.S.C. 80b–2(a)(11)(A)–(G). 284 See 17 CFR 275.203–1 and 204–4. A detailed description of Form ADV’s requirements is available at https://www.sec.gov/oiea/investoralerts-bulletins/ib_formadv.html. PO 00000 Frm 00061 Fmt 4701 Sfmt 4700 72215 administered self-disclosure form that collects certain information about each RIA and ERA. On Form ADV, RIAs must report ownership, clients, employees, business practices, custodians of client funds, and affiliations, as well as any disciplinary events of the adviser or its employees, and marketing and certain disclosure reporting materials it provides to clients. ERAs report a subset of this information. i. SEC Registration and Reporting Criteria Unless eligible to rely on an exemption, investment advisers that manage more than $110 million must register with the SEC, rather than a State authority, as well as submit a Form ADV and update it at least annually.285 Besides having AUM above $110 million, additional criteria may result in an investment adviser registering with the SEC.286 For example, investment advisers with AUM of at least $100 million but less than $110 million are allowed, but not required, to register with the SEC. Unless a different exception from the prohibition on registration applies, investment advisers with AUM under $100 million are prohibited from registering with the SEC,287 but must register instead with the relevant State securities regulator. An ERA is an investment adviser that would be required to register with the SEC but is statutorily exempt from such requirement because: (1) it is an adviser solely to one or more venture capital funds, or (2) it is an adviser solely to private funds and has AUM in the United States of less than $150 285 Exceptions to this registration requirement include (1) venture capital advisers, (2) private fund advisers with AUM under $150 million, (3) advisers to life insurance companies, (4) foreign private advisers, (5) advisers to charitable organizations, (6) certain commodity trading advisers, (7) advisers to small business investment companies, and (8) advisers to rural business investment companies. See 15 U.S.C. 80b–3(b). 286 Other exceptions to the prohibition on SEC registration include: (1) an adviser that would be required to register with 15 or more States (the multi-State exemption); (2) an adviser advising a registered investment company; (3) an adviser affiliated with an RIA; and (4) a pension consultant. Persons satisfying these criteria and the definition of ‘‘investment adviser’’ are required to register as investment advisers with the SEC. See Form ADV: Instructions for Part IA, Item 2. Advisers with a principal office and place of business in New York and over $25 million AUM are required to register with the SEC. 287 17 CFR 275.203A–1. Note that if an RIA’s AUM falls below $90 million as of the end of such RIA’s fiscal year, then it must withdraw its registration with the SEC, unless otherwise eligible for an exception to the prohibition on SEC registration. E:\FR\FM\04SER2.SGM 04SER2 72216 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations million.288 ERAs are required to report to the SEC on Form ADV. Based on FinCEN’s initial regulatory flexibility analysis and public comments submitted on the proposed rule, in the final rule, FinCEN has exempted several classes of investment advisers from the rule’s requirements. FinCEN is making these adjustments to the definition of ‘‘investment adviser’’ to reduce the regulatory burden on small advisers and appropriately tailor the final rule to balance regulatory burden, identified illicit finance risk, and the range of advisory activities in clearly understood and administrable fashion. First, the final rule exempts RIAs that report $0 in AUM. Second, the final rule also exempts RIAs that register with the SEC (as indicated on their Form ADV) solely for one or more of the following reason(s): • Mid-Sized Adviser [Item 2.A.(2)] • Pension Consultant [Item 2.A.(7)] • Multi-state Adviser [Item 2.A.(10)] In addition, FinCEN has clarified how the rule will apply to foreign-located investment advisers (RIAs and ERAs that have their principal office and place of business outside the United States). As described at section 1032.111, the rule will apply only to advisory activities of foreign-located investment advisers that (i) take place within the United States, including through the involvement of U.S. personnel of the investment adviser, such as the involvement of an agency, branch, or office within the United States or (ii) provide services to a U.S. person or a foreign-located private fund with an investor that is a U.S. person. As of July 31, 2023, there were 830 RIAs and 2,145 ERAs with their principal office and place of business outside the United States.289 No ERAs are exempt from the final rule. As of July 31, 2023, there were 212 small RIAs 290 that would have been subject to the final rule had it then been in effect. Based on information in the IA CIP NPRM, FinCEN estimates that, due to SEC registration thresholds, the only small ERAs that would be subject to the final rule would be those that maintain their principal office and place of business outside the United States.291 Thus, FinCEN estimates there are 173 small ERAs.292 Therefore, approximately 385 investment advisers, or 1.9 percent of all investment advisers, impacted by the final rule are estimated to be small advisers. ii. Size of the Regulated Population The number of RIAs and ERAs is well-defined based on the number of Form ADV filings. The four subcategories of RIAs that are exempted from the final rule, noted above, account for 1,318 entities as of July 31, 2023. Table 3.1 shows the number of RIAs and ERAs as of July 31, 2023, subject to the final rule. For this Impact Analysis, one additional RIA was omitted because it reported an implausibly high number of total clients. Table 3.1. Estimated Population of RIAs and ERAs Subject to the Final Rule293 ddrumheller on DSK120RN23PROD with RULES2 In total, there are 14,073 RIAs subject to the final rule. These firms manage a total of $119 trillion in assets and have roughly 861,000 total employees.294 Additionally, there are 5,846 ERAs subject to the final rule with total gross assets of $5.2 trillion (ERAs do not 288 See sections 203(l) and 203(m) of the Advisers Act and 17 CFR 275.203(l)–1 and 275.203(m)–1, respectively. 289 According to Form ADV data as of July 31, 2023. FinCEN is not able to determine from available information which particularly advisory activities of the 830 RIAs and 2,145 ERAs that may be foreign-located investment advisers would be subject to the rule, so for the purposes of this costbenefit analysis, it is assuming all their advisory activities would be subject to the rule. 290 As noted below, FinCEN is relying on the small entity definition under the Advisers Act rule adopted for purposes of the RFA. Under SEC regulations implementing the Advisers Act, which FinCEN is relying on for its analysis under the Regulatory Flexibility Act, an investment adviser is considered a small entity if (i) it has, and reports on Form ADV, less than $25 million in AUM; (ii) it has less than $5 million in total assets on the last day of its most recent fiscal year; and (iii) it does not control, is not controlled by, and is not under common control with another investment adviser that is not a small entity. See 17 CFR 275.0–7. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 ERAs Total Investment Advisers 14,073 5,846 19,919 report the number of employees to the SEC).295 With limited exceptions, the final rule does not apply to RIAs with respect to their mutual fund or collective investment fund customers, or when they advise other investment advisers subject to this rule.296 ERAs do 291 See 89 FR 44571 (May 21, 2024). are no direct data indicating which ERAs that maintain their principal office and place of business outside the United States are small entities because, although ERAs are required to report in Part 1A, Schedule D, the gross asset value of each private fund they manage, advisers with their principal office and place of business outside the United States may have additional AUM other than what they report in Schedule D. Therefore, to estimate how many of the ERAs that maintain their principal office and place of business outside the United States could be small entities, an analysis was conducted from a comparable data set: SECregistered investment advisers. According to Form ADV data as of July 31, 2023, there are 67 small RIAs with their principal office and place of business outside the United States and 830 total RIAs with their principal office and place of business outside the United States (67 ÷ 830 = 8.1%). Based on Form ADV data, there are approximately 2,145 ERAs with their principal office and place of business outside the United States. Applying the same percentage (8.1%) to 292 There PO 00000 Frm 00062 Fmt 4701 Sfmt 4700 not advise mutual funds or collective investment funds. Therefore, as a practical matter, RIAs that exclusively advise such funds or other investment advisers subject to this rule are exempt from most of the requirements of this rule.297 Details on cost estimates for ERAs, FinCEN estimates there are 173 ERAs that are small entities. 293 Based on a Treasury review of Form ADV information filed as of July 31, 2023. See supra note 23. The sum across individual categories for RIAs and ERAs is greater than the total because each investment adviser may belong in more than one category. 294 See supra note 25. 295 ERAs report gross assets for each fund they advise, but only if that fund is not reported by another adviser in its own Form ADV; therefore, some ERAs report zero gross assets because all of the funds they advise are also reported by another adviser. See Form ADV, Instructions for Part 1A. 296 See, e.g., section1032.210(a) infra. See supra Section III.D.1 for additional detail on the treatment of mutual funds and collective investment funds under the final rule. 297 But an RIA would still be required to designate an AML/CFT officer, for example. E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.001</GPH> Number of Investment Advisers RIAs Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations these advisers are provided in the next sub-section. ddrumheller on DSK120RN23PROD with RULES2 (b) Categorizing the Regulated Population Based on Business Structure The economic impact of the final rule will depend on an adviser’s business structure and the extent to which such an adviser is already implementing some AML/CFT requirements. FinCEN assesses that RIAs and ERAs dually registered as broker-dealers or banks, are a subsidiary or affiliate of a bank or broker-dealer are more likely to already apply a significant or moderate number of the requirements of the final rule. Additionally, as described below, survey data indicate that some RIAs are already implementing certain requirements of the final rule. RIAs and ERAs are also subject to a variety of regulations and reporting requirements, such as those under Federal securities laws, in addition to the final rule. In some cases, compliance with existing regulations under Federal securities laws may reduce the burden of the final rule. In addition, RIAs and ERAs rely on third-party entities to execute business services, and those entities may be required to comply with AML/CFT regulations. Depending on the business structure of an RIA or ERA, such third-party relationships may also reduce the burden of the final rule. Therefore, FinCEN categorized RIAs and ERAs based on their likelihood of having existing AML/CFT measures in place, and the extent of those measures. This subsection first details the justification for the categorization, based on the regulatory structure of the investment adviser industry and associated institutions. The subsection then describes each category of the regulated population. i. Dual Registrants and AML/CFTCompliant Entities Associated With RIAs and ERAs Some RIAs and ERAs are dually registered as, subsidiaries of, or affiliated with entities that are already subject to AML/CFT obligations and, therefore, may already be applying such obligations to their advisory activities, although they may not be legally obligated to do so.298 For instance, dual registrants may seek to provide customers with both brokerage and advisory services, and apply AML/CFT measures across their businesses rather than incurring greater costs by duplicating measures across each business. Additionally, some AML/CFT 298 See Treasury, 2022 National Money Laundering Risk Assessment, pp. 63–66, https:// home.treasury.gov/system/files/136/2022-NationalMoney-Laundering-Risk-Assessment.pdf. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 measures, such as employee training and initial customer due diligence, can be designed to apply across a firm rather than to specific activities. Further, in past Treasury outreach to financial institutions, those that have a financial subsidiary subject to AML/ CFT program obligations as well as a subsidiary investment adviser have indicated they choose to typically apply an enterprise-wide AML/CFT program extending to all their subsidiaries and their customers so that all business lines or entities in their corporate enterprise are subject to consistent risk practices and procedures. In other circumstances, an RIA or ERA may perform AML/CFT functions via contract with a broker-dealer or other financial institution, such as when the adviser advises a mutual fund, or the adviser may have voluntarily implemented certain AML/CFT measures, such as due diligence or identification requirements.299 Many RIAs and ERAs also frequently use the services of certain third-party entities that are required to comply with AML/ CFT regulations, namely, prime brokers, qualified custodians (e.g., banks), and in some circumstances, fund administrators. ii. Existing Laws and Regulations The Advisers Act and its implementing rules and regulations form the primary existing framework governing investment adviser activity. Some rules and regulations that apply to RIAs are relevant to AML/CFT compliance and may lower the cost of compliance, including, as discussed further below: (1) the Custody Rule, which governs the custody of client funds and securities, often through relationships with qualified custodians who are often subject to AML/CFT requirements; and (2) the Compliance Rule, which governs policies and procedures designed to prevent violations of the Advisers Act, and establishes a procedural and organizational framework that RIAs may be able to build upon to implement AML/CFT measures, thus lowering the cost of compliance with the final rule. Custody Rule. The Custody Rule requires that client funds or securities over which an RIA has custody be held at a qualified custodian.300 The qualified custodian may hold the funds or securities in separate accounts for each client under that client’s name; or in accounts under the name of the RIA 299 See id. See also Managed Funds Association, Sound Practices for Hedge Fund Managers (2009), Chapter 6 (Anti-Money Laundering) (recommending voluntary implementation). 300 See 17 CFR 275.206(4)–2. PO 00000 Frm 00063 Fmt 4701 Sfmt 4700 72217 as agent or trustee for clients, with only client funds and securities inside. Qualified custodians can be banks, registered broker-dealers, futures commission merchants, or certain foreign entities. Because such qualified custodians are BSA-defined financial institutions (or their equivalents under foreign law) that must comply with AML/CFT regulations, accounts maintained on behalf of an RIA—and the associated client relationships—are subject to AML/CFT requirements. Compliance Rule. Under the Compliance Rule,301 an RIA must adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder. RIAs must review their policies and procedures at least annually and designate a chief compliance officer to administer the policies and procedures. Although these policies and procedures do not include requirements that an RIA comply with the BSA, having written policies in place may reduce the time needed to develop and review specific AML/CFT policies and procedures. Alternatively, having a framework in place for establishing policies and procedures may be useful for RIAs in complying with the final rule. Additionally, the presence of a chief compliance officer may reduce costs associated with designating an AML/CFT compliance officer, for example by dual-hatting the current chief compliance officer. Other Requirements. Certain private fund advisers also fill out Form PF, which requires disclosure of limited beneficial ownership information for private funds; for example, the percentage of the private fund’s equity owned by broker-dealers, pension plans, and U.S. and foreign-located persons.302 Some investment advisers may have policies and procedures to comply with OFAC sanctions, which similarly may provide a framework for implementing certain AML/CFT measures included in the final rule. Due to these information collection requirements, RIAs and ERAs already compile varying amounts of information that could be useful in AML/CFT compliance—particularly information related to the identity and citizenship of various clients. Such information collection activities would lower the burden of the final rule on covered RIAs and ERAs. 301 See 302 See E:\FR\FM\04SER2.SGM 17 CFR 275.206(4)–7. 17 CFR 279.9. 04SER2 72218 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations iii. RIA and ERA Categories for Cost Analyses As described above, some RIAs and ERAs are already applying some AML/ CFT requirements (although there is no legal requirement to do so). This is primarily because of their registration as or affiliation with another type of BSAdefined financial institution (such as a broker-dealer). Therefore, the baseline level of AML/CFT measures for an RIA or ERA may vary with their business structure. For the purposes of the cost analysis, FinCEN categorized RIAs and ERAs based on business structure and likelihood of having existing AML/CFT measures in place in the baseline. Based on discussions with industry, information from the 2016 Investment Management Compliance Testing Survey (IMCT Survey),303 and the framework described above, FinCEN assessed that dual registrants are most likely to already have a significant number of AML/CFT measures in place. An RIA or ERA with a significant number of AML/CFT measures in place is assessed to be applying most requirements in the final rule, including filing SARs, recordkeeping, information sharing, and special due diligence measures. Any modifications to existing policies or procedures, such as training programs, are likely to be less burdensome than developing new policies and procedures as some processes could be incorporated into existing routine maintenance, review, and updating procedures. FinCEN also assessed that the majority of RIAs and ERAs affiliated with a bank or broker-dealer are most likely to have a moderate number of AML/CFT measures, though they are less likely than dual registrants to have a significant number AML/CFT measures in place. An RIA or ERA with a moderate number of AML/CFT measures in place are assessed as more likely to implement internal recordkeeping, annual training programs, and initial customer due diligence. However, these RIAs and ERAs are less likely to meet SAR filing, ongoing due diligence, information sharing, and special due diligence requirements under the BSA. These ddrumheller on DSK120RN23PROD with RULES2 303 Investment Management Compliance Testing Survey, Investment Adviser Association (2016) [hereinafter 2016 IMCT Survey], Executive Summary available at https://higherlogic download.s3.amazonaws.com/INVESTMENT ADVISER/aa03843e-7981-46b2-aa49-c572f2 ddb7e8/UploadedImages/publications/2016IMCTex summary.pdf, Results available at https:// higherlogicdownload.s3.amazonaws.com/ INVESTMENTADVISER/aa03843e-7981-46b2-aa49c572f2ddb7e8/UploadedImages/publications/2016 IMCTresults.pdf. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 additional measures would need to be implemented under the final rule. Finally, FinCEN assessed that while most RIAs or ERAs that are not dually registered or affiliated with a bank or broker-dealer are currently implementing a limited number of AML/CFT measures, a minority of that subgroup are currently implementing a moderate number of—rather than a limited number of—AML/CFT measures. An RIA or ERA with a limited number of AML/CFT measures in place would need to implement most of the requirements in the final rule, except that they are likely to be collecting some customer information at the beginning of the client relationship and filing reports (Form 8300) that are substantially similar to CTRs. First, RIAs and ERAs were categorized into three types of entities based on business structure: advisers that are dually registered as broker-dealers or as banks (‘‘dual registrants’’); advisers that are affiliated with a broker-dealer or bank (‘‘affiliated advisers’’); and all others that are not affiliated advisers or dual registrants (i.e., ‘‘other advisers’’). Because broker-dealers and banks must comply with AML/CFT requirements, dual registrants are more likely than other investment advisers to have a significant number of AML/CFT measures in place, and this is reflected in the baseline. Similarly, affiliated advisers are more likely than other advisers to have a moderate number of AML/CFT measures in place in the baseline. Formally, FinCEN defined each group based on Form ADV filings as follows: • Dual registrants. RIAs or ERAs that report to the SEC that they are actively engaged in business as a broker-dealer or bank, responding ‘‘Yes’’ to Item 6.A.(1) and/or Item 6.A.(7).304 As of July 31, 2023, there were 376 dually registered RIAs and 44 dually registered ERAs that would have been subject to the final rule had it then been in effect. • Affiliated advisers. RIAs or ERAs that report to the SEC that they have a related person that is a broker-dealer or bank (responding ‘‘Yes’’ to Item 7.A.(1) and/or Item 7.A.(8)) and are not also dual registrants.305 As of July 31, 2023, 304 Items 6.A.(1) and 6.A.(7) on Form ADV require an investment adviser to identify whether it is actively engaged in a particular business. This response does not necessarily mean that the investment adviser is registered as a broker-dealer or regulated as any particular kind of bank. The phrase ‘‘dual registrant’’ should be interpreted on this basis for purposes of this analysis. 305 A related person is any advisory affiliate (as defined for purposes of Form ADV) of and any person that is under common control (as defined for purposes of Form ADV) with the investment adviser. See Form ADV, Glossary of Terms. PO 00000 Frm 00064 Fmt 4701 Sfmt 4700 there were 2,083 affiliated RIAs and 288 affiliated ERAs that would have been subject to the final rule had it then been in effect. • Other advisers. All RIAs or ERAs that are neither dual registrants nor affiliates of broker-dealers or banks. As of July 2023, there were 11,614 RIAs and 5,514 ERAs that would have been subject to the final rule had it been in effect that were neither a dual registrant nor an affiliated adviser. FinCEN then divided the RIAs and ERAs in each of these categories into subgroups based on the proportion estimated to be implementing a significant, a moderate, or a limited number of AML/CFT measures in the baseline. Because the exact distribution is unknown, FinCEN relied on different assumptions to generate lower and upper bounds and identify a primary estimate. In this case, ‘‘lower bound’’ means more RIAs and ERAs are assumed to have a significant or moderate number of AML/CFT measures in place and will have to implement relatively fewer additional measures under the final rule, while ‘‘upper bound’’ means more RIAs and ERAs are assumed to have a limited number of AML/CFT measures in place and will have to implement relatively more additional measures under the final rule. Although the size of each initial group, i.e., dual registrants, affiliated advisers, and other advisers, is well-defined based on Form ADV data, the extent of existing AML/CFT measures within each group is uncertain and may vary considerably. For this analysis, FinCEN used information from the 2016 IMCT Survey as a benchmark. The 2016 IMCT Survey collected information from approximately 700 RIAs on their existing implementation of AML/CFT measures.306 According to the 2016 IMCT Survey, as of 2016, approximately 40 percent of RIAs had already adopted AML/CFT policies consistent with FinCEN’s 2015 NPRM to apply AML 306 See 2016 IMCT Survey, supra note 301 . The 2024 IMCT Survey, which was published on July 16, 2024, was the first IMCT Survey since 2016 to ask detailed questions about AML policies and procedures. The 2024 IMCT Survey reported a slight drop in the percentage of respondent RIAs with AML policies and procedures that would comply with the requirements of this rule (from 40 percent to 38 percent), and a slight increase in with AML policies and procedures that did not comply with all the requirements of this rule (36 percent to 40 percent). Given this minimal change, FinCEN has determined it is not necessary to adjust its baseline for those investment advisers with significant, moderate, or limited AML/CFT measures. See Investment Management Compliance Testing Survey, Investment Adviser Association (2024), available at https:// www.investmentadviser.org/wp-content/uploads/ 2024/07/2024_IMCT-Survey.pdf. E:\FR\FM\04SER2.SGM 04SER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations 72219 Program and SAR filing requirements to RIAs (2015 NPRM).307 An additional 36 percent of RIAs adopted some AML/ CFT policies and procedures, but those were not in line with those in the 2015 NPRM. Therefore, approximately 76 percent of RIAs had at least some AML/ CFT measures in place as of 2016. More granularly, 49 percent had annual employee AML/CFT training, 24 percent had a designated an AML/CFT compliance officer, and 40 percent performed independent testing of their AML/CFT program annually. Similar information was not available for ERAs, and FinCEN thus lacks information on the extent to which ERAs are already implementing AML/CFT measures. Therefore, FinCEN assumed the proportion of dual-registered, affiliated, and other ERAs implementing AML/ CFT measures was the same as for RIAs across all scenarios. FinCEN assumed in the baseline that a minority of RIAs and ERAs had a significant number of AML/CFT measures in place consistent with the requirements of the final rule, including filing SARs, recordkeeping, information sharing, and special due diligence measures. However, that proportion likely varies across the three groups defined above. As discussed in the uncertainty analysis, based on the 2016 IMCT Survey this figure could be as high as 40 percent. For this group, modifications to existing policies or procedures, such as training programs, are likely to be less burdensome than developing new policies and procedures as some processes could be incorporated into existing routine maintenance, review, and updating procedures. Based on discussions with industry and the framework described above, for the primary estimate FinCEN assessed only dual registrants—i.e., the 376 RIAs and 44 ERAs cited above or approximately two percent of all investment advisers— are likely to already have a significant number of AML/CFT measures in place (even if such measures are not required for their advisory activities). FinCEN then assessed that the majority of affiliated advisers implement a moderate number of AML/ CFT measures, though they are less likely than dual registrants to have a significant number of AML/CFT measures in place. For RIAs and ERAs with a moderate number of AML/CFT measures in place, FinCEN assessed that existing programs most likely include internal recordkeeping, annual training programs, and initial customer due diligence. However, these entities are less likely to meet SAR filing, ongoing due diligence, information sharing, and special due diligence requirements under the BSA. Therefore, they would need to implement additional measures under the final rule. For the primary estimate, FinCEN assumed that 75 percent of affiliated RIAs, amounting to 1,562 entities, have implemented a moderate number of AML/CFT measures. FinCEN further assumed that 25 percent of affiliated RIAs, amounting to 521 entities have implemented a limited number of AML/CFT measures. The same percentages are applied to ERAs. Finally, FinCEN assessed that while most ‘‘other advisers’’ are currently implementing a limited number of AML/CFT measures, a minority are currently implementing a moderate number of AML/CFT measures. The RIAs and ERAs with just a limited number of AML/CFT measures in place would need to implement most of the additional AML/CFT requirements under the final rule. However, FinCEN assessed that all RIAs and ERAs, even those in the ‘‘other advisers’’ group, are likely to be collecting some customer information at the beginning of the client relationship and filing reports 308 that are substantially similar to CTRs. If 40 percent of RIAs have a significant or moderate number of AML/CFT measures, as reported in the 2016 IMCT Survey, the above estimates for dual registrants and affiliated advisers imply that 32 percent of other RIAs are implementing a moderate number of AML/CFT measures. This suggests that 68 percent of other RIAs have just a limited number of AML/CFT measures. The same percentages are applied to ERAs. Overall, this implies that a slightly higher proportion of ERAs have a limited number of AML/CFT measures, and a slightly lower proportion of ERAs have a significant or moderate number of measures, relative to RIAs because fewer ERAs are dually registered or affiliated. As the true distribution of investment advisers implementing a significant, a moderate, or a limited number of AML/ CFT measures is unknown, FinCEN presents an uncertainty analysis using upper and lower bound estimates. For the upper bound estimate, FinCEN assumed that the AML/CFT measures implemented by RIAs and ERAs (either under the current regulatory framework or voluntarily) would not meet the requirements of the final rule, and that therefore all RIAs not dually registered would have to implement for the first time the complete set of AML/CFT measures under the final rule. Based on that assumption, all covered RIAs and ERAs except dually registered entities are assumed to have implemented a limited number of AML/CFT measures. Thus, about two percent of all covered entities (376 RIAs and 44 ERAs) are estimated to have a significant number of AML/CFT measures, and the remaining 98 percent (13,697 RIAs and 5,802 ERAs) are estimated to have a limited number of AML/CFT measures. For the lower bound estimate based on the 2016 IMCT Survey, FinCEN first assumed that approximately 40 percent of all covered RIAs are implementing a significant number of AML/CFT measures. This includes dually registered RIAs, 75 percent of affiliated RIAs, and 32 percent of other RIAs. Next, FinCEN assumed that approximately 36 percent of all covered RIAs are implementing a moderate number of measures. This includes 25 percent of affiliated RIAs and 39 percent of other RIAs. The remaining 24 percent of all covered RIAs (or 29 percent of ‘‘other’’ RIAs) are assumed to have a limited number of AML/CFT measures. The same percentages are applied to ERAs. Classification of RIAs Advising Mutual Funds, Collective Investment Funds, and Other Investment Advisers. As discussed above, RIAs that exclusively advise mutual funds, collective investment funds, or other investment advisers subject to this rule are largely exempt from the requirements of the final rule. However, these RIAs have not been identified specifically through the Form ADV data. FinCEN assumed these advisers were most likely in the other advisers group. Because the clients (mutual funds and, collective investment funds, other investment advisers subject to this rule) of these RIAs are subject to comprehensive AML/CFT obligations, FinCEN assessed these advisers as having a moderate number of AML/CFT measures in place. Table 3.2 shows the resulting size of the population for each of the scenarios described above. 307 2016 IMCT Survey, supra note 301; see also 80 FR 52680 (Sept. 1, 2015). 308 Investment advisers are currently required to file reports for the receipt of more than $10,000 in cash and negotiable instruments using joint FinCEN/Internal Revenue Service Form 8300. See supra note 191. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 PO 00000 Frm 00065 Fmt 4701 Sfmt 4700 E:\FR\FM\04SER2.SGM 04SER2 72220 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations Table 3.2. Number of RIAs and ERAs, by Scenario309 Registered Investment Advisers :;:; cr.s. 0 >> < ="'.,-· = ....-· ~ Q. """::n ~= ., = = ....= "' Significa nt Lower Bound ~ "' 376 (100% ~ Q. Exempt Reporting Advisers 6'.:o < .... ... ="' ~ ~ "' ., 3,692 (32%) 4,546 0 521 25% Limited 0 0 376 ddrumheller on DSK120RN23PROD with RULES2 Q. """::n .,~ = = = ....= - ~ "' 44 (100%) 0 ~ Q. 0 ~ ., "' 216 (75%) 1,753 (32%) 7,643 (38%) 72 2,158 7,297 0 44 0 0 44 (100%) 0 0 420 (2%) Moderat e 0 0 0 0 0 0 0 0% Limited 0 2,083 (100%) 12,652 (100% 0 288 (100% 5,514 (100% Total 376 (100% 288 (100% 5,514 (100% Baselin e AML/ CFT 2,083 (100%) 11,614 (100% 44 (100%) 23:30 Sep 03, 2024 19,499 (98%) 19,919 (100% Re istered Investment Advisers Dual Registra nts Affiliated Advisers Other Advise rs Dual Registrants ed Advise rs 309 Parentheses indicate the percentage of entities within a given category by scenario. Totals may not sum precisely due to rounding. VerDate Sep<11>2014 6'.: ..."'< ....=-~ 376 (100% Significa nt Scena rio >> < =.,"'-· =....-· ~ 0 Total Upper Bound :;:; cr.s. 0 "' 1,562 (75%) Moderat e Total Jkt 262001 PO 00000 Frm 00066 Fmt 4701 Sfmt 4700 E:\FR\FM\04SER2.SGM 04SER2 Other Advise rs Total ER04SE24.002</GPH> Scenar io Baseline AML/ CFT Measur es Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations 376 100% 0 Lower Boun Limited d ddrumheller on DSK120RN23PROD with RULES2 44 100% 216 75% 72 25% 0 0 0 1,753 32% ,15 39% ,60 29% 0 376 (100%) 2,083 (100%) 11,614 (100%) 44 (100%) 288 (100%) 5,514 (100% ) Signific ant Moder ate 376 100% 0 0 44 100% 0 0 0 0 0 0 0 0 Limited 0 2,083 (100%) 12,652 (100%) 0 288 (100%) Total 376 (100%) 2,083 (100%) 11,614 (100%) 44 (100%) 288 (100%) (c) Baseline Economic and Financial Characteristics of Regulated Population This subsection describes the economic and financial profiles of RIAs and ERAs subject to the final rule in the baseline, including the number of employees and customer relationships with legal entities, natural persons, and pooled investment vehicles (PIVs)—and annual changes in these numbers. VerDate Sep<11>2014 3,692 32% 4,546 39% 3,376 29% 0 Total Upper Boun d 1,562 75% 521 25% 23:30 Sep 03, 2024 Jkt 262001 i. Number of Employees RIAs report employment figures on their Form ADV, while ERAs do not. To estimate the number of employees at ERAs, FinCEN assumed that the number of employees was similar to those at RIAs with the same number of private funds. In particular, the number of ERA employees was approximated as follows. First, FinCEN focused on RIAs with private funds only. FinCEN calculated deciles for the number of PO 00000 Frm 00067 Fmt 4701 Sfmt 4700 5,514 (100% 5,514 (100% ) 7,643 38% 7,297 37% 4,979 25% 19,91 9 (100 420 2% 0 0% 19,49 9 98% 19,91 9 (100 % funds among each RIA category: dual registrants, affiliated RIAs, and other RIAs. Then, for each category of ERA, FinCEN calculated the average number of employees for the decile of the corresponding distribution of RIAs, based on the number of private funds advised by that ERA. This served as the approximation for the total number of ERA employees in the cost calculation. Table 3.3 shows the average number of employees for each category of investment adviser. E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.003</GPH> Measu res Signific ant Moder ate 72221 72222 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations Table 3.3: Average Number of Employees, by Type of Investment Adviser3 10 Investment Adviser Type Dual Registrant Affiliated Adviser Other Adviser ii. Number of Clients On Form ADV, RIAs report the number of clients, enumerated for specific types of clients.311 As described in section 3 of this Impact Analysis, RIAs ERAs 828 152 20 27 26 11 certain costs of the final rule vary depending on the type of client, across three categories of clients: individual persons including high-net worth individuals, collectively known as ‘‘natural persons’’; PIVs; and various other types of clients collectively denoted as ‘‘legal entities.’’ Table 3.4 shows the average number of clients of each type, based on the RIA categories defined above. Table 3.4: Average Number of Clients per RIA, by Client Type and Category Investment Adviser Type Dual Registrant Affiliated Adviser Other Adviser ERAs report the number of private funds they advise (i.e., an ERA’s clients), including the number of funds Natural Persons Legal Entities 46,198 11,444 701 932 224 143 for which another investment adviser already reports fund-specific information. Table 3.5 reports the PIVs 13 20 4 average number of funds reported per ERA, based on the investment adviser categories described above. Table 3.5: Average Number of Private Funds per ERA, by Category312 Investment Adviser Type Dual Registrant Affiliated Adviser Other Adviser 310 Based on a Treasury review of Form ADV information filed as of July 31, 2023. See supra note 23. RIAs report total employees in Item 5.A. ERA data come from FinCEN calculations of the median employment among RIAs that report only private fund clients. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 RIAs and ERAs, including but not limited to dual registrants, accordingly, may report multiple lines of revenue on their Form ADV, and it is occasionally challenging to identify their primary line of business. Using the North American Industry Classification System (NAICS), the standard classification system used by Federal statistical agencies in classifying business establishments for the purpose of collecting, analyzing, and publishing statistical data on U.S. businesses, FinCEN assesses that most (if not all) RIAs and ERAs are classified within the NAICS subsector 523 (Securities, Commodity Contracts, and Other Financial Investments and Related Activities)—with most entities classified in the national industry NAICS 523940 (Portfolio Management and Investment Advice). However, that subsector may not account for the primary line of business of all investment advisers, and some may be classified under NAICS 522 (Credit Intermediation and Related 311 Id. Clients are reported in Item 5.D. Natural persons are calculated as the sum of 5.D.(a).(1) and 5.D.(b).(1). PIVs are reported in 5.D.(f).(1), and exclude investment companies and business development companies. Legal entities are the sum of the remaining rows of column 1 of Item 5.D. Numbers are rounded to the nearest integer. 312 Id. The total number of funds is calculated as the sum of the number of funds reported in Schedule D, sections 7.B.(1) and 7.B.(2). Numbers are rounded to the nearest integer. PO 00000 Frm 00068 Fmt 4701 Sfmt 4700 E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.006</GPH> 5 ER04SE24.005</GPH> i. Industry Classification by NAICS Code In general, businesses may be categorized under multiple industries due to having multiple lines of revenue or multiple business functions. Many 63 ER04SE24.004</GPH> ddrumheller on DSK120RN23PROD with RULES2 (d) Other Characteristics of Regulated Entities This section describes the industry classification and business size of RIAs and ERAs to be regulated under the final rule. Average Number of Private Funds Reported 4 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations Activities) or NAICS 525 (Funds, Trusts, and Other Financial Vehicles). ii. Small Entities To assess the prevalence of small businesses affected by the final rule, FinCEN relied on the small entity definition under the Advisers Act rule adopted for purposes of the RFA. Under this definition, an investment adviser is considered a small entity if (i) it has, and reports on Form ADV, less than $25 million in AUM; (ii) it has less than $5 million in total assets on the last day of its most recent fiscal year; and (iii) it does not control, is not controlled by, and is not under common control with another investment adviser that is not a small entity.313 RIAs report whether they meet the conditions listed above in items 5.F and 12 of Form ADV.314 As of July 31, 2023, there were 212 small entities RIAs that would have been subject to the final rule had it then been in effect. ERAs are not required to report regulatory AUM on Form ADV; therefore, it is not 72223 feasible to determine whether they meet the conditions above. Based on information in the IA CIP NPRM, FinCEN estimates that due to SEC registration thresholds, the only small entity ERAs that would be subject to the final rule would be those that maintain their principal office and place of business outside the United States.315 Thus, FinCEN estimates there are 173 small entity ERAs.316 Table 3.6 reports the estimated number of small entities subject to the final rule. Table 3.6: Number of Small Entities, by Type of Investment Adviser Investment Adviser Type Dual Registrant Affiliated Adviser Other Adviser Total RIAs ERAs Total 1 17 194 2 14 157 3 31 351 212 173 385 For comparison, Table 3.7 shows the characteristics of small RIAs versus all other RIAs. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 entities because although ERAs are required to report in Part 1A, Schedule D the gross asset value of each private fund they manage, advisers with their principal office and place of business outside the United States may have additional AUM other than what they report in Schedule D. Therefore, to estimate how many of the ERAs that maintain their principal office and place of business outside the United States could be small entities, an analysis was conducted from a comparable data set: SECregistered investment advisers. According to Form ADV data as of July 31, 2023, there are 67 small RIAs with their principal office and place of business outside the United States and 830 total PO 00000 Frm 00069 Fmt 4701 Sfmt 4725 RIAs with their principal office and place of business outside the United States (67 ÷ 830 = 8.1 percent). Based on Form ADV data as of July 31, 2023, there are approximately 2,145 ERAs with their principal office and place of business outside the U.S. Applying the same percentage (8.1 percent) to ERAs, FinCEN estimates there are 173 ERAs that are small entities. 317 Based on a Treasury review of Form ADV information filed as of July 31, 2023. See tables above for details on the Form ADV items used to calculate each table entry. Numbers are rounded to nearest whole number or percent. E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.008</GPH> 313 17 CFR 275.0–7 (defining ‘‘small business’’ or ‘‘small organization’’ for purposes of the Advisers Act). 314 Based on a Treasury review of Form ADV information filed as of July 31, 2023. See supra note 25. An RIA qualifies as a small entity under the SEC’s definition if it has fewer than $25 million in regulatory AUM (Item 5.F.(2)(c)) and answers ‘‘No’’ to each of the questions in Item 12. 315 89 FR 44571, 44592–44593, n.131 (May 21, 2024). 316 There are no direct data indicating which ERAs that maintain their principal office and place of business outside the United States are small ER04SE24.007</GPH> ddrumheller on DSK120RN23PROD with RULES2 Table 3.7: Characteristics of RIAs by Business Size317 Small All Other Entity Characteristic RIAs RIAs Avg. Assets Under $5.3M $8.6B Management Avg. No. Employees 4 62 Percent that Advise Private 34% 56% Funds Avg. No. Individual Clients 2,341 3,524 Avg. No. PIV Clients 0 7 Avg. No. Legal Entity Clients 1 179 72224 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 4. Assessment of Benefits The benefits assessed here are more difficult to quantify than the costs, but the final rule is nonetheless anticipated to add substantial value directly and indirectly through effects that can contribute to detection, deterrence, and broader policy goals.318 The principal direct benefits of the final rule are expected to accrue primarily in the public sector, most notably to U.S. law enforcement and the national security community, as well as certain Federal functional regulators, and to the investment adviser industry. Further, the identification of illicit activity in the investment adviser industry by applying program, reporting, and recordkeeping obligations to those industry participants, i.e., covered RIAs and ERAs, that have direct access to customer information would enhance detecting, investigating, and prosecuting illicit finance activity occurring through the industry and contribute to deterrence, which will benefit society more generally though a range of economic, security, and other effects.319 The AML/CFT requirements in the final rule will help address existing information gaps regarding suspicious activity reporting discussed in section 1, with potentially significant implications for detection and deterrence.320 They 318 In OMB Circular No. A–4 (2023), OMB acknowledges that some regulatory measures may incur costs or benefits that are highly uncertain or cannot be quantified, e.g., for lack of data or methods. Among other challenges in the context of this rule, the so-called dark figure of crime, which is typically defined as the difference between reported or known and actual crime, further complicates the assessment of both illicit activity and the potential effects of changes in policy and regulation. Specifically, faced with criminals’ active concealment, one can neither directly observe the true dimensions of the criminal activity (i.e., the baseline) nor unambiguously interpret some common indicators of change. For example, an increase in reported crime can reflect better enforcement, an increase in criminal activity, or a combination of the two. Provisions of this rule will improve the availability of information about financial activity that could make estimation less challenging in the future. 319 Economists have long argued that increasing the costs and risks of law breaking, e.g., by increasing the likelihood of detection and punishment, makes law breaking less attractive. For the seminal work in this area, see Gary S. Becker, ‘‘Crime and Punishment: An Economic Approach,’’ Journal of Political Economy, Mar.-Apr. 1968, pp. 169–217, which has given rise to a vast and still expanding literature. 320 OMB guidance has addressed such benefits in an analogous context: ‘‘For some regulations, costs are associated with activity that does not itself yield benefits, but instead may prompt intermediate actions that connect those effects with ultimate beneficial outcomes. For instance, a regulation may require collection and dissemination of information related to safety practices; the information itself does not make anyone safer, but its greater availability may prompt more widespread use of effective safety practices.’’ OMB Circular No. A–4 (2023), p. 40. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 will also help harmonize AML/CFT requirements between investment advisers and similarly situated financial institutions that must comply with these requirements, which would mean greater parity among them, and between the United States and its allies. As noted in the Risk Assessment, investment advisers manage tens of trillions of dollars in assets.321 While some of these assets are subject to AML/ CFT requirements, others are not. For instance, as of Q3 2023, RIAs manage approximately $20 trillion in private fund assets, and this included $243 billion owned by foreign-located investors where the RIA did not have the information on hand to identify the beneficial owner because the beneficial interest was held through a chain involving one or more third-party intermediaries.322 ERAs managed approximately $5 trillion in AUM in private funds. In addition to the specific direct benefits discussed further below, each provision in the final rule will also convey benefits indirectly by forming part of a comprehensive framework for identifying and reporting money laundering, terrorist financing, or other illicit finance activity. For instance, the requirement for employee training and independent testing will help ensure that the systems and employees who will identify whether an investment adviser is being used for illicit finance activity are best positioned to do so. Specific direct benefits from the final rule include (a) increasing access for law enforcement to relevant information for complex financial crime investigations, (b) enhancing interagency understanding of priority national security threats and their associated financial activity, (c) improving financial system transparency and integrity to strengthen the U.S. financial system from abuse by illicit actors, and, relatedly, (d) aligning with international financial standards and supporting international regulatory cooperation, including information sharing, with and among allies.323 321 See Risk Assessment, supra note 2, at 2. 322 See SEC, Private Fund Statistics, Third Calendar Quarter 2023, available at https:// www.sec.gov/files/investment/2023q3-privatefunds-statistics-20240331.pdf. 323 OMB guidance highlights the relevance of international cooperation, ‘‘Consistent with Executive Order 13609, agencies often engage in international regulatory cooperation (IRC), which can include information exchange, work sharing, scientific collaboration, pilot programs, and alignment of regulatory requirements . . . . [I]nclusion of the foreign effects of a regulation in your primary analysis will often be appropriate when such analysis would help inform cooperative efforts with foreign regulators that aim to minimize PO 00000 Frm 00070 Fmt 4701 Sfmt 4700 Through these direct benefits, crucial indirect benefits will accrue to the public at large by reducing money laundering, which can distort legitimate markets, countering the financing of terrorism and other illicit finance activity, and protecting national security. (a) Strengthening Law Enforcement Investigations of Certain Financial Crimes Requiring covered RIAs and ERAs to file SARs and keep certain customer records makes that information more readily available to law enforcement authorities, assisting those authorities in detecting, investigating, and prosecuting financial crimes. The FBI reported that 36.3 percent of active complex financial crimes investigations and 27.5 percent of public corruption investigations involved BSA reporting.324 However, for other types of criminal investigations, the percentage of criminal investigations supported by BSA reporting was even higher. For example, 46 percent of transnational organized crime investigations were supported by BSA reporting.325 SAR filing by RIAs and ERAs may increase BSA information availability to support investigations into corruption, fraud, and tax evasion, the criminal activities that the Risk Assessment identified as being most prominently tied to illicit proceeds moving through investment advisers.326 Information from the reporting of suspicious activity and recordkeeping by covered RIAs and ERAs may benefit specific types of law enforcement financial crime investigations, particularly those involving the proceeds of foreign corruption, along with other transnational financial crimes. For instance, according to the FBI, in the 1MDB criminal investigation, at least $1 billion traceable to the conspiracy was laundered through the United States,327 including through private funds advised by at least one RIA, and used to purchase assets in the United States.328 In another case unnecessary regulatory differences and meet shared challenges.’’ OMB Circular No. A–4 (2023), p. 9. 324 See FinCEN, Year in Review for FY 2022 (Apr. 21, 2023), p.2, available at https://www.fincen.gov/ sites/default/files/shared/FinCEN_Infographic_ Public_2023_April_21_FINAL.pdf. 325 Id. 326 See Risk Assessment, supra note 2, at 16. 327 See FBI, ‘‘U.S. Seeks to Recover $1 Billion in Largest Kleptocracy Case to Date,’’ (Jul. 20, 2016), available at https://www.fbi.gov/news/stories/usseeks-to-recover-1-billion-in-largest-kleptocracycase-to-date. 328 See Verified Compl. for Forfeiture (Dkt. 3) ¶ 760, United States v. Real Property Located in London, United Kingdom Titled in the Name of Red Mountain Global Ltd., No. 19–cv–1326, (C.D. Cal. E:\FR\FM\04SER2.SGM 04SER2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations involving the misuse of private funds, the defendant established fake private equity investment funds in the British Virgin Islands to launder approximately $400 million in proceeds of a large international pyramid fraud scheme called OneCoin.329 These examples demonstrate that investment advisers and the funds they advise have been implicated in certain financial crimes and suggest the scope of potential benefit from covering RIAs and ERAs under this proposal. They provide concrete evidence that investment advising relationships can create openings that can be and have been leveraged as conduits in substantial financial crimes that bear on the provisions of this rule. The additional visibility that the final rule will convey may discourage such leveraging and will provide law enforcement with information that it needs to uncover it. Further, requiring RIAs and ERAs to respond to section 314(a) requests is likely to increase the number of positive responses for law enforcement when trying to locate accounts and transactions of persons that may be involved in terrorism or money laundering activity. In FY 2022, 66 law enforcement agencies made 519 requests under section 314(a) to over 14,000 financial institutions, which resulted in 37,835 positive responses.330 Adding RIAs and ERAs to these requests is likely to increase positive responses for account and transactions information and then support further investigations using other legal tools. ddrumheller on DSK120RN23PROD with RULES2 (b) Improve Understanding of Priority National Security Threats Applying AML/CFT obligations to RIAs and ERAs may help increase U.S. government understanding of two priority national security threats: (1) funds moving through the U.S. financial system that may be associated with Russian oligarchs and (2) investment activity that may be tied to foreign-state efforts to invest in early-stage companies developing critical or emerging technologies with national security implications. Feb. 22, 2019), https://www.justice.gov/opa/pressrelease/file/1134376/download. 329 See Department of Justice, ‘‘Former Partner Of Locke Lord LLP Convicted In Manhattan Federal Court Of Conspiracy To Commit Money Laundering And Bank Fraud In Connection With Scheme To Launder $400 Million Of OneCoin Fraud Proceeds,’’ (Nov. 21, 2019), available at https://www.justice. gov/usao-sdny/pr/former-partner-locke-lord-llpconvicted-manhattan-federal-court-conspiracycommit-money. 330 See FinCEN, Year in Review for FY 2022 (Apr. 21, 2023), p. 2, available at https://www.fincen.gov/ sites/default/files/shared/FinCEN_Infographic_ Public_2023_April_21_FINAL.pdf. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 SAR filings or information collected by RIAs and ERAs in the CDD process could improve the U.S. government’s understanding of how illicit funds linked to Russian oligarchs may be accessing the U.S. financial system. According to a 2022 FinCEN Financial Trend Analysis, BSA data provides significant financial intelligence about the movement of oligarch-related funds and assets with a nexus to the United States around the time of Russia’s unprovoked military invasion of Ukraine, including likely attempts by Russian oligarchs and elites to conceal their assets, property, and financial activities.331 Treasury and FinCEN guidance has identified typologies Russian oligarchs and elites have used to access U.S. investment opportunities and the financial system through private funds or other PIVs, to avoid disclosing their identities to other parties.332 However, FinCEN currently receives only limited information from investment advisers and the securities industry in general regarding illicit Russian financial activity. For instance, of 454 SARs reviewed as part of a FinCEN Financial Trend Analysis on U.S. financial activity linked to Russian oligarchs, only 11, or less than 3 percent, were filed by the securities and futures industry.333 Applying SAR filing, CDD, and other recordkeeping requirements to RIAs and ERAs may also assist the U.S. government in identifying foreignlinked investments in certain U.S. companies that could raise national security issues. This could be beneficial for CFIUS and potentially other programs. In particular, while there are certain transactions where notification to CFIUS is required, most transactions reviewed by CFIUS are filed voluntarily.334 To complement the largely voluntary nature of the CFIUS process, Treasury (as chair of CFIUS) along with certain member agencies 331 See FinCEN, Trends in Bank Secrecy Act Data: Financial Activity by Russian Oligarchs in 2022 (Dec. 2022), available at https://www.fincen.gov/ sites/default/files/2022-12/FinancialTrend Analysis_RussianOligarchsFTA_Final.pdf. 332 See Department of the Treasury, Global Advisory on Russian Sanctions Evasion Issued Jointly by the Multilateral REPO Task Force, p. 3 (Mar. 9, 2023), available at https://home.treasury. gov/system/files/136/REPO_Joint_Advisory.pdf; see also FinCEN, Alert on Potential U.S. Commercial Real Estate Investments by Sanctioned Russian Elites, Oligarchs, and Their Proxies, p. 4, (Jan. 25, 2023), available at https://www.fincen.gov/sites/ default/files/shared/FinCENAlertRealEstate FINAL508_1-25-23FINALFINAL.pdf. 333 See supra note 329. 334 See Treasury, ‘‘Remarks by Assistant Secretary for Investment Security Paul Rosen at the Second Annual CFIUS Conference,’’ (Sept. 14, 2023), available at https://home.treasury.gov/news/pressreleases/jy1732. PO 00000 Frm 00071 Fmt 4701 Sfmt 4700 72225 invest staff time and resources in identifying transactions that may be a covered transaction and may raise national security considerations, and assessing whether to request that the parties file with CFIUS.335 CFIUS transactions that originate through this process (referred to as the non-notified process) remain among the most complicated that CFIUS considers, and often require mitigation measures to address national security risks.336 SAR filing obligations may help identify these transactions earlier on (such as prior to the closing of a transaction). Assessing the national security consequences of investments into earlystage companies developing emerging technology can be particularly challenging.337 Requiring ERAs, particularly venture capital advisers, to submit SARs may help Treasury and some CFIUS member agencies identify transactions where investors affiliated with foreign governments are attempting to use an investment to acquire technology or know-how with national security implications. This could include providing information about transactions CFIUS was unaware of, or providing new information about investors or other parties to transactions already before CFIUS. In addition, law enforcement agencies involved in CFIUS reviews could use section 314(a) information sharing authorities to engage venture capital advisers or other RIAs or ERAs on particular technologies or concerning foreign investors, consistent with CFIUS statutory obligations to protect confidentiality of relevant information.338 (c) Protect the U.S. Financial System From Abuse Applying AML/CFT obligations to RIAs and ERAs will also strengthen the ability of the Federal Government and private sector to better protect the U.S. financial system from being misused for illicit finance. First, the final rule applies a set of AML/CFT obligations to 335 See id. 336 Committee on Foreign Investment in the United States—Annual Report to Congress CY 2022, p. 52, available at https://home.treasury.gov/ system/files/206/CFIUS%20-%20Annual% 20Report%20to%20Congress%20CY%202022_ 0.pdf. 337 See The Washington Post, ‘‘Scrutiny mounts over tech investments from Kremlin-connected expatriates’’ (Dec. 19, 2022), available at https:// www.washingtonpost.com/technology/2022/12/19/ russia-expatriates-links-probed/; see also The Wall Street Journal, ‘‘Government ‘SWAT Team’ Is Reviewing Past Startup Deals Tied to Chinese Investors’’ (Jan. 31, 2021), available at https:// www.wsj.com/articles/government-swat-team-isreviewing-past-startup-deals-tied-to-chineseinvestors-11612094401. 338 See 50 U.S.C. 4565(c). E:\FR\FM\04SER2.SGM 04SER2 72226 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations RIAs and ERAs (with certain exemptions), and those investment advisers are subject to enforcement actions for failure to comply with those requirements. Those investment advisers are required to, as described above, implement AML/CFT programs, conduct due diligence on customers, report suspicious activity, and keep certain records, among other obligations. In doing so, these obligations imposed on investment advisers will help identify, prevent, and deter bad actors from using investment advisers to further illicit finance activity, as investment advisers will be required to obtain information from customers to comply with these requirements. Moreover, the final rule also strengthens the ability of RIAs, ERAs, and other financial institutions to identify and report illicit activity. Covered RIAs and ERAs are able to coordinate with broker-dealers and banks to file joint SARs, and voluntarily share information on illicit activity under section 314(b) of the USA PATRIOT Act. Such reporting by financial institutions under the BSA— and their broader efforts to implement effective AML/CFT programs—are fundamental to the government’s effort to detect and prevent illicit finance activity and to protect the integrity of the financial system as a whole. ddrumheller on DSK120RN23PROD with RULES2 (d) Improve Alignment With International Standards The final rule also helps bring the United States into full compliance with several international AML/CFT standards established by the FATF. In the 2016 FATF Mutual Evaluation Report (MER) of the United States, the United States was rated (and remains rated) ‘‘partially compliant’’ or ‘‘non compliant’’ on eight of the 40 FATF Recommendations.339 These included partially compliant ratings on Recommendations 1, 12, and 20 for the failure to apply AML/CFT requirements 339 See FATF (2016), Mutual Evaluation of the United States, pp. 255–258, available at https:// www.fatf-gafi.org/content/dam/fatf-gafi/mer/MERUnited-States-2016.pdf.coredownload.inline.pdf. The U.S. was re-rated from ‘‘partially compliant’’ to ‘‘largely compliant’’ on Recommendation 10, and from ‘‘non compliant’’ to ‘‘largely compliant’’ on Recommendation 24. See FATF (2024), Anti-money laundering and counter-terrorist financing measures—United States, 7th Enhanced Follow-up Report & Technical Compliance Re-Rating, available at https://www.fatf-gafi.org/content/dam/ fatf-gafi/fur/USA-FUR-2024.pdf.core download.inline.pdf; see also FATF (2020), Antimoney laundering and counter-terrorist financing measures—United States, 3rd Enhanced Follow-up Report & Technical Compliance Re-Rating [hereinafter 2020 US FUR], available at https:// www.fatf-gafi.org/content/dam/fatf-gafi/fur/FollowUp-Report-United-States-March-2020.pdf. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 to investment advisers, among other reasons.340 As a result of its MER, the United States was put in ‘‘enhanced followup.’’ 341 For countries in enhanced follow-up, the FATF can take several actions, including ‘‘issuing a formal FATF statement to the effect that the member jurisdiction is insufficiently in compliance with the FATF Standards, and recommending appropriate action.’’ 342 These statements and other actions by the FATF can have material consequences on the economy of a jurisdiction.343 The final rule will assist the U.S. in avoiding these consequences and strengthening compliance with the FATF standards. In addition to the benefits of increased U.S. compliance with the FATF standards, the final rule will also support international regulatory cooperation, including information sharing, with and among allies. For instance, FinCEN could use information from investment adviser reporting requirements to support illicit finance typology work at the FATF and multilateral information sharing at the Egmont Group of Financial Intelligence Units.344 This information sharing could increase allies’ visibility into relevant financial activity that could both aid their enforcement efforts and feedback into U.S. efforts, all of which would contribute to more robust, mutually beneficial efforts to combat financial crimes globally. The final rule could also strengthen coordination between SEC and foreign securities and financial regulators in identifying and addressing AML/CFT supervisory challenges in the investment adviser sector. 5. Assessment of Costs This section assesses the potential costs to RIAs and ERAs, their clients, and government agencies associated 340 See FATF (2016), Mutual Evaluation of the United States, pp. 255–258, available at https:// www.fatf-gafi.org/content/dam/fatf-gafi/mer/MERUnited-States-2016.pdf.coredownload.inline.pdf. A ‘‘partially compliant’’ rating is generally not considered an acceptable rating for purposes of the FATF Follow-Up Process. See FATF (2023), Procedures for the FATF Fourth Round of AML/ CFT Mutual Evaluations [hereinafter FATF Fourth Round Procedures], pp. 22–23, available at https:// www.fatf-gafi.org/publications/mutualevaluations/ documents/4th-round-procedures.html. 341 See 2020 US FUR, supra note 337, at 1. 342 See FATF Fourth Round Procedures, supra note 338, at 24. 343 See Julia Morse, The Bankers Blacklist: Unofficial Market Enforcement and the Global Fight against Illicit Financing 131–138 (Cornell University Press 2021) (discussing the consequences of FATF listing). 344 The Egmont Group of Financial Intelligence Units (FIUs) is an international body that facilitates and prompts the exchange of information, knowledge, and cooperation amongst member FIUs. PO 00000 Frm 00072 Fmt 4701 Sfmt 4700 with the final rule. Specifically, this Impact Analysis estimates the one-time, upfront costs and recurring administrative and maintenance costs incurred by RIAs and ERAs to establish or modify an existing AML/CFT program, which includes conducting ongoing CDD, filings SARs, and the other requirements of the final rule. It also estimates costs to customers to provide additional information to RIAs and ERAs and to the government to enforce those requirements. This Impact Analysis estimates the incremental costs of the final rule over a 10-year period. Some RIAs and ERAs may have reduced costs because they may already perform certain AML/CFT functions because they are dual registrants or affiliated advisers, as described in section 2, although, depending on the entity and its structure, may not currently be required to do so. Under the final rule, RIAs that are dual registrants or affiliated advisers are not legally required to establish a separate AML/CFT program for their advisory activities, provided that an existing comprehensive AML/CFT program covers all of the investment adviser’s applicable legal and regulatory obligations, as described above. RIAs are also exempt from having to apply most of the regulatory requirements with respect to the mutual funds, collective investment funds, and other investment advisers they advise. As described above mutual funds have their own AML/CFT program requirements, must file SARs, and are otherwise required to comply with the other reporting and recordkeeping requirements included in the final rule. Similarly, other investment advisers subject to this rule are also required to implement the same requirements. Collective investment funds, while not separate legal entities, are subject to the AML/CFT requirements of the bank or trustcompany that administers the fund. Certain RIAs and ERAs may also already collect and verify and certain information in performing AML/CFT functions provided by customers via contract for a joint customer with another financial institution or through a voluntary AML/CFT program. To the extent that information pertains to a customer of both the investment adviser and the other financial institution, the investment adviser may enjoy reduced costs; in any case, the investment adviser already has a process in place that can be applied to satisfy its new requirements under the final rule. This section is organized as follows. First, it describes and compiles relevant cost information associated with these activities. Based on this information, it E:\FR\FM\04SER2.SGM 04SER2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations estimates the costs likely to be incurred by RIAs and ERAs. It then describes government implementation costs for oversight and enforcement. Finally, it summarizes the total costs of the final rule. (a) Cost Methodology This section describes and compiles relevant cost information for this Impact Analysis. Based on this information, FinCEN estimates the typical costs RIAs and ERAs are anticipated to incur to comply with the requirements of the final rule. The cost information consists of the amount of time (in hours) and hourly labor cost of staff involved in compliance activities, such as developing and updating AML/CFT policies and procedures and training staff on new requirements, as well as costs associated with third party software licensing and independent testing. The implementation and scope of these activities, however, will vary widely and depend on a number of factors, such as the degree of automation of compliance activities and level of filer sophistication. All costs are reported in 2022 dollars. For transparency, all costs in this section are reported on an undiscounted basis. At the end of this section, costs are also reported on a discounted basis and the annualized costs of the final rule are calculated. To estimate the value of time associated with various compliance activities, FinCEN identified roles and corresponding staff positions involved in reviewing regulatory requirements; developing policies and procedures; filling out forms; transmitting data; conducting training; and maintaining, updating, and obtaining written approval of AML/CFT programs. FinCEN calculated the fully loaded (i.e., wages plus benefits, leave, etc.) hourly labor cost for each of these roles by using the median hourly wage estimated by the U.S. Bureau of Labor Statistics and computing an additional factor accounting for fringe benefits as reported in Table 5.1.345 The final rule requires, at a minimum, that an investment adviser designate an 72227 AML/CFT compliance officer to implement and monitor its AML/CFT program. This Impact Analysis does not include the direct cost of hiring a fulltime equivalent AML/CFT compliance officer, which is not required by the final rule.346 RIAs must already designate a chief compliance officer responsible for administering policies and procedures to comply with the Advisers Act and the rules thereunder. In smaller banks and broker-dealers, compliance or legal officers are often dual-hatted as AML/CFT compliance officers. Similarly, FinCEN assumes many RIAs and ERAs will appoint or dual hat a compliance or legal officer as their AML/CFT compliance officer. Therefore, this Impact Analysis accounts directly for the fully loaded hourly labor costs (i.e., salary plus fringe benefits) for each compliance activity that would be performed by this individual rather than by calculating an annual salary, to avoid double-counting labor costs for each requirement. Table 5.1 Hourly Labor Costs (in 2022 dollars) Occupation ddrumheller on DSK120RN23PROD with RULES2 Chief Executives Financial Managers Compliance Officers New Accounts Clerks Financial Clerk All Employees $115.00 $100.28 $39.66 $23.17 $23.10 $47.45 Adjustment Factor for Fringe Benefits for Private Industrv348 1.50 1.50 1.50 1.50 1.50 1.50 Fully Loaded Hourly Labor Cost $172.42 $150.35 $59.46 $34.74 $34.63 $71.14 FinCEN estimates that, in general and on average, each role would spend different amounts of time on each portion of the compliance burden associated with the final rule. These assumptions are provided in detail below for each compliance activity. In addition to incurring labor costs, RIAs and ERAs will likely need to invest in new technology to comply with the final rule, including purchasing software and entering into licensing agreements with third party vendors. Although financial institutions are not required to use software to meet their AML/CFT requirements, most entities currently subject to the BSA use specialized AML/CFT software for this purpose. It is challenging to allocate technology costs to specific provisions of the final rule as technology may be 345 U.S. Bureau of Labor Statistics, May 2022 National Industry-Specific Occupational Employment and Wage Estimates for NAICS 523000—Securities, Commodity Contracts, and Other Financial Investments and Related Activities. The adjustment factor for fringe benefits is calculated as 1 + ($18.26 per hour in total benefits ÷ $36.57 per hour in wages and salaries) = 1.50. Based on U.S. Bureau of Labor Statistics, Table 4. Employer Costs for Employee Compensation for Private Industry Workers by Occupational and Industry Group—Financial Activities Industry, June 2022. 346 This is consistent with how FinCEN assesses burden hours and costs associated with the designation of a BSA officer, whereby the costs are assessed individually across other BSA regulatory requirements that the designated officer may implement. See FinCEN, Agency Information Collection Activities; Proposed Renewal; Comment Request; Renewal Without Change of Anti-Money Laundering Programs for Certain Financial Institutions, 85 FR 49418 (Oct. 13, 2020). 347 See U.S. Bureau of Labor Statistics, May 2022 National Industry-Specific Occupational Employment and Wage Estimates for NAICS 523000—Securities, Commodity Contracts, and Other Financial Investments and Related Activities. The BLS website notes that the median wage for chief executives in this subsector is greater than or equal to $115 per hour. 348 See U.S. Bureau of Labor Statistics, Table 4. Employer Costs for Employee Compensation for Private Industry Workers by Occupational and Industry Group—Financial Activities Industry, June 2022. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 PO 00000 Frm 00073 Fmt 4701 Sfmt 4700 E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.009</GPH> Median Hourly Wage347 72228 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations used to implement and automate several processes.349 This Impact Analysis uses estimates derived from a 2020 Government Accountability Office (GAO) report assessing the costs of financial institutions to comply with the BSA to quantify these technology costs.350 GAO documented a wide range of compliance costs across a diverse group of banks. For estimating technology and other costs in this Impact Analysis, FinCEN relied on the reported values for ‘‘Large Community Bank B,’’ for which the costs were assessed to be most similar to the costs likely to be incurred by the entities affected by the final rule. Table 5.2 reports selected characteristics for this benchmark. Table 5.2 Characteristics of Selected Financial Institution Benchmark351 Characteristic Financial Institution Type Total Assets Under Management Total Noninterest Expenses Number of Employees Number of New Accounts Opened Number of SARs filed Number of CTRs filed Table 5.3 reports the estimated compliance costs for specialized AML/ CFT software and an independent Value (in 2018) Community bank $401 million to 4500 million $20.1 million to $30 million 101 to 500 1,001 to 5,000 51 73 annual audit to test the AML/CFT program. The costs are based on values for the financial institution benchmark described in the previous paragraph adjusted for inflation to 2022 dollars using the GDP implicit price deflator.352 Table 5.3 Estimated Compliance Costs for Independent Testing, Software, and Other Third-Party Technology Vendors (in 2022 dollars) 353 Average Annual Cost AML/CFT Software Costs Independent Testing $17,000 As described in section 3, the regulated universe for purposes of the final rule consists of RIAs and ERAs, which vary in terms of their business structure, size, client relationships, and degree of existing AML/CFT measures already in place. Across these advisers, several characteristics vary across groups that directly impact the magnitude of the estimated costs, including the average number of employees and the number/type of customer relationships. However, the most significant cost determinant is the extent of existing AML/CFT measures in place: RIAs and ERAs with established AML/CFT programs in place will likely incur relatively fewer costs under the final rule, while those with few AML/ CFT measures in place may incur potentially more significant costs. For the purposes of estimating the cost impacts of the final rule, this Impact Analysis has sub-divided RIAs and ERAs into groups based on: (1) whether they are dual registrants, affiliated advisers, or other advisers (as described in section 2); and (2) whether they have a significant, moderate, or a limited number of AML/CFT measures already in place (see Table 3.2). FinCEN believes that these sub-divisions are the best available method of estimating the cost impacts. 349 GAO, Anti-Money Laundering: Opportunities Exist to Increase Law Enforcement Use of Bank Secrecy Act Reports, and Banks’ Costs to Comply with the Act Varied (GAO–20–574), (Sept. 2020), available at https://www.gao.gov/products/gao-20574 [hereinafter 2020 GAO BSA Report]. The 2020 GAO BSA Report noted that it reported software costs separately and did not allocate them by requirement because the banks reviewed commonly used the same software to meet multiple BSA/AML requirements. 350 Id. 351 Id. at Table 111: Selected Characteristics of Large Community Bank B, 2018. 352 Bureau of Economic Analysis, National Income and Product Accounts Tables, Table 1.1.9. Implicit Price Deflators for Gross Domestic Product, https://www.bea.gov/itable/national-gdp-andpersonal-income. 353 See 2020 GAO BSA Report, supra note 347, at Table 113. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 PO 00000 Frm 00074 Fmt 4701 Sfmt 4700 i. AML/CFT Program Costs RIAs and ERAs subject to the final rule will need to implement and maintain an AML/CFT program that E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.011</GPH> (b) Compliance Costs to Industry by Regulatory Provision ddrumheller on DSK120RN23PROD with RULES2 $12,400 ER04SE24.010</GPH> Compliance Activity Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations meets the minimum requirements of the BSA. This includes developing internal policies, procedures, and controls to comply with the requirements of the BSA and address money laundering, terrorist financing, and other illicit finance risks. Entities that do not already have an AML/CFT program in place will incur costs to establish such a program. In addition, those entities will incur costs for maintaining, updating, storing, and producing upon request the written AML/CFT program. Dual registrants or affiliated advisers do not have to establish multiple AML/CFT programs, provided that an existing comprehensive AML/CFT program would cover all of the entity’s advisory businesses. Entities that already have an existing AML/CFT program will need to review and/or modify their AML/CFT program to ensure it complies with the requirements of the final rule. Based on public comments on the 2015 NPRM,354 FinCEN estimates it will take approximately 120 hours for affiliated or other RIAs and ERAs that have a limited number of existing AML/ CFT measures in place to develop the necessary policies, procedures, and controls to establish an AML/CFT program. Once established, FinCEN estimates annually it will take approximately 1 hour to maintain and update the existing AML/CFT program plus an average of 10 minutes to store and produce upon request the written AML/CFT program. In response to public comments on the draft Impact Analysis, FinCEN acknowledges that RIAs and ERAs with existing AML/CFT policies, procedures, and controls will likely need to update those measures as 72229 their current measures may not be fully consistent with BSA requirements. Therefore, for the final Impact Analysis FinCEN assumes that the cost burden for dually registered entities covered by an existing AML/CFT program and entities that have a significant or moderate number of AML/CFT measures in place to update their existing AML/CFT policies, procedures, and controls will be approximately 25 percent of the estimated burden for entities without an existing AML/CFT program, or about 30 hours. FinCEN assumes the vast majority of entities would develop or update a written program within the first year after the promulgation of the regulation. Table 5.4 reports the average costs of establishing and maintaining an AML/ CFT program to comply with the BSA requirements. Financial Manager % Hourly Time Cost Activity ddrumheller on DSK120RN23PROD with RULES2 Develop New AML/CFT Program Update or Modify Existing AML/CFT Program Maintain and Update Written AML/CFT Program Store Written AML/CFT Program Produce Written AML/CFT Program Upon Request 10% $150.35 Compliance Officer % Hourly Time Cost 90% $59.46 Total Hours Total Cost per Entity 120 $8,226 30 $2,057 1.0 $69 0.0833 $6 0.0833 $6 In addition, the AML/CFT program must be approved in writing by an RIA’s or ERA’s board of directors or trustees.355 FinCEN estimates that it will take approximately 4 hours for a trustee or director to review and approve a written AML/CFT program the first year it is implemented and approximately 2 hours each subsequent year to review the program.356 For this activity, FinCEN uses an average hourly wage based on the minimum BLS estimate for a chief executive as a proxy for a trustee of director’s hourly compensation. Therefore, using the fully loaded labor cost of $172.42 per hour, the estimated labor cost for program review and approval is approximately $690 for a new AML/CFT program and $345 for an existing AML/CFT program. This represents an upfront and recurring cost for RIAs and ERAs that do not have an existing AML/CFT program, but only a one-time cost for RIAs and ERAs that currently have a significant or moderate number of AML/CFT measures in place. Further, RIAs and ERAs will need to implement an AML/CFT training 354 See Public Comments, Docket ID FINCEN– 2014–0003, available at https:// www.regulations.gov/docket/FINCEN-2014-0003/ comments. 355 If an RIA or ERA does not have a board, then the program must be approved by the adviser’s sole proprietor, general partner, trustee, or other persons that have functions similar to a board of directors. And, as explained above in Section III.D.5 other members of senior management may also be appropriately suited to approve the AML/CFT program. 356 FinCEN notes that this estimate reflects the time spent by one trustee/director, and that for those RIAs or ERAs with a full board of directors, there could be incremental cost for each additional director. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 PO 00000 Frm 00075 Fmt 4701 Sfmt 4700 E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.012</GPH> Table 5.4. Average Cost of Establishing and Updating AML/CFT Program 72230 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations program for employees.357 FinCEN estimates approximately two-thirds of employees will need to be trained on the AML/CFT program requirements, and assumes that such training could occur annually.358 FinCEN assesses that RIAs and ERAs with a significant or moderate number of AML/CFT measures in place are already training staff and will not incur additional training costs under the final rule—with the exception of reviewing and updating the training materials to ensure they cover all of the regulatory requirements. For RIAs and ERAs with a limited number of AML/CFT measures in place, FinCEN estimates it will initially take 50 hours to develop an AML/CFT training program. For entities that have an existing AML/CFT training program (those entities with a significant or moderate number of AML/CFT measures in place), FinCEN estimates the one-time burden to review and update training materials will be 10 hours. Some RIAs and ERAs may choose to use a third-party consultant or external training event to conduct trainings, but this would not be required under the final rule.359 FinCEN estimates the training will take approximately 1 hour for each employee, assuming such training occurs annually.360 Table 5.5 reports the estimated average cost of developing and conducting AML/CFT program compliance training annually. The number of total hours is estimated based on the average number of employees for each type of RIA or ERA. Table 5.5. Average Cost of AML/CFT Program Compliance Training361 ddrumheller on DSK120RN23PROD with RULES2 Develop AML/CFT Program Training 10% $150.35 (one-time cost) Review and Update AML/CFT Program 10% $150.35 Training (one-time cost) Conduct Annual Training Costs for Employees to Attend Trainine RIA, Affiliated RIA, Other ERA, Affiliated ERA, Other Compliance Officer % Hourly Time Cost All Employees % Time $59.46 50 $3,428 90% $59.46 10 $686 100% $59.46 1 $59 100 13 17 7 $7,087 $924 $1,209 $522 100% 100% 100% 100% $17,000.362 This reflects a new recurring cost for all RIAs and ERAs affected by the final rule with the exception of dually registered entities, which are assumed to already use independent auditors. 357 Employees of an investment adviser (and of any agent or third-party service provider that is charged with administering any portion of the AML/CFT program) have to be trained in AML/CFT requirements relevant to their functions and to recognize possible signs of money laundering, terrorist financing, or other illicit finance activity that could arise in the course of their duties. 358 The frequency of the investment adviser’s training program is determined by the responsibilities of the employees and the extent to which their functions bring them in contact with AML/CFT requirements or possible money laundering, terrorist financing, or other illicit finance activity. 359 The 2020 GAO BSA Report estimated the average cost per employee trained ranged between $20 and $400 with a mean estimate of approximately $116 per employee (measured in 2022 dollars). For ‘‘Large Community Bank B’’ the average estimated cost per employee trained was approximately $130 (measured in 2022 dollars). See 2020 GAO BSA Report, supra note 349. 23:30 Sep 03, 2024 Jkt 262001 PO 00000 Total Cost per Entity2 90% In addition, all RIAs and ERAs will need to implement independent testing of their AML/CFT program. As described in the previous section, FinCEN estimates the average cost of such testing will be approximately VerDate Sep<11>2014 Hourly Cost Total Hours 1 Frm 00076 Fmt 4701 Sfmt 4700 $71.14 $71.14 $71.14 $71.14 Table 5.6 summarizes the average incremental costs per entity of developing or maintaining and updating an AML/CFT program by type and characteristics of each RIA or ERA. 360 See id. at p. 52. annual training, total hours includes 1 hour per employee. FinCEN assumes approximately two-thirds of employees will require training each year, to include periodic updates and refresher training. Total cost may differ from hourly cost multiplied by total hours shown in table due to rounding. 362 See 2020 GAO BSA Report, supra note 349, at Table 113. 361 For E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.013</GPH> Activity Financial Manager % Hourly Time Cost Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations 72231 Investment Adviser Type ddrumheller on DSK120RN23PROD with RULES2 Dual Registrant RIA, Affiliated Adviser, with a moderate number of AML/CFT measures RIA, Affiliated Adviser, with a limited number of AML/CFT measures RIA, Other, with a moderate number of AML/CFT Measures RIA, Other, with a limited number of AML/CFT Measures ERA, Affiliated Adviser, with a moderate number of AML/CFT measures ERA, Affiliated Adviser, with a limited number of AML/CFT measures ERA, Other, with a moderate number of AML/CFT Measures ERA, Other, with a limited number of AML/CFT Measures ii. Customer Due Diligence Costs The final rule requires RIAs and ERAs to implement appropriate risk-based procedures for conducting ongoing customer due diligence. Specifically, RIAs and ERAs are required to (1) understand the nature and purpose of customer relationships for the purpose of developing a customer risk profile; and (2) conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information. FinCEN assumes that all RIAs and ERAs have some existing information on their customers and processes to identify and conduct additional diligence on certain customers. For instance, in reviewing the data from the 2016 IMCT Survey, in addition to the 40 percent who had implemented a full AML/CFT program consistent with the 363 Costs are rounded to the nearest thousand dollars. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 Upfront Cost (Year 1) $3,000 Recurring Cost (Year 2+) $0 $20,000 $17,000 $37,000 $25,000 $20,000 $17,000 $30,000 $18,000 $20,000 $17,000 $31,000 $19,000 $20,000 $17,000 $30,000 $18,000 requirements of the 2015 NPRM, an additional 36 percent of RIAs implemented some AML/CFT measures.364 Based on this information as well as industry input about some of the voluntary AML/CFT measures firms have in place, it is more common for firms to develop voluntary CDD programs as part of their onboarding process as compared to other AML/CFT measures.365 Therefore, FinCEN assumes that any covered RIAs and ERAs with a moderate number of AML/ CFT measures in place will likely not need to modify their existing ongoing CDD measures, while covered RIAs and ERAs with a limited number of AML/ CFT measures in place will need to perform additional customer review for existing customers and at the time of 364 See 2016 IMCT Survey, supra note 303 at Question 15. 365 See, e.g., Managed Funds Association, Sound Practices for Hedge Fund Managers (2009), Ch. 6 (Anti-Money Laundering). PO 00000 Frm 00077 Fmt 4701 Sfmt 4700 account opening for new customers. Since investment advisers generally already collect some of this information, the estimated cost burden is less than implementing a fully comprehensive customer review at the time of account opening, and accounts primarily for the costs of modifying existing procedures. FinCEN assumes the cost of modifying existing CDD procedures will be approximately 25 percent of the full cost for initial customer review and risk profiling. Covered RIAs and ERAs with a limited number of AML/CFT measures in place will need to collect additional information to develop a customer risk profile. Table 5.7 documents key assumptions regarding the number of customer accounts at affiliated and other RIAs and ERAs. ERAs only have legal entity customers—therefore, they have no natural person customers. Based on an analysis of Form ADV Filings, as of July 31, 2023, RIAs had approximately 49.3 million natural E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.014</GPH> Table 5.6. Average Cost of AML/CFT Program363 72232 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations person customers, 2.5 million legal entity customers, and 96,000 PIV accounts. FinCEN estimates the average number of customer accounts will grow at an annual rate of 9.5 percent—and PIV accounts will grow at an annual rate of 6 percent—based on average industry growth in individual and PIV accounts from 2018 to 2023.366 Table 5.7 Average Number of Customer Relationships (as of July, 31 2023)367 ddrumheller on DSK120RN23PROD with RULES2 Avg. Number of Natural Person Relationships Avg. Number of Legal Entity Relationships Avg. Number of PIV Accounts Exempt Reporting Advisers Dual Affiliated Other Registrant 46,198 11,444 701 0 0 0 933 224 143 4 63 5 13 20 4 0 0 0 Affiliated and other covered RIAs and ERAs with a limited number of existing AML/CFT measures will also need to collect and review customer information to implement risk-based procedures for conducting ongoing CDD. As described above, FinCEN estimates the costs associated with modifying existing customer diligence information and procedures will be significantly less than the full cost for developing the initial customer risk profile. In this Impact Analysis, FinCEN estimates the average cost of collecting additional information for new accounts to develop a customer risk profile will be approximately 25 percent of the total estimated cost of this information collection (30 minutes per natural person or 1 hour per legal entity).368 Thus, the estimated cost of information collection is approximately 7.5 minutes per natural person or 15 minutes per legal entity. For this activity, FinCEN uses an average hourly labor cost of $34.76 for a new account clerk. Therefore, the estimated labor cost to develop a risk profile is approximately $4.34 for per natural person and $8.68 per legal entity. In addition to new accounts, FinCEN anticipates that covered RIAs and ERAs will need to conduct this information collection for existing accounts. FinCEN estimates this information collection for existing accounts will be conducted over the first three years after the promulgation of the final rule.369 The costs to build and maintain technology and information systems to house this customer information is not reflected here but is included in the annual costs of software licensing described elsewhere in this Impact Analysis. These costs are multiplied by the average number of natural persons, legal entities, and PIV accounts, respectively, for each covered RIA and ERA. In addition to the costs to the adviser, this requirement likely represents an information collection burden for legal entities that hold accounts with investment advisers. FinCEN estimates it would take between approximately 15 and 30 minutes, or an average of 22.5 minutes, for legal entity customers to provide any additional data required for this information collection. Since these customers are not employees of the regulated entities, but rather other investment advisers in most cases, FinCEN uses an hourly burden estimate of $49.17 that is representative of the customer base.370 Therefore, the average information collection cost is approximately $18.44 per customer. This average cost is multiplied by the number of legal entity customers for each covered RIA or ERA. Table 5.8 summarizes the average ongoing CDD costs per entity by type and characteristics of each covered RIA or ERA. The relatively higher costs in the first three years reflects the compliance burden associated with data collection activities to develop a customer risk profile for existing customer accounts and new customer accounts, while the ongoing costs after 2026 reflect the burden associated with data collection for only new customer accounts. 366 See Investment Adviser Association, Investment Adviser Industry Snapshot 2023 (Jul. 2023), p.26, available at https:// investmentadviser.org/wp-content/uploads/2023/ 06/Snapshot2023_Final.pdf. 367 See supra note 25. 368 See 81 FR at 29448. 369 Current industry practices suggest customers are often re-rated for risk purposes. Industry input suggests high-risk customers, which make up a small portion of many RIAs customer base, are rerated at least annually or when SARs are filed, while medium- or low-risk customers are re-rated less frequently. 370 This estimate is based on a populationweighted average of $32.79, which represents the median salary for all employees in NAICS 522, 523, and 525, multiplied by an adjustment factor for fringe benefits of 1.50. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 PO 00000 Frm 00078 Fmt 4701 Sfmt 4700 E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.015</GPH> Registered Investment Advisers Dual Affiliated Other Registrant Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations 72233 Year RIAs and ERAs with a Significant or Moderate Number of AML/CFT Measures372 RIAs, Affiliated, with a Limited Number of AML/CFT Measures 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $17,000 $22,000 $23,000 $6,000 $7,000 $7,000 $8,000 $9,000 $10,000 $10,000 RIAs, Other, with a Limited Number of AML/CFT Measures ERAs, Affiliated, with a Limited Number of AML/CFT Measures ERAs, Other, with a Limited Number of AML/CFT Measures $2,000 $2,000 $2,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $400 $500 $500 $300 $300 $300 $300 $300 $300 $300 $300 $300 $300 $200 $200 $200 $200 $200 $200 $200 iii. Suspicious Activity Report Filing Costs As part of their AML/CFT program, RIAs and ERAs will be required to conduct ongoing monitoring of customers’ transactions and file SARs when appropriate. FinCEN assumes that RIAs and ERAs that are dually registered as a broker-dealer or bank are already submitting SARs. The extent of SAR filing by affiliated or other advisers is uncertain. Therefore, FinCEN assumes that all RIAs and ERAs that are not dually registered as a broker-dealer or bank would have to begin filing SARs due to the final rule. To the extent that some RIAs and ERAs in this category are already filing SARs, this may overestimate the costs of the final rule. Based on an analysis of dual registrant’s SAR filings between 2018 and 2022, FinCEN estimates that RIAs will each file an average of approximately 60 SARs per year.373 Since no information was available for ERAs, FinCEN applies the same estimate of 60 SARs per year. Several public comments on the draft Impact Analysis indicated this figure was too high, particularly for smaller investment advisers. Because the estimated costs include time spent reviewing alerts to determine whether a SAR is merited and documenting cases that do not become SARs, FinCEN chose to retain this estimate to avoid underestimating the burden associated with this review process and those cases that result in new SARs. SARs can be submitted as initial or continuing, discrete or batch, and standard or extended in different combination, e.g., initial/discrete/ standard, initial/discrete/extended, initial/batch/standard. Without a more detailed breakdown available, FinCEN assumes that an average of 60 SARs per investment adviser will be proportionally distributed across each category as follows: 374 • 51 (85 percent) would be initial SARs and 9 (15 percent) would be continuing SARs. • 51 (85 percent) would be discrete SARs and 9 (15 percent) would be batch SARs. • 55 (92 percent) would be standard SARs and 5 (8 percent) would be extended SARs. Each type of filing is expected to have a different reporting burden because of differences in the cost per hour and/or the number of hours needed for completion. In addition, the estimated costs of ongoing monitoring in (Table 5.8 above) include the review of alerts that do not result in a SAR being filed. FinCEN previously estimated that approximately 42 percent of suspicious activity alerts were turned into SARs.375 Therefore, for each case filed as a SAR, approximately 1.4 cases were not filed. Table 5.9 reports the average cost of determining whether a SAR is needed and filing SARs. While the burden estimates are based on FinCEN’s previous analysis,376 in this Impact Analysis the burden is attributed primarily to a compliance officer rather than a financial clerk or teller due to the smaller size of RIAs and ERAs relative to banks and to avoid potentially underestimating the average hourly labor costs associated with these activities. To the extent that a portion of this work can be completed by clerical staff that report to a compliance officer, this may slightly overestimate certain costs. The licensing cost for transaction monitoring software is not reflected here but is included in the software costs described elsewhere in this Impact Analysis. 371 Costs are rounded to the nearest thousand dollars for RIAs and to the nearest hundred dollars for ERAs. 372 This category includes dual registrants that are applying a significant number of AML/CFT measures and affiliated advisers that are applying a moderate number of AML/CFT measures. 373 Dual registrants were assessed to be the population of investment advisers most likely to file SARs and best represent an investment adviser subject to SAR filing obligations. 374 Based on summary statistics of SAR filings by dual registrants from 2018 to 2022. 375 See FinCEN, Proposed Renewal: Reports by Financial Institutions of Suspicious Transactions, 85 FR 31598, 31605 (May 26, 2020). 376 See id. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 PO 00000 Frm 00079 Fmt 4701 Sfmt 4700 E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.016</GPH> ddrumheller on DSK120RN23PROD with RULES2 Table 5.8. Average Cost of Ongoing Customer Due Diligence371 72234 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations Table 5.9. Weighted Average Hourly Cost of Reviewing Alerts and Drafting, Writing, and Submitting a Suspicious Activity Report Determining Whether a SAR is Merited Documenting Cases not Submitted as SARs Drafting, Writing, and Submitting SARs (standard content) Drafting, Writing, and Submitting SARs (extended content) Storing SARs and Supporting Documentation ddrumheller on DSK120RN23PROD with RULES2 Figure 5.1 illustrates FinCEN’s estimates regarding the average number and distribution of SARs, including for suspicious activity alerts that do not result in a SAR being filed, as well as the hourly recordkeeping, reporting, and storing burden estimates by type of filing. As an example, the average VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 Compliance Officer % Hourly Time Cost 10% $150.35 90% $59.46 $68.55 1% $150.35 99% $59.46 $60.37 1% $150.35 99% $59.46 $60.37 5% $150.35 95% $59.46 $64.01 0% $150.35 100% $59.46 $59.46 number of original/discrete/standard SARs is estimated as follows: (1) an average of 143 alerts results in 60 SARs (42% of alerts), (2) approximately 51 of 60 (or 85%) are original SARs, (3) approximately 43 of 51 (85%) are discrete SARs, and (4) approximately 40 of 43 (92%) are standard SARs. PO 00000 Frm 00080 Fmt 4701 Sfmt 4700 Weighted Average Hourly Cost Therefore, of the 143 alerts, approximately 40 of 143 alerts (28%) are estimated to result in original/discrete/ standard SARs compared with 83 of 143 (58%) estimated to result in a declined case. The remaining SAR categories comprise a smaller proportion of all suspicious activity alerts. E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.017</GPH> Activity Financial Manager % Hourly Time Cost Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations 72235 Figure 5.1. Average Number and Distribution of Suspicious Activity Alerts and Estimated Burden by Type of Filing per Investment Adviser377 1 Actlvrty J Time I Cost per (hours) ' Alert/SAR Alerts: 143 (100%) iv. Other Compliance Costs As discussed above, there are certain costs associated with the final rule that may be spread across several of the regulatory requirements. It is challenging to allocate those expenditures to specific provisions of the final rule described above. These include software licensing and general recordkeeping costs. Dual registrants, affiliated, and other RIAs and ERAs that already apply a significant or moderate number of AML/ CFT measures are expected to already be using specialized AML/CFT software as part of their AML/CFT program. Affiliated or non-affiliated entities that have a limited number of AML/CFT measures in place will likely have to invest in this type of software to implement an AML/CFT program. FinCEN estimates that annual licensing fees for specialized AML/CFT software will be approximately $12,400.378 The final rule requires RIAs and ERAs to comply with certain recordkeeping obligations (under the Recordkeeping and Travel Rules),379 including recording and maintaining originator and beneficiary information for certain transactions. FinCEN assumes that RIAs and ERAs that are dually registered as a broker-dealer or as a bank with a significant number of AML/CFT measures in place are already in compliance with the recordkeeping requirements, while other RIAs and ERAs would have to take additional steps to comply with these measures. FinCEN estimates the annual recordkeeping burden per RIA or ERA for these requirements is 50 hours.380 Table 5.10 summarizes the average cost associated with these recordkeeping requirements. 377 Information on the number and distribution of SARs by type of filing based on an analysis of SAR filings. Information on the number of alerts and burden estimates based on FinCEN, Proposed Renewal: Reports by Financial Institutions of Suspicious Transactions. 85 FR 31598 (May 26, 2020). 378 See 2020 GAO BSA Report, supra note 349, at Table 113. 379 See 31 CFR 1010.410(a), (e). 380 FinCEN, Proposed Renewal: Renewal Without Change of Regulations Requiring Records to be Made and Retained by Financial Institutions, Banks, and Providers and Sellers of Prepaid Access, 85 FR 84105 (Dec. 23, 2020). ddrumheller on DSK120RN23PROD with RULES2 Based on this information, the average annual cost of SAR filings is estimated to be approximately $10,000 per entity for any RIA or ERA that does not have a full AML/CFT program in place. No incremental costs are estimated for dual registrants because those entities are already submitting SARs in the baseline. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 PO 00000 Frm 00081 Fmt 4701 Sfmt 4700 E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.018</GPH> . . - - - - - ~ Continuing SARs / Batch: 1.35 (0.95%) --➔I Continuing SARs: 9 (6.3%) Continuing SARs / Discrete: - - - - - + I 7.65 (5.36%) 72236 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations Table 5.10. Average Cost Associated with AML/CFT Recordkeeping Requirements Activity Creating and Maintaining Records Financial Mana2er % Hourly Time Cost 5% Compliance Officer % Hourly Time Cost $150.35 In addition, the final rule requires RIAs and ERAs to implement the information sharing procedures contained in section 314(a) of the USA PATRIOT Act.381 Upon receiving an information request from FinCEN, an RIA or ERA will be required to search its records to determine whether it maintains or has maintained any account or engaged in any transaction with an individual, entity, or organization named in the request. Covered financial institutions are 15% $59.46 Financial Clerk % Time Hourly Cost 80% $34.63 instructed not to reply to the 314(a) request if a search does not uncover any matching of accounts or transactions. Currently, all 314(a) responses are filed using automated technology.382 FinCEN assumes that dually registered entities with a significant number of AML/CFT measures in place are already complying with these requirements, while most other RIAs and ERAs will likely incur additional reporting costs to comply with these measures. FinCEN estimates the average burden will be Total Hours Total Cost per Entity 50 $2,207 approximately 4 minutes per 314(a) request for 365 reports per year per investment adviser, an average of one request per calendar day.383 Therefore, the estimated burden is approximately 24 hours (4 minutes × 365 reports = 1,460 minutes) per year per investment adviser. The information technology costs associated with 314(a) requests are assumed to be included within the overall software costs. Table 5.11 summarizes the information collection costs for 314(a) measures. ddrumheller on DSK120RN23PROD with RULES2 Research and Respond to 314(a) Requests Compliance Officer % Hourly Time Cost 10% 60% $150.35 $59.46 Financial Clerk % Time Hourly Cost 30% $34.63 Total Hours Total Cost per Entity 24.33 $1,487 As ‘‘covered financial institutions’’ under FinCEN regulations, RIAs and ERAs will also be required to maintain due diligence measures that include policies, procedures, and controls that are reasonably designed to detect and report any known or suspected money laundering or other suspicious activity conducted through or involving any correspondent or private banking account that is established, maintained, administered, or managed in the United States for a foreign financial institution. FinCEN estimates the annual hourly burden of maintaining and updating the due diligence program for such correspondent or private banking accounts would be approximately two hours for each RIA and ERA—one hour to maintain and update the program and one hour to obtain the approval of senior management.384 Information technology costs associated with this requirement are included within the overall software costs. Table 5.12 summarizes the cost burden associated with special due diligence measures. 381 FinCEN, Special Information Sharing Procedures to Deter Money Laundering and Terrorist Activity, Final Rule, 67 FR 60579 (Sept. 26, 2002). 382 FinCEN, Proposed Renewal: Renewal Without Change on Information Sharing Between Government Agencies and Financial Institutions, 87 FR 41186 (Jul. 11, 2022). 383 Id. 384 FinCEN, Proposed Renewal: Due Diligence Programs for Correspondent Accounts for Foreign Financial Institutions and for Private Banking Accounts, 85 FR 61104 (Sep. 9, 2020). VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 PO 00000 Frm 00082 Fmt 4701 Sfmt 4700 E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.019</GPH> Activity Financial Mana2er % Hourly Time Cost ER04SE24.020</GPH> Table 5.11. Average Cost for Section 314(a) Measures 72237 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations Table 5.12. Average Cost Associated With Updating and Maintaining Special Due Diligence Measures Activity Maintain and Update Special Due Diligence Program Obtain Written Aooroval Trustee or Director % Hourly Time Cost 100% Under the final rule, RIAs and ERAs must also comply with special measures procedures and prohibitions contained in section 311 of the USA PATRIOT Act.385 Section 9714 of the Combating Russian Money Laundering Act 386 allows for similar special measures in the context of illicit Russian finance, as does section 7213A of the Fentanyl Sanctions Act in connection with illicit opioid trafficking.387 Generally, these special measures grant FinCEN the authority, upon finding that reasonable grounds exist for concluding that a foreign jurisdiction, financial institution, class of transactions, or type of account is of ‘‘primary money laundering concern,’’ to require Financial Manae:er % Hourly Time Cost Compliance Officer % Hourly Time Cost 10% 90% $150.35 $59.46 $172.42 domestic financial institutions and financial agencies to take one or more ‘‘special measures,’’ which impose additional recordkeeping, information collection, and reporting requirements on covered U.S. financial institutions. Among other authorities, these sections also authorize FinCEN to impose prohibitions or conditions on the opening or maintenance of certain correspondent accounts. Currently, such prohibitions are in place under section 311 for four foreign financial institutions and three foreign jurisdictions, and one foreign financial institution under section 9714.388 The special measures under section 311 require financial institutions to provide Total Hours Total Cost per Entity 1 $68.55 1 $172.42 notice to foreign account holders and document compliance with the statute. FinCEN assumes that dually registered RIAs and ERAs with a significant number of AML/CFT measures in place are already complying with these requirements, while most other RIAs and ERAs will likely incur additional costs to comply with these special measures. FinCEN estimates the average burden will be approximately 1 hour per special measure.389 Therefore, the estimated burden is approximately 6 hours. Table 5.13 summarizes the average cost for implementation section 311 special measures. ddrumheller on DSK120RN23PROD with RULES2 Section 311 Special Measures Compliance Officer % Hourly Time Cost 10% 60% $150.35 $59.46 Financial Clerk % Time Hourly Cost 30% $34.63 Total Hours Total Cost per Entity 6 $367 Finally, in addition to filing SARs, financial institutions must file CTRs under the BSA’s reporting obligations. Currently, all investment advisers are required to report transactions in currency over $10,000 on Form 8300, which is being replaced by the CTR.390 Therefore, FinCEN estimates that the 385 31 U.S.C. 5318A; FinCEN, Special Information Sharing Procedures to Deter Money Laundering and Terrorist Activity, Final Rule, 67 FR 60579 (Sept. 26, 2002). 386 Section 9714 (as amended) can be found in a note to 31 U.S.C. 5318A. 387 This provision, codified at 21 U.S.C. 2313a, was added to the Fentanyl Sanctions Act by the Fentanyl Eradication and Narcotics Deterrence Off Fentanyl Act, Public Law 118–50, 3201(a), 138 Stat 895, 940 (2024). 388 These foreign financial institutions and jurisdictions subject to prohibitions under section 311 are: (1) Bank of Dandong, (2) Burma, (3) Commercial Bank of Syria, including Syrian Lebanese Commercial Bank, (4) FBME Bank Ltd., (5) Al-Huda Bank, (6) Islamic Republic of Iran, and (7) Democratic People’s Republic of North Korea. See FinCEN, Special Measures for Jurisdictions, Financial Institutions, or International Transactions of Primary Money Laundering Concern, https:// www.fincen.gov/resources/statutes-and-regulations/ 311-and-9714-special-measures. The foreign financial institution subject to prohibitions under section 9714 is Bitzlato Limited. See FinCEN, Imposition of Special Measure Prohibiting the Transmittal of Funds Involving Bitzlato, 88 FR 3919 (Jan. 23, 2023). While section 9714 allows for the imposition of similar prohibitions to section 311, it does include an explicit notification requirement, so FinCEN is not including an estimated burden for compliance with the section 9174 action for Bizlato Limited. Similarly, while Burma is subject to a section 311 prohibition, FinCEN granted exemption relief for U.S. financial institutions to maintain correspondent accounts for Burmese banks under certain conditions. See FIN–ADMINX–10–2016, Exception to Prohibition Imposed by Section 311 Action against Burma (Oct. 7, 2016). 389 See, e.g., FinCEN, Proposed Renewal: Imposition of a Special Measure against Bank of Dandong as a Financial Institution of Primary Money Laundering Concern, 88 FR 48285, 48286 (Jul. 26, 2023). 390 FinCEN, Proposed Renewal: Renewal Without Change of the Bank Secrecy Act Reports of Transactions in Currency Regulations at 31 CFR 1010.310 Through 1010.314, 31 CFR 1021.311, and 31 CFR 1021.313, and FinCEN Report 112-Currency Transaction Report, 85 FR 29022 (Jul. 13, 2020). VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 PO 00000 Frm 00083 Fmt 4701 Sfmt 4700 E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.021</GPH> Activity Financial Manager % Hourly Time Cost ER04SE24.022</GPH> Table 5.13. Average Cost for Section 311 Special Measures 72238 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations incremental cost for RIAs and ERAs to use the CTR is de minimis.391 Based on this information, the average annual cost of other compliance measures not characterized elsewhere in this Impact Analysis are estimated to be approximately $4,000 for affiliated or other RIAs and ERAs with a moderate number of AML/CFT measures already in place and approximately $16,000 for affiliated or other RIAs and ERAs with a limited number of AML/CFT measures already in place. (c) Costs to Government This section describes the costs to Federal Government agencies to implement and enforce the final rule. i. Costs to FinCEN Administering the regulation is estimated to entail costs to FinCEN as well as other government agencies. In terms of technology and IT costs, the final rule does not create new kinds or requirements or new reporting forms, and instead applies existing SAR and CTR filing obligations to investment advisers. As a result, technology and IT costs are estimated to be small but are included in this analysis for comprehensiveness. The primary costs that FinCEN and other government agencies are expected to incur with respect to administering this final rule relate to personnel costs for enforcing compliance with the regulation, as well as providing guidance and engaging in outreach, training, investigations, and policy development in support of this regulation. FinCEN estimates the total annual personnel cost relating to administering this final rule to be $7.5 million, as reflected in Table 5.14, with continuing recurring annual costs of roughly the same magnitude for ongoing outreach, policy, and enforcement activities thereafter. In addition, FinCEN estimates the average technology and IT costs associated with receiving SAR filings will be approximately $0.10 per SAR. Based on an average estimate of 60 SARs per entity per year, FinCEN anticipates it will receive approximately 1,245,420 SARs each year from RIAs and ERAs that do not currently have most AML/CFT measures in place. This estimate excludes SAR filings for dually registered entities because those entities are expected to be submitting SARs in the baseline. Therefore, the incremental technology and IT costs to FinCEN associated with the SAR filing requirement are estimated to be approximately $125,000 per year. Enforcement of this regulation will involve coordination with law enforcement agencies, which will incur costs (time and resources) while conducting investigations into noncompliance. FinCEN does not currently propose an estimate of these costs. ii. Costs to SEC 391 In the 2015 NPRM, FinCEN estimated each investment adviser would file an average of one CTR per year, at a time cost of one hour per CTR. Incorporating these costs in the model would change the total hour and dollar burden by less than one percent. 392 U.S. Office of Personnel Management, Salary Table 2023 Incorporating the 4.1 percent General Schedule Increase and a Locality Payment of 32.49 percent for the Washington-Baltimore-Arlington area, available at https://www.opm.gov/policy-dataoversight/pay-leave/salaries-wages/salary-tables/ pdf/2023/DCB.pdf. Rounded to three significant digits. 393 The Department of Health and Human Services recommends using an adjustment factor of 2 to account for fringe benefits and overhead when agency-specific financial data are unavailable. See Department of Health and Human Services, Guidelines for Regulatory Impact Analysis (2016), p. 30, available at https://www.aspe.hhs.gov/sites/ default/files/migrated_legacy_files//171981/HHS_ RIAGuidance.pdf. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 PO 00000 Frm 00084 Fmt 4701 Sfmt 4700 The SEC is also estimated to incur costs, primarily relating to additional staff needed to examine for compliance with the requirements of the final rule, and to provide any needed regulatory guidance or analysis. Costs associated with implementing the final rule are expected to primarily affect the Division of Investment Management and the Division of Examinations, though certain potential costs may also be incurred by the Division of Enforcement. In addition, as the SEC E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.023</GPH> ddrumheller on DSK120RN23PROD with RULES2 Table 5.14 Estimated Personnel Costs to FinCEN Related to Administering the Final Rule (in 2022 dollars) Adjustment Factor for Fully Number Average Fringe Benefits Loaded Division Grade of Annual and Overhead Hourly Employees Salary392 for Federal Labor Cost Employees393 GS-12 1 $108,000 2.0 $217,000 Policy (PD) GS-13 1 $129,000 2.0 $258,000 GS-13 Global 2 $129,000 2.0 $258,000 Investigations 2.0 GS-14 1 $152,000 $304,000 (GID) Counsel (OCC) GS-15 2 $184,000 2.0 $367,000 GS-13 4 $129,000 2.0 $258,000 Strategic Operations (SOD) GS-14 1 $152,000 2.0 $304,000 GS-12 10 $108,000 2.0 $217,000 GS-13 4 $129,000 2.0 $258,000 Enforcement and Compliance (ECD) GS-14 2 $152,000 2.0 $304,000 GS-15 1 $184,000 2.0 $367,000 Total 29 $3,770,000 $7,540,000 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations receives a significant portion of its revenue from fees on registrants and other market participants, many of these costs would ultimately be paid for through those fees.394 The SEC’s Division of Investment Management administers the Advisers Act and develops regulatory policy for investment advisers, among other responsibilities. The Division of Investment Management may require two additional staff to provide regulatory guidance or analysis related to the final rule. The average salary for a GS–15 equivalent is approximately $203,500 based on the SEC’s SK series adjusted for the locality pay area of Washington, DC.395 Applying an adjustment factor of 2.0 for fringe benefits and overhead yields an estimated fully loaded labor cost of 72239 estimate of the additional costs the SEC’s Division of Examinations may incur for these activities. approximately $407,000. Therefore, FinCEN estimates the total annual personnel cost to the SEC relating to administering this final rule to be approximately $814,000. RIAs are subject to examination by SEC staff in the SEC’s Division of Examinations. Within the Division of Examinations, the Investment Adviser/ Investment Company (IA/IC) Examination Program completed more than 2,300 examinations of SECregistered investment advisers in FY22.396 The SEC maintains authority to examine ERAs as well. While the Division of Examinations may conduct examinations for compliance with the requirements of the final rule within its existing examination program, this may require additional examination staff. FinCEN does not currently have an (d) Summary of Costs This section reports the total costs of the final rule on a per entity basis and in aggregate, by type and characteristics of each RIA or ERA. As described in section 3, the regulated universe consists of RIAs and ERAs that vary in terms of business structure, number of employees, number of accounts, and the extent that existing AML/CFT measures are being applied (e.g. significant, moderate, limited). Table 5.15 summarizes the total number of entities by type and characteristics of each RIA and ERA. Table 5.15. Number of Affected Investment Advisers by Type Baseline AML/CFT Measures Registered Investment Advisers Dual Affiliated Registrant Significant Moderate Limited Total 376 0 0 376 i. Average Cost per Private Entity and Total Costs by Category of Investment Adviser This section describes the estimated average cost per entity and total costs by type and characteristics of each RIA and ERA. The average costs per RIA and ERA are multiplied by the number of impacted entities to estimate the 0 1,562 521 2,083 Exempt Reporting Advisers Dual Affiliated Registrant Other 0 3,692 7,922 11,614 44 0 0 44 0 216 72 288 aggregate cost burden of the final rule, by category of RIA and ERA. Table 5.16 summarizes the estimated costs for RIAs and ERAs that are dually registered as a broker-dealer or a bank with a significant number of AML/CFT measures in place. The estimated costs for dually registered entities are minimal because most firms are Other 0 1,753 3,761 5,514 Total 420 7,223 12,276 19,919 expected to have an existing AML/CFT program in place. The relatively small incremental costs are associated with RIAs and ERAs maintaining and updating a written AML/CFT program and reviewing and updating AML/CFT training to ensure they cover the activities of all RIAs and ERAs and meet the requirements of the BSA. Table 5.16. Total Costs for Dually Registered Entities with a Significant Number of AML/CFT Measures in Place, by Year (in 2022 dollars)397 Number of Entities 420 420 Year Total Costs ($M) $1.2 $0.0 394 See SEC, FY 2023 Agency Financial Report, p. 32, available at https://www.sec.gov/files/sec-2023agency-financial-report.pdf. 395 This estimate is based on the midpoint salary for a GS–15 equivalent of $153,600 multiplied by the locality pay rate of 32.49 percent for VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 Washington, DC. See SEC, SEC Compensation Program (Apr. 9, 2024), available at https:// www.sec.gov/about/careers-securities-exchangecommission/sec-compensation-program. 396 See SEC, FY 2024 Congressional Budget Justification, p. 22, https://www.sec.gov/files/fy- PO 00000 Frm 00085 Fmt 4701 Sfmt 4700 2024-congressional-budget-justification_final-310.pdf. 397 For Tables 5.16 to 5.37, costs are rounded to the nearest thousand dollars or two significant digits. E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.025</GPH> Table 5.17 summarizes the estimated costs for affiliated RIAs with a moderate number of AML/CFT measures in place. ER04SE24.024</GPH> ddrumheller on DSK120RN23PROD with RULES2 2024 2025-2033 Average Cost per Entity $3,000 $0 72240 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations Table 5.17. Total Costs for RIAs, Affiliated, with a Moderate Number of AML/CFT Measures in Place, by Year (in 2022 dollars) Year 2024 2025-2033 Number of Entities 1,562 1,562 Average Cost per Entity $33,000 $30,000 Total Costs ($M) $52.1 $47.3 Table 5.18 summarizes the estimated costs for affiliated RIAs with a limited number of AML/CFT measures in place. Table 5.18. Costs for RIAs, Affiliated, with a Limited Number of AML/CFT Measures in Place, by Year (in 2022 dollars) Number of Entities 521 521 521 521 521 521 521 521 521 521 Year 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 Average Cost per Entity $80,000 $73,000 $73,000 $56,000 $57,000 $58,000 $58,000 $59,000 $60,000 $61,000 Total Costs ($M) $41.5 $37.9 $38.1 $29.4 $29.7 $30.0 $30.4 $30.8 $31.2 $31.7 Table 5.19 summarizes the estimated costs for other RIAs with a moderate number of AML/CFT measures in place. Table 5.19. Costs for RIAs, Other, with a Moderate Number of AML/CFT Measures in Place, by Year (in 2022 dollars) Year 2024 2025-2033 Number of Entities 3,692 3,692 Average Cost per Entity $33,000 $30,000 Total Costs ($M) $123.1 $111.7 ER04SE24.028</GPH> ER04SE24.027</GPH> VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 PO 00000 Frm 00086 Fmt 4701 Sfmt 4700 E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.026</GPH> ddrumheller on DSK120RN23PROD with RULES2 Table 5.20 summarizes the estimated costs for other RIAs with a limited number of AML/CFT measures in place. Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations 72241 Table 5.20. Costs for RIAs, Other, with a Limited Number of AML/CFT Measures in Place, by Year (in 2022 dollars) Number of Entities 7,922 7,922 7,922 7,922 7,922 7,922 7,922 7,922 7,922 7,922 Year 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 Table 5.21 summarizes the estimated costs for ERAs, affiliated, with a Average Cost per Entity $58,000 $46,000 $46,000 $45,000 $45,000 $45,000 $45,000 $45,000 $45,000 $45,000 Total Costs ($M) $456.9 $365.7 $366.1 $355.1 $355.4 $355.8 $356.3 $356.8 $357.3 $357.9 moderate number of AML/CFT measures in place. Table 5.21. Total Costs for ERAs, Affiliated, with a Moderate Number AML/CFT Measures in Place, by Year (in 2022 dollars) Number of Entities 216 216 Year 2024 2025-2033 Table 5.22 summarizes the estimated costs for ERAs that are affiliated with a Average Cost per Entity $33,000 $30,000 Total Costs ($M) $7.2 $6.5 bank or broker-dealer with a limited number of AML/CFT measures in place. Table 5.22. Costs for ERAs, Affiliated, with a Limited Number of AML/CFT Measures in Place, by Year (in 2022 dollars) Year 2024 2025-2033 Number of Entities 72 72 Average Cost per Entity $57,000 $45,000 Total Costs ($M) $4.1 $3.2 ER04SE24.031</GPH> ER04SE24.030</GPH> VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 PO 00000 Frm 00087 Fmt 4701 Sfmt 4700 E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.029</GPH> ddrumheller on DSK120RN23PROD with RULES2 Table 5.23 summarizes the estimated costs for other ERAs with a moderate number of AML/CFT measures in place. 72242 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations Table 5.23. Costs for ERAs, Other, with a Moderate Number of AML/CFT Measures in Place, by Year (in 2022 dollars) Year Number of Entities Average Cost per Entity Total Costs ($M) 1,753 1,753 $33,000 $30,000 $58.5 $53.0 2024 2025-2033 Table 5.24 summarizes the estimated costs for other ERAs with a limited number of AML/CFT measures in place. Table 5.24. Costs for ERAs, Other, with a Limited Number of AML/CFT Measures in Place, by Year (in 2022 dollars) Year Number of Entities Average Cost per Entity Total Costs ($M) 3,761 3,761 $56,000 $44,000 $210.0 $165.2 2024 2025-2033 ii. Estimated Burden of the Final Rule to Industry Table 5.25 summarizes the total costs of the final rule on an undiscounted basis. Customers Federal Agencies Total 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 $670 $560 $560 $540 $540 $540 $550 $550 $550 $550 $280 $230 $230 $230 $230 $230 $230 $230 $230 $230 $24.0 $2.2 $2.4 $2.7 $2.9 $3.2 $3.5 $3.9 $4.2 $4.6 $8.5 $8.5 $8.5 $8.5 $8.5 $8.5 $8.5 $8.5 $8.5 $8.5 $990 $800 $800 $780 $780 $780 $790 $790 $790 $790 Table 5.26 summarizes the total costs of the final rule by entity and business structure for dual registrants, affiliated VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 advisers, and other advisers on an undiscounted basis. PO 00000 Frm 00088 Fmt 4701 Sfmt 4700 E:\FR\FM\04SER2.SGM ER04SE24.034</GPH> Exempt Reporting Advisers ER04SE24.033</GPH> Year SECregistered Investment Advisers 04SER2 ER04SE24.032</GPH> ddrumheller on DSK120RN23PROD with RULES2 Table 5.25. Total Estimated Burden of the Final Rule by Entity Type, by Year($ Millions, 2022) Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations 72243 Table 5.26. Total Estimated Burden of the Final Rule by Entity and Business Structure, by Year($ Millions, 2022) Year Dually Registered Entities Affiliated Entities Neither Customers Federal Agencies Total 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 $1.2 $0 $0 $0 $0 $0 $0 $0 $0 $0 $100 $95 $95 $86 $87 $87 $87 $88 $88 $89 $850 $700 $700 $680 $690 $690 $690 $690 $690 $690 $24.0 $2.2 $2.4 $2.7 $2.9 $3.2 $3.5 $3.9 $4.2 $4.6 $8.5 $8.5 $8.5 $8.5 $8.5 $8.5 $8.5 $8.5 $8.5 $8.5 $990 $800 $800 $780 $780 $780 $790 $790 $790 $790 ddrumheller on DSK120RN23PROD with RULES2 In regulatory impact analyses, discount rates are used to account for differences in the timing of the estimated benefits and costs. Benefits and costs that accrue further in the future are more heavily discounted than those impacts that occur today. Discounting reflects, among other 398 U.S. Office of Management and Budget, Circular A–4 (Nov. 9, 2023) at 75. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 things, individuals’ general preference to receive benefits sooner rather than later (and defer costs) and recognizes that costs incurred today are more expensive than future costs because businesses must forgo an expected rate of return on investment of that capital.398 OMB recommends using a discount rate of 2 percent.399 This represents the real (inflation-adjusted) rate of return on long-term U.S. 399 Id. PO 00000 government debt over the last 30 years, calculated between 1993 and 2022, and is a reasonable approximation of the social rate of time preference. Table 5.27 summarizes the total costs of the final rule using a 2 percent discount rate. As shown in the table, RIAs account for approximately 71 percent of the annualized costs to industry, while ERAs account for the remaining 29 percent. at 76–77. Frm 00089 Fmt 4701 Sfmt 4700 E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.035</GPH> iii. Discounted Estimated Burden of the Final Rule 72244 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations Table 5.27. Total Estimated Burden of the Final Rule by Entity Type, by Year($ Millions, 2022) using a 2 percent Discount Rate Year SECregistered Investment Advisers Exempt Reporting Advisers Customers Federal Agencies Total 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 $670 $550 $540 $510 $500 $490 $480 $480 $470 $460 $280 $220 $220 $210 $210 $210 $200 $200 $190 $190 $24.0 $2.2 $2.4 $2.5 $2.7 $2.9 $3.1 $3.4 $3.6 $3.9 $8.5 $8.3 $8.1 $8.0 $7.8 $7.7 $7.5 $7.4 $7.2 $7.1 $990 $790 $770 $740 $720 $710 $700 $680 $670 $660 $5,600 $2,300 $53.0 $85.0 $8,100 $5,200 $560 $2,100 $230 $50.0 $5.5 $78.0 $8.5 $7,400 $810 ddrumheller on DSK120RN23PROD with RULES2 Table 5.28 summarizes the total costs of the final rule by entity and business structure for dual registrants, affiliated advisers, and other advisers using a 2 VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 percent discount rate. As shown in the table, entities that are dual registrants account for less than 0.1 percent, affiliated advisers account for PO 00000 Frm 00090 Fmt 4701 Sfmt 4700 approximately 11 percent, and other advisers account for approximately 89 percent of the annualized costs to industry. E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.036</GPH> 10-Year Undiscounted Cost 10-Year Present Value Annualized Cost 72245 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations Table 5.28. Total Estimated Burden of the Final Rule by Entity and Business Structure, by Year($ Millions, 2022) using a 2 percent Discount Rate Year Dually Registered Entities Affiliated Entities Neither Customers Federal Agencies Total 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 $1.2 $0 $0 $0 $0 $0 $0 $0 $0 $0 $100 $93 $91 $81 $80 $79 $78 $76 $75 $74 $850 $680 $670 $650 $630 $620 $610 $600 $590 $570 $24.0 $2.2 $2.4 $2.5 $2.7 $2.9 $3.1 $3.4 $3.6 $3.9 $8.5 $8.3 $8.1 $8.0 $7.8 $7.7 $7.5 $7.4 $7.2 $7.1 $990 $790 $770 $740 $720 $710 $700 $680 $670 $660 $1.2 $910 $7,000 $53.0 $85.0 $8,100 $1.2 $0.13 $830 $91 $6,500 $700 $50.0 $5.5 $78.0 $8.5 $7,400 $810 (e) Uncertainty Analysis ddrumheller on DSK120RN23PROD with RULES2 As described in section 3, the number of RIAs and ERAs is well-defined based on the number of Form ADV filings. However, there is uncertainty about the extent of existing AML/CFT measures within each group. While an uncertainty analysis could layer various assumptions about the percentage of RIAs and ERAs that have in place certain AML/CFT measures to address each individual requirement—and the degree to which those measures would have to be reviewed and modified to comply with the requirements of the final rule—such information is unavailable and the existing framework described in the section presents a simpler approach to account for this uncertainty by varying certain 400 See assumptions around the categorization of RIAs and ERAs. Specifically, this Impact Analysis estimates the impact of varying assumptions regarding the distribution of RIAs and ERAs into categories of significant, moderate, and limited AML/CFT measures in place. This provides a lower and upper bound estimate of the potential costs of the final rule. The costs presented earlier in this section represent FinCEN’s primary estimate of the burden of the final rule. i. Lower Bound Estimate The lower bound estimate assumes that a greater proportion of RIAs and ERAs have a significant or moderate number of AML/CFT measures in place and will have to implement relatively fewer additional measures under the final rule. Table 5.29 summarizes the total number of entities according to the business type and characteristics of each RIA and ERA. This represents an optimistic, but not implausible, scenario based on self-reported assessments indicating that approximately 40 percent of RIAs already have AML/CFT policies and procedures consistent with the BSA.400 For the lower bound estimate, FinCEN assumes the same proportion of affiliated ERAs and other ERAs have a significant number of AML/CFT measures as the corresponding RIA groups. Thus, this estimate is optimistic in that the number of ERAs with policies and procedures similar to those of RIAs is highly uncertain—although it is still likely to be less than the overall percentage of RIAs. 2016 IMCT Survey, supra note 303. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 PO 00000 Frm 00091 Fmt 4701 Sfmt 4700 E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.037</GPH> 10-Year Undiscounted Cost 10-Year Present Value Annualized Cost 72246 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations Table 5.29. Number of Affected Investment Advisers by Type (Lower Bound) Baseline AML/CFT Measures Exempt Reporting Advisers Registered Investment Advisers Dual Affiliated Registrant Advisers Significant Moderate Limited Total 1,562 521 0 2,083 376 0 0 376 Table 5.30 summarizes the total costs of the final rule in the lower bound scenario using a 2 percent discount rate. Other Dual Affiliated Registrant Advisers 3,692 4,546 3,376 11,614 44 0 0 44 As shown in the table, although the overall costs of the final rule are lower, the distribution of costs between RIAs 216 72 0 288 Other 1,753 2,158 1,603 5,514 Total 7,643 7,297 4,979 19,919 and ERAs is similar to the primary estimate. Table 5.30. Total Estimated Burden of the Final Rule by Entity Type, by Year ($ Millions, 2022) using a 2 percent Discount Rate (Lower Bound) Year SECregistered Investment Advisers Exempt Reporting Advisers Customers Federal Agencies Total 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 $380 $300 $300 $290 $280 $280 $270 $270 $260 $260 $170 $140 $130 $130 $130 $120 $120 $120 $120 $120 $9.1 $0.9 $0.9 $1.0 $1.0 $1.1 $1.2 $1.3 $1.4 $1.5 $8.4 $8.3 $8.1 $7.9 $7.8 $7.6 $7.5 $7.3 $7.2 $7.0 $570 $450 $440 $430 $420 $410 $400 $390 $390 $380 $3,100 $1,400 $21.0 $84.0 $4,600 $2,900 $310 $1,300 $140 $19.0 $2.1 $77.0 $8.4 $4,300 $470 10-Year Undiscounted Cost 10-Year Present Value Annualized Cost 95 percent) are attributed to other advisers. ER04SE24.039</GPH> bound scenario using a 2 percent discount rate. As shown in the table, in the lower bound scenario a greater proportion of the costs (approximately VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 PO 00000 Frm 00092 Fmt 4701 Sfmt 4700 E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.038</GPH> ddrumheller on DSK120RN23PROD with RULES2 Table 5.31 summarizes the total costs of the final rule by entity and business structure for dual registrants, affiliated advisers, and other advisers in the lower Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations 72247 Table 5.31. Total Estimated Burden of the Final Rule by Entity and Business Structure, by Year ($ Millions, 2022) using a 2 percent Discount Rate (Lower Bound) Year Dually Registered Entities Affiliated Entities Neither Customers Federal Agencies Total 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 $1.2 $0 $0 $0 $0 $0 $0 $0 $0 $0 $25 $18 $17 $17 $17 $16 $16 $16 $15 $15 $520 $420 $410 $400 $390 $380 $380 $370 $360 $360 $9.1 $0.9 $0.9 $1.0 $1.0 $1.1 $1.2 $1.3 $1.4 $1.5 $8.4 $8.3 $8.1 $7.9 $7.8 $7.6 $7.5 $7.3 $7.2 $7.0 $570 $450 $440 $430 $420 $410 $400 $390 $390 $380 $1.2 $190 $4,300 $21.0 $84.0 $4,600 $1.2 $0.13 $170 $19 $4,000 $440 $19.0 $2.1 $77.0 $8.4 $4,300 $470 10-Year Undiscounted Cost 10-Year Present Value Annualized Cost ii. Upper Bound Estimate ERAs have limited number of AML/CFT measures in place and will have to implement relatively greater additional measures under the final rule. Table The upper bound estimate assumes that a greater proportion of RIAs and 5.32 summarizes the total number of entities by type and characteristics of each RIA and ERA. Table 5.32. Number of Affected Entities by Type (Upper Bound) Baseline AML/CFT Measures Registered Investment Advisers Dual Affiliated Registrant Advisers Significant Moderate Limited Total Dual Affiliated Registrant Advisers Other Total 376 0 0 0 0 2,083 0 0 11,614 44 0 0 0 0 288 0 0 5,514 420 0 19,499 376 2,083 11,614 44 288 5,514 19,919 As shown in the table, although the overall costs of the final rule are higher, the distribution of costs between RIAs and ERAs is similar to the primary estimate. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 PO 00000 Frm 00093 Fmt 4701 Sfmt 4700 E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.040</GPH> ER04SE24.041</GPH> Table 5.33 summarizes the total costs of the final rule in the upper bound scenario using a 2 percent discount rate. ddrumheller on DSK120RN23PROD with RULES2 Other Exempt Reporting Advisers 72248 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations Table 5.33. Total Estimated Burden of the Final Rule by Business Type, by Year ($ Millions, 2022) using a 2 percent Discount Rate (Upper Bound) Year SECregistered Investment Advisers Exempt Reporting Advisers Customers Federal Agencies Total 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 $840 $670 $660 $600 $590 $580 $570 $560 $550 $540 $320 $250 $250 $240 $240 $230 $230 $220 $220 $210 $40.0 $3.7 $4.0 $4.3 $4.6 $5.0 $5.3 $5.7 $6.1 $6.6 $8.5 $8.3 $8.1 $8.0 $7.8 $7.7 $7.5 $7.4 $7.2 $7.1 $1,200 $940 $920 $850 $840 $820 $810 $800 $780 $770 $6,700 $2,600 $91.0 $85.0 $9,500 $6,200 $670 $2,400 $260 $86.0 $9.3 $78.0 $8.5 $8,700 $950 10-Year Undiscounted Cost 10-Year Present Value Annualized Cost Table 5.34 summarizes the total costs of the final rule by entity and business structure for dual registrants, affiliated advisers, and other advisers in the upper bound scenario using a 2 percent discount rate. As shown in the table, although the overall costs of the final rule are higher, the distribution of costs between the different types of RIAs and ERAs is similar to the primary estimate. Affiliated Entities Neither Customers Federal Agencies Total 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 $1.2 $0 $0 $0 $0 $0 $0 $0 $0 $0 $180 $160 $160 $120 $120 $120 $120 $120 $120 $120 $980 $760 $750 $720 $710 $690 $680 $670 $650 $640 $40.0 $3.7 $4.0 $4.3 $4.6 $5.0 $5.3 $5.7 $6.1 $6.6 $8.5 $8.3 $8.1 $8.0 $7.8 $7.7 $7.5 $7.4 $7.2 $7.1 $1,200 $940 $920 $850 $840 $820 $810 $800 $780 $770 $1.2 $1,500 $7,900 $91.0 $85.0 $9,500 $1.2 $0.13 $1,300 $150 $7,200 $790 $86.0 $9.3 $78.0 $8.5 $8,700 $950 10-Year U ndiscounted Cost 10-Year Present Value Annualized Cost VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 PO 00000 Frm 00094 Fmt 4701 Sfmt 4725 E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.043</GPH> Year Dually Registered Entities ER04SE24.042</GPH> ddrumheller on DSK120RN23PROD with RULES2 Table 5.34. Total Estimated Burden of the Final Rule by Business Structure, by Year ($ Millions, 2022) using a 2 percent Discount Rate (Upper Bound) Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations iii. Comparison of Costs in the Lower and Upper Bound Estimates As described in this section, FinCEN estimates the cost of the final rule to regulated entities will be approximately $810 million on an annualized basis. In comparison to alternative assumptions about the degree of existing AML/CFT measures among RIAs and ERAs subject to the final rule, FinCEN’s primary estimate is relatively conservative in that it assumes a greater proportion of RIAs and ERAs have only a moderate or limited number of existing AML/CFT measures in place in comparison to input provided by industry suggesting that figure may be lower. Therefore, the primary estimate is closer to the upper bound than the lower bound. Under the most pessimistic assumptions regarding the degree of existing AML/CFT measures, the final rule is estimated to cost approximately $950 million on an annualized basis. This scenario is highly improbable because more than 520 RIAs 72249 (out of 690 surveyed) indicated that they already have a significant or moderate number of AML/CFT measures in place. Under more optimistic assumptions about the proportion of RIAs with a significant or moderate number of AML/ CFT measures in place, FinCEN estimates the cost of the final rule will be approximately $470 million on an annualized basis. Table 5.35 provides a comparison of the estimated costs of the final rule under each of these scenarios. Year 1 Lower Bound Primary Estimate Upper Bound 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 $570 $450 $440 $430 $420 $410 $400 $390 $390 $380 $990 $790 $770 $740 $720 $710 $700 $680 $670 $660 $1,200 $940 $920 $850 $840 $820 $810 $800 $780 $770 $4,600 $8,100 $9,500 $4,300 $470 $7,400 $810 $8,700 $950 ddrumheller on DSK120RN23PROD with RULES2 10-Year Undiscounted Cost 10-Year Present Value Annualized Cost iv. Alternative Higher Third-Party Vendor Cost Scenario While the estimated costs of the final rule are not highly sensitive to several of the unit cost assumptions described in this section—in part because most of the labor costs are generally estimated in hours rather than days or weeks—two of the major cost drivers are software licensing fees and independent testing. Therefore, FinCEN compared how the estimated costs changed if third-party vendor costs increased by 100 percent.401 The estimated costs are relatively sensitive to assumptions regarding third-party fees for certain AML/CFT functions because these comprise a large share of the overall costs for RIAs and ERAs with a moderate or limited number of existing AML/CFT measures in place. Table 5.36 reports alternative cost assumptions for third-party vendor costs that are double the primary estimate.402 FinCEN assessed that the average technology costs used in the primary estimate are more likely to be representative of the costs likely to be incurred by RIAs and ERAs, which are typically much smaller than the bank benchmark in the 2020 GAO BSA Report. Smaller banks generally reported lower technology costs. However, for direct comparison this regulatory impact analysis reports higher estimated technology costs as an alternative scenario. 401 Independent testing under the final rule can be conducted by an adviser’s employees and is not required to be conducted by a third-party vendor. The costs identified here could be less than estimated to the extent employees (and not thirdparty vendors) are used. 402 The alternative third-party vendor costs are more in line with the cost estimates in the 2020 GAO BSA Report for ‘‘Large Community Bank A’’ ($501 million to $600 million in assets) and ‘‘Large Credit Union A’’ ($101 million to $201 million in assets). In comparison, the primary cost estimates are based on ‘‘Large Community Bank B’’ ($401 million to $500 million in assets) in the same report. See 2020 GAO BSA Report, supra note 349. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 PO 00000 Frm 00095 Fmt 4701 Sfmt 4700 E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.044</GPH> Table 5.35. Comparison of Compliance Costs using Lower and Upper Bound Estimates Relative to the Primary Estimate ($ Millions, 2022) using a 2 percent Discount Rate 72250 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations Table 5.36 Alternative Compliance Costs for Independent Testing, Software, and Other Third-Party Technology Vendors (in 2022 dollars) Compliance Activity AML/CFT Software Costs Independent Testing Table 5.37 provides a comparison of the estimated costs of the final rule under the higher technology cost scenario. Overall, the estimated costs Primary Estimate Cost Assumption $12,400 $17,000 Alternative Cost Assumption $24,800 $34,000 would be approximately 60 percent higher under this scenario relative to the primary estimate. FinCEN ascribes a low probability to the average technology/ third-party vendor costs being this high given the typical size of RIAs and ERAs affected by the final rule. Table 5.37. Comparison of Compliance Costs using Higher Technology Cost Relative to the Primary Estimate ($ Millions, 2022) using a 2 percent Discount Rate VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 $7,400 $810 $12,000 $1,300 (a) Alternative 1: Inclusion of StateRegistered Investment Advisers In the first alternative, FinCEN considered including State-registered investment advisers in the final rule. This alternative would bring all investment advisers that file Form ADV and register with a Federal or State regulatory authority under the scope of the final rule. FinCEN estimates there are approximately 17,000 Stateregistered investment advisers, based on reports from the North American Security Administrators Association (NASAA).403 Table 6.1 summarizes their characteristics. ER04SE24.046</GPH> ddrumheller on DSK120RN23PROD with RULES2 403 NASAA Investment Adviser Section: 2023 Annual Report, p.2, https://www.nasaa.org/wp- $13,000 content/uploads/2023/09/2023-IA-Section-ReportFINAL.pdf. PO 00000 Frm 00096 Fmt 4701 Sfmt 4700 E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.045</GPH> 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 10-Year Undiscounted Cost 10-Year Present Value Annualized Cost This section evaluates the potential benefits and costs of regulatory alternatives in comparison to the final regulation. This regulatory impact analysis considers two alternatives as described below. $8,100 Primary Estimate Year1 6. Regulatory Alternatives $990 $790 $770 $740 $720 $710 $700 $680 $670 $660 High Technology Cost Estimate $1,500 $1,300 $1,200 $1,200 $1,200 $1,100 $1,100 $1,100 $1,100 $1,100 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations 72251 Table 6.1: Characteristics of State-registered Investment Advisers 404 Characteristic Number of Investment Advisers Average No. Employees Avg. No. Individual Clients Avg. No. PIV Clients Avg. No. Legal Entity Clients Avg.ADM FinCEN assumed that the costs of the rule would apply to State-registered investment advisers in the same way as for RIAs that are ‘‘other advisers.’’ If State-registered investment advisers are less likely than RIAs to have any AML/ Value 17,063 2.9 46 0.1 1.1 $24.7 million total costs of Alternative 1 for Stateregistered investment advisers in addition to the other entities subject to regulation. CFT measures in the baseline, then this assumption would understate the costs of the rule for State-registered investment advisers. Under the assumptions of the cost model in section 3, Table 6.2 summarizes the Exempt Reporting Advisers 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 $670 $560 $560 $540 $540 $540 $550 $550 $550 $550 $280 $230 $230 $230 $230 $230 $230 $230 $230 $230 Stateregistered Federal Customers Investment Agencies Advisers $830 $690 $690 $690 $690 $690 $690 $690 $690 $690 $24.0 $2.2 $2.4 $2.7 $2.9 $3.2 $3.5 $3.9 $4.2 $4.6 $8.5 $8.5 $8.5 $8.5 $8.5 $8.5 $8.5 $8.5 $8.5 $8.5 Total $1,800 $1,500 $1,500 $1,500 $1,500 $1,500 $1,500 $1,500 $1,500 $1,500 FinCEN assesses the potential benefits of including State-registered investment advisers in the definition of ‘‘financial institution’’ are significantly smaller relative to the likely benefits of including RIAs and ERAs. Although the overall benefits may exceed those of the final regulation because the requirements extend to a larger number of entities, the limited incremental benefits of applying the requirements to State-registered investment advisers suggest this would be a less costeffective approach to regulation. Specifically, including Stateregistered investment advisers nearly doubles the cost of the final rule, because of the large number of Stateregistered investment advisers. But such inclusion is less likely to achieve the same degree of benefits as for other investment advisers, partly because State-registered advisers are smaller, in terms of number of clients and AUM, and their customers tend to be localized. The Risk Assessment found few examples of State-registered investment advisers being used to move illicit proceeds or facilitate other illicit activity.405 Further, the vast majority of their clients are natural persons who are not high net-worth customers and are U.S. persons.406 Therefore, FinCEN 404 See id. The average number of employees per investment adviser was calculated as a weighted average of the bins reported on page 5 of the report, using the following employees for each respective bin: 2 [0–2 employees], 6.5 [3–10 employees], 15 [11–20 employees], 25 [>20 employees]. 405 See Risk Assessment, supra note 2, at 33. 406 A survey of select State securities regulators found that for State-registered investment advisers they supervised, on average, less than 3 percent of their customers were non-U.S. persons. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 PO 00000 Frm 00097 Fmt 4701 Sfmt 4700 E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.048</GPH> Year Registered Investment Advisers ER04SE24.047</GPH> ddrumheller on DSK120RN23PROD with RULES2 Table 6.2. Total Estimated Burden of Alternative 1 by Entity Type, by Year($ Millions, 2022) 72252 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations rejected this regulatory alternative in favor of the more cost-effective approach in the final regulation. (b) Alternative 2: Requirements for Private Fund Advisers To Conduct RiskBased Customer Due Diligence and Amendments to Form PF for Reporting Beneficial Ownership Information for the Private Funds Being Advised In the second alternative, FinCEN considered whether to limit the rule requirements to only certain reporting requirements among private fund advisers. In particular, the alternative rule would require private fund advisers to conduct risk-based customer due diligence and to report beneficial ownership information. Under Alternative 2, investment advisers would incur compliance costs associated with the following requirements: (1) identifying beneficial ownership for new legal entity and PIV accounts and (2) developing a customer risk profile for legal entities. Investment advisers would be exempt from other requirements of the BSA, including developing and maintaining an AML/ CFT program, filing SARs, and other recordkeeping requirements. Investment advisers that do not advise private funds would also be exempt from any requirement. Alternative 2 would limit both the covered population and the number of requirements, relative to the final rule. FinCEN estimates there are approximately 8,800 RIAs advising private funds, as well as all ERAs. Some RIAs and ERAs already have measures in place that would meet the requirements of Alternative 2. FinCEN estimated the cost of Alternative 2 based on the same cost methodology as in section 3, in this case only for investment advisers that report private funds in Form ADV. As described in sections 3 and 5, FinCEN’s cost analysis assumed that RIAs and ERAs with a significant or moderate number of AML/CFT measures would already meet the requirements of Alternative 2; those RIAs and ERAs would have zero cost burden under this alternative. Therefore, the costs are borne only by RIAs and ERAs with a limited number of AML/CFT measures in the baseline. FinCEN used Form ADV data for those advisers that advise private funds, and Table 6.3 summarizes the total costs of Alternative 2. For Alternative 2, there are no estimated Federal agency costs attributed to the CDD requirement. Table 6.3. Total Estimated Burden of Alternative 2 by Entity Type, by Year($ Millions, 2022) Year 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 ddrumheller on DSK120RN23PROD with RULES2 FinCEN rejected this regulatory alternative in favor of the final regulation because, although it is a less costly rule, it is less likely to provide a similar level of benefits and thus would not achieve FinCEN’s objectives in addressing the illicit finance risk for investment advisers. The absence of mandatory SAR filing in this regulatory alternative would limit the potential VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 Exempt Reporting Advisers $1.4 $1.1 $1.1 $1.0 $1.0 $1.0 $1.0 $1.0 $1.0 $1.0 Customers Total $24.0 $2.2 $2.4 $2.7 $2.9 $3.2 $3.5 $3.9 $4.2 $4.6 $54.0 $11.0 $12.0 $8.6 $9.2 $9.9 $11.0 $11.0 $12.0 $13.0 benefits to law enforcement to investigate financial crimes and interagency cooperation on national security threats and their associated financial activity. Further, the lack of information sharing authorities would limit the ability of law enforcement and other agencies, as well as other financial institutions, to provide more specific information on illicit finance threats. PO 00000 Frm 00098 Fmt 4701 Sfmt 4700 This alternative would also not be sufficient for the U.S. to be in compliance with the international AML/ CFT standards established by the FATF. (c) Comparison Table 6.4 reports the costs for each of the regulatory alternatives in comparison to the final regulation. E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.049</GPH> Registered Investment Advisers $29.0 $7.9 $8.2 $4.9 $5.3 $5.7 $6.1 $6.6 $7.1 $7.7 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations 72253 Table 6.4. Comparison of Costs of Regulatory Alternatives to the Final Rule ($ Millions, 2022) using a 2 percent Discount Rate Year1 Alternative 1 Alternative 2 $1,800 $1,500 $1,400 $1,400 $1,400 $1,300 $1,300 $1,300 $1,300 $1,200 $54.0 $11.0 $11.0 $8.1 $8.5 $9.0 $9.5 $10.0 $11.0 $11.0 $15,000 $150.0 $14,000 $1,500 $140.0 $16.0 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 10-Year Undiscounted Cost 10-Year Present Value Annualized Cost VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 alternative (annualized using a 2 percent discount rate over 10 years). PO 00000 Frm 00099 Fmt 4701 Sfmt 4700 E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.050</GPH> ddrumheller on DSK120RN23PROD with RULES2 Table 6.5 provides a detailed summary of the costs and benefits associated with each regulatory 72254 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations Table 6.5. Summary of Benefits and Costs of Regulatory Alternatives ($ Millions, 2022) ddrumheller on DSK120RN23PROD with RULES2 Unquantified Benefits 23:30 Sep 03, 2024 Alternative 2 36,982 13,628 NIA NIA • Increase access for law enforcement to relevant information for complex financial crime investigations and asset forfeiture. • Enhance interagency understanding of priority national security threats and their associated financial activity. • Improve financial system transparency and integrity and align with international financial standards to strengthen the U.S. financial system from abuse by illicit actors. Annualized Monetized Costs, millions 2% Annualized monetized net benefits, millions 2% Change from the Final Rule VerDate Sep<11>2014 Alternative 1 Jkt 262001 • Improve financial system transparency and integrity for certain investment advisers. $1,500 $16 -$1,500 -$16 -$690 +$794 PO 00000 Frm 00100 Fmt 4701 Sfmt 4725 E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.051</GPH> Number of Covered Entities Annualized Monetized Benefits 2% Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 B. Final Regulatory Flexibility Analysis The RFA 407 requires an agency either to provide a final regulatory flexibility analysis (FRFA) with a final rule or certify that the final rule would not have a significant economic impact on a substantial number of small entities. This section, VI.B, contains the FRFA prepared pursuant to the RFA. 1. Discussion of Comments to the Initial Regulatory Flexibility Analysis Two commenters provided comments on the initial regulatory flexibility analysis. Both commenters objected to FinCEN’s use of the SEC definition of small entity. One commenter noted that the definition was outdated, that most investment advisers are small businesses, and that FinCEN should use a different definition of small entity. The commenter noted that according to a recent report, approximately 92 percent of advisers reported having 100 or fewer non-clerical employees, and that the median number of employees was eight. The same commenter also requested that FinCEN delay the compliance date for an additional year for those investment advisers with less than 100 employees. The second commenter, the Small Business Administration (SBA) Office of Advocacy, requested that FinCEN prepare a supplemental regulatory flexibility analysis that uses the SBA size standards to better assess the impact of the proposed rule on small entities. The SBA Office of Advocacy noted that the SBA size standards measure a firm’s receipts, while the SEC size standards measures a firm’s AUM, and that over 90 percent of investment advisers would be considered small entities using the SBA size standards. The SBA Office of Advocacy also requested that FinCEN consider other alternatives to reduce the impact on small entities, to include additional time for compliance, as well as to provide guidance to assist small entities in complying with the requirements of the rule. As described in the IA AML NPRM, FinCEN determined to use the definition of ‘‘small business’’ or ‘‘small organization’’ under the Advisers Act rule adopted for purposes of the RFA, in lieu of using the SBA definition.408 FinCEN continues to assess that using this standard is the most appropriate way to ensure regulatory harmonization and consistency in how the impacts of this and other AML/CFT regulations, including the IA CIP NPRM, are understood, providing the advisory 407 5 U.S.C. 601 et seq. 13 CFR 121.201. 408 See VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 industry with a uniform standard. Using the SEC standard also allows FinCEN to use information from Form ADV that is individualized to each investment adviser and updated annually. In contrast, information on business revenue is derived from the U.S. Economic Census, is not individualized, likely includes firms not covered by this rule, and is only updated every five years. Further, as noted in the IA AML NPRM, using a standard tied to AUM is consistent with how Congress (in the 2010 Dodd-Frank Act) and SEC regulations distinguish between small, mid-sized, and large investment advisers and how other regulatory requirements are applied to investment advisers.409 In addition, FinCEN’s use of the SEC’s definition of small entity will have no material impact upon the application of this rule to the advisory industry. Given its intention to continue to use the SEC small entity standard, FinCEN also declines the SBA Office of Advocacy suggestion to issue a supplemental initial regulatory flexibility analysis. Regarding alternatives that would lessen the impact on small entities, as described above, FinCEN has determined to exempt from the definition of ‘‘investment adviser’’ (and so from the scope of the final rule) midsized and multi-state advisers (among others). FinCEN has decided to exempt these entities in response to the concerns raised by SBA Office of Advocacy and other commenters, while also addressing the identified risk in the investment adviser sector and ensuring any exemption for smaller entities does not cause additional challenges in administering the AML/CFT requirements in the rule. These exemptions have reduced the number of small RIAs subject to the rule from 573 to 212, significantly reducing the impact of these small entities. As noted above, FinCEN is not choosing to exempt advisers with fewer than 20 or 100 employees, as was suggested by two commenters.410 To consider a threshold for application of AML/CFT requirements based on employee numbers alone would be inconsistent with Treasury’s 409 See SEC, Rules Implementing Amendments to the Investment Advisers Act of 1940 (June 22, 2011) (implementing regulatory changes required by the Dodd-Frank Act)(. As described above, SEC registration is generally determined by AUM. See supra note 26. In addition, investment advisers filing Form PF are required to provide additional information if they have more than $1.5 billion in hedge fund assets under management or more than $2 billion in private equity fund assets under management. See Form PF Instructions on p. 2 and 3 at https://www.sec.gov/files/formpf.pdf. 410 See supra Section III.B.2. PO 00000 Frm 00101 Fmt 4701 Sfmt 4700 72255 understanding of risk in the investment adviser sector. Regarding the suggestion to delay the compliance date for advisers with less than 100 employees, FinCEN declines to do so. FinCEN is concerned that applying a later compliance date for small advisers could incentivize illicit actors or others seeking to avoid compliance with AML/ CFT measures to seek services from smaller advisers. In addition, as noted above, FinCEN is concerned that an employee threshold for application of the rule would lead to advisers hiring fewer compliance staff. FinCEN will consider if additional guidance targeted at small entities is necessary to facilitate compliance with the final rule. 2. Statement of the Need for, and Objectives of, the Final Rule As described above in Sections II.C and III.A, FinCEN is finalizing this regulation to address identified illicit finance risks in the investment adviser industry. The final rule will apply AML/CFT program, recordkeeping, and reporting requirements to RIAs and ERAs. 3. Small Entities Affected by the Final Rule FinCEN is defining the term small entity in accordance with the definition of ‘‘small business’’ or ‘‘small organization’’ under the Advisers Act rule adopted by the SEC for purposes of the RFA, in lieu of using the SBA’s definition.411 Relying on the SEC’s definition, which it has adopted by regulation, has the benefit of ensuring consistency in the categorization of small entities for the SEC’s purposes,412 as well as providing the advisory industry with a uniform standard. Using the SEC standard also allows FinCEN to use the most current and precise data about investment advisers. Investment advisers must update Form ADV, including whether they qualify as a ‘‘small entity,’’ at least annually. Because Form ADV information is individualized to each investment 411 See 13 CFR 121.201. FinCEN consulted with the SBA Office of Advocacy in determining to use this definition. In their comments to the proposed rule, the SBA Office of Advocacy asserted that it is inappropriate for FinCEN to use the SEC’s small entity definition for this rule and urged FinCEN to use the SBA size standard in its analysis to have a more accurate reflection of the impact of this rulemaking on small entities. While taking into account the SBA Office of Advocacy’s comment, for the reasons described in this FRFA, FinCEN is relying on the SEC’s small entity definition. 412 As noted above, FinCEN is amending section 1010.810 to include investment advisers within the list of financial institutions that the SEC would examine for compliance with the BSA’s implementing regulations. E:\FR\FM\04SER2.SGM 04SER2 72256 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 adviser, FinCEN can identify the specific entities qualifying as ‘‘small entities’’ under the SEC standard. In contrast, information on business revenue is derived from the Economic Census, and the most recent Economic Census data reflect business information for 2017. These data are not individualized to specific firms and as detailed below, likely include other firms that are not covered by the final rule, requiring FinCEN to make additional assumptions. The data represent the average revenues of all firms, not just RIAs and ERAs, with less than $50 million in annual receipts rather than firms with AUM of less than $25 million. This is likely to be an underestimate because those firms that are required to register with the SEC tend to be larger and some of the firms reported in the SUSB, particularly Stateregistered investment advisers, would not be subject to the final rule. Given the data limitations, it is not feasible to directly estimate the average annual revenues of investment advisers that fall under the definition of ‘‘small entity’’ described above. Further, using a standard tied to AUM is consistent with how Congress (in the 2010 Dodd-Frank Act) and SEC regulations distinguish between small, mid-sized, and large investment advisers and how other regulatory requirements are applied to investment advisers.413 Using this standard would also be consistent with the standard applied by FinCEN in the 2015 NPRM and the SEC in recent rulemakings for investment advisers.414 This is a wellknown, common-sense understanding of investment adviser size based on AUM (e.g., small advisers are those managing less than $25 million in customer assets). Further, FinCEN notes that over 80 percent of advisers covered by the final rule manage at least $110 million in customer assets and accordingly would not be understood to be small entities. In addition, FinCEN’s use of the SEC’s definition of small entity will have no material impact upon the 413 See SEC, Rules Implementing Amendments to the Investment Advisers Act of 1940 (June 22, 2011). As described above, SEC registration is generally determined by AUM. See supra note 26. In addition, investment advisers filing Form PF are required to provide additional information if they have more than $1.5 billion in hedge fund assets under management or more than $2 billion in private equity fund assets under management. See Form PF Instructions on p. 2 and 3 at https:// www.sec.gov/files/formpf.pdf. 414 See 80 FR at 52695; see also SEC, Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews, Final Rule, Investment Advisers Act Release No. 6383 (Aug. 23, 2023) 88 FR 63206, 63381–3, (Sep. 14, 2023). VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 application of the final rule to the advisory industry. Under SEC rules under the Advisers Act, for the purposes of the RFA, an investment adviser generally is a small entity if it: (i) has, and reports on Form ADV, AUM of less than $25 million; (ii) has less than $5 million in total assets on the last day of its most recent fiscal year; and (iii) does not control, is not controlled by, and is not under common control with another investment adviser that has AUM of $25 million or more, or any person (other than a natural person) that had total assets of $5 million or more on the last day of its most recent fiscal year.415 As of July 31, 2023, there are 573 RIAs who meet the SEC definition of small entity. These RIAs, have on average, $5.3 million in AUM and 4 employees. As of July 24, 2024, there were 8,126 state-registered investment advisers who report $25 million or less in AUM and 5,041 that did not report AUM—these entities account for more than 75 percent of all state-registered investment advisers. As noted above in Table 6.1, state-registered investment advisers have, on average, $24.7 million in AUM and 3 employees. Those that report $25 million or less in AUM have, on average, $7.6 million in AUM and 1.3 employees. Generally, only large advisers, having $110 million or more in AUM, are required to register with the SEC.416 The final rule would not affect most investment advisers that are small entities (‘‘small advisers’’) because they are generally registered with one or more State securities authorities and not with the SEC, and as noted above, the final rule does not apply to stateregistered investment advisers. Under section 203A of the Advisers Act, most small advisers are prohibited from registering with the SEC and therefore most small advisers are regulated by State regulators.417 Therefore, these small advisers are unlikely to be required to register with the SEC absent a statutory change to the SEC registration requirements, and so are being excluded from the small entity population for this FRFA. Based on FinCEN’s initial regulatory flexibility analysis and public comments submitted on the proposed rule, for the final rule FinCEN has exempted several additional classes of investment advisers to reduce the regulatory burden on small advisers. 415 17 CFR 275.0–7(a). 17 CFR 275.203A–1. 417 Based on Form ADV data as of July 31, 2023, see supra note 25. To determine the number of RIAs that were ‘‘small entities,’’ Treasury reviewed responses to Items 5.F. and 12 of Form ADV. 416 See PO 00000 Frm 00102 Fmt 4701 Sfmt 4700 First, the final rule additionally exempts RIAs that report $0 in AUM. Second, the final rule additionally exempts RIAs that register with the SEC (as indicated on their Form ADV) solely because the RIA is for one or more of the following: • a Mid-Sized Adviser [Item 2.A.(2)] • a Pension Consultant [Item 2.A.(7)]; or • a Multi-State Adviser [Item 2.A.(10)] No ERAs are exempt from the final rule. Based on data as of July 31, 2023, there would be 212 small RIAs subject to the final rule.418 ERAs are not required to report regulatory AUM on Form ADV; therefore, it is not feasible to determine whether they meet the conditions above. Based on information in the IA CIP NPRM, FinCEN estimates that, due to SEC registration thresholds, the only small ERAs that would be subject to the final rule would be those that maintain their principal office and place of business outside the United States.419 Thus, FinCEN estimates there are 173 small ERAs.420 Therefore, approximately 385 investment advisers, or 1.9 percent of all investment advisers covered by the final rule, impacted by the final regulation are estimated to be small advisers. Assuming that all statedregistered investment advisers that reported $25 million or less in AUM and those that did not report AUM are small entities implies that approximately 13,430 or 36.3 percent of all investment advisers, including stateregistered investment advisers, are small entities. However, the 385 small investment advisers noted above—the only small entities covered by the final rule—account for just 1.0 percent of all investment advisers (including stateregistered investment advisers). Based 418 As noted above, the exemptions for certain RIAs in the final rule have reduced the number of small RIAs subject to the rule from 573 to 212. 419 89 FR 44571, 44592 & n.131 (May 21, 2024). 420 There are no direct data indicating which ERAs that maintain their principal office and place of business outside the United States are small entities because although ERAs are required to report in Part 1A, Schedule D the gross asset value of each private fund they manage, advisers with their principal office and place of business outside the United States may have additional AUM other than what they report in Schedule D. Therefore, to estimate how many of the ERAs that maintain their principal office and place of business outside the United States could be small entities, an analysis was conducted from a comparable data set: SECregistered investment advisers. According to Form ADV data as of July 31, 2023, there are 67 small RIAs with their principal office and place of business outside the United States and 830 total RIAs with their principal office and place of business outside the United States (67 ÷ 830 = 8.1 percent). Based on Form ADV data, there are approximately 2,145 ERAs with their principal office and place of business outside the U.S. Applying the same percentage (8.1 percent) to ERAs, FinCEN estimates there are 173 ERAs that are small entities. E:\FR\FM\04SER2.SGM 04SER2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 on a review of Form ADV data between 2018 and 2023, FinCEN calculates that the overall population of investment advisers has grown by about 1.6 percent per year. The population of investment advisers that are not dually registered or affiliated with a bank or broker-dealer— the group that is most likely to be a small entity—has grown by about 2.5 percent per year. Assuming that the population of small entities were to grow at the same rate as all nonaffiliated investment advisers suggests that the population of small investment advisers could increase from 385 to approximately 500 over 10 years from 2024 to 2033. Based on this figure, FinCEN estimates that the final rule will not impact a substantial number of small entities. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 Regarding the economic impact on small advisers, Form ADV does not collect revenue information. Therefore, additional information on investment advisers was obtained from the U.S. Economic Census. The Economic Census, conducted every five years by the U.S. Census Bureau, is the U.S. Government’s official measure of American businesses, representing most industries and geographic areas of the United States and Island Areas.421 It provides information on business locations, employees, payroll, and revenues. The most recent Economic Census data reflect business information for 2017. These data are reported in the 421 U.S. Census Bureau, Economic Census, web page, last updated on Aug. 31, 2023, https:// www.census.gov/programs-surveys/economiccensus.html. PO 00000 Frm 00103 Fmt 4701 Sfmt 4700 72257 U.S. Census Bureau’s annual Statistics of U.S. Businesses (SUSB). Based on data from the 2017 SUSB, the average firm in NAICS 523930 had approximately $2.7 million in annual revenue adjusted for inflation to 2022 dollars using the GDP price deflator.422 According to that data, approximately 99 percent of firms had less than $50 million in annual receipts, with average revenues of approximately $850,000 measured in 2022 dollars. Table B.1 reports the distribution of firms by firm revenue size. 422 Data accessed at https://www.census.gov/data/ tables/2017/econ/susb/2017-susb-annual.html.The NAICS code for this industry changed between 2017 and 2022. The U.S. Small Business Administration’s size standard for this industry applies to the 2022 NAICS code 523940. The SUSB firm revenue size data use the 2017 NAICS code 523930. E:\FR\FM\04SER2.SGM 04SER2 72258 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations Table B.1. Average Annual Receipts and Employment by Firm Size in 2017 for NAICS 523930 VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 8.5% $1,800,000 5 2.3% $4,000,000 10 0.7% $6,500,000 12 0.4% $9,400,000 18 0.4% $13,000,000 28 0.3% $16,000,000 32 0.2% $22,000,000 35 0.1% $26,000,000 50 0.1% $33,000,000 65 0.1% $19,000,000 62 0.1% $41,000,000 47 0.2% $38,000,000 82 0.1% $18,000,000 53 1.0% $180,000,000 245 98.8% $850,000 3 1.2% $160,000,000 215 100.0% $2,700,000 5 Percent of Firms <$100,000 $100,000-$499 ,999 $500,000-$999 ,999 $1,000,000$2,499,999 $2,500,000$4,999,999 $5,000,000$7,499,999 $7,500,000$9,999,999 $10,000,000$14,999,999 $15,000,000$19,999,999 $20,000,000$24,999,999 $25,000,000$29,999,999 $30,000,000$34,999,999 $35,000,000$39,999,999 $40,000,000$49,999,999 $50,000,000$74,999,999 $75,000,000$99,999,999 $100,000,000+ All Firms <$50,000,000 All Firms $50,000,000+ Total Importantly, as discussed above regarding the limitations with Economic Census data, the $850,000 figure is an 24.3% 46.7% 14.6% Average Annual Receipts ($2022) $58,000 $300,000 $830,000 imperfect proxy for the annual revenues of investment advisers subject to the PO 00000 Frm 00104 Fmt 4701 Sfmt 4700 Average Employment 1 2 3 final rule that meet the SEC’s definition of a small entity. E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.052</GPH> ddrumheller on DSK120RN23PROD with RULES2 Firm Size (based on 2017 receipts) Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations As further detailed in the section below, using information from the SUSB for firms with revenues below $50 million, FinCEN estimates that the annualized cost burden of the final rule would be approximately 4.7 percent of revenues or 0.8 percent of AUM for a small investment adviser. FinCEN is unable to conclusively determine whether such a cost burden would be ‘‘significant’’ for purposes of the RFA, and so it is unable to certify that the final rule would not ‘‘have a significant economic impact on a substantial number of small entities.’’ Therefore, FinCEN is conducting this FRFA. 4. Compliance Costs To examine the potential impact of the final rule on small entities, FinCEN estimates the average compliance costs for a small firm and compares those costs to small firms’ average annual revenues and AUM. As described above, 212 RIAs and 173 ERAs would be considered small entities under the SEC definition. All small firms affected by the final rule will bear upfront costs to revise their internal policies, procedures, and controls to establish or update an existing AML/CFT program. Small firms that do not already have a significant or moderate number of AML/ CFT measures in place would need to adopt additional measures, such as collecting additional information to develop a customer risk profile for new and existing clients and conducting ongoing CDD, filing SARs, acquiring 72259 AML/CFT software licenses, complying with other information collection requests, and general recordkeeping activities. To estimate these costs for small advisers, FinCEN relies on the methodology described in the Impact Analysis applied to the subset of small advisers and their relevant financial characteristics. Table B.2 reports the financial characteristics of small RIAs compared with all other RIAs impacted under the final rule based on information reported in their Form ADV filings.423 Since information on small ERAs is not directly available, estimates of average AUM and number of legal entity clients for RIAs are also applied to ERAs to develop representative cost estimates for small advisers. Table B.2: Characteristics of RIAs by Business Size Characteristic Avg. Assets Under Management Avg. No. Employees Percent that Advise Private Funds Avg. No. Individual Clients Avg. No. PIV Clients Avg. No. Legal Entity Clients Based on this information, the average cost of the final rule for a small investment adviser (i.e., those managing up to $25 million in client assets) would be approximately $48,000 in the first Small Entity RIAs All Other RIAs $5.3M $8.6B 4 62 34% 56% 2,341 0 1 3,524 7 179 year of the regulation and $39,000 in subsequent years. These costs vary slightly across the different categories of RIAs described in the Impact Analysis, with a small number of dual registrants likely to incur around $3,000 in compliance costs. Table B.3. reports the average costs per small entity by compliance activity in the first year and subsequent years of the final regulation. Yearl Years 2-10 AML/CFT Program Customer Due Diligence SAR Filings Recordkeeping 314( a) Requests Software Licensing Section 311 Measures Total $26,000 $1,300 $9,000 $2,200 $1,500 $7,700 $370 $48,070 $17,000 $900 $9,000 $2,200 $1,500 $7,700 $370 $39,070 423 This information is reported in Table 3.7 of the Impact Analysis. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 ER04SE24.054</GPH> Activity 424 See supra Section IV.A.5, supra, for details on how costs of the rule were calculated. PO 00000 Frm 00105 Fmt 4701 Sfmt 4725 E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.053</GPH> ddrumheller on DSK120RN23PROD with RULES2 Table B.3: Average Costs Per Small Entity (in 2022 dollars) 424 72260 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations Therefore, the average annualized cost of the final rule for a small investment adviser over the first 10 years would be approximately $40,000. This suggests the annualized cost burden of the final rule would be approximately 4.7 percent of revenues or 0.8 percent of AUM for a small investment adviser when using information from the SUSB for firms with revenues below $50 million. However, this estimate assumes that less than 1 percent of small investment advisers have a significant number of AML/CFT measures in place and more than 60 percent have a limited number of AML/CFT measures in place and would have to develop a full AML/ CFT program and initial and ongoing CDD measures. If the assumed distribution was overly pessimistic and more small investment advisers had a significant or moderate number of existing AML/CFT measures in place in the baseline, the average cost burden would be lower. Based on the lower bound estimate discussed in section 3, the average annualized cost of the final rule for a small investment adviser would be approximately $24,000, suggesting the average cost burden would be approximately 2.8 percent of revenues or 0.4 percent of AUM. If fewer small investment advisers had a significant or moderate number of existing AML/CFT measures in place in the baseline, the average annualized cost of the final rule for a small investment adviser would be approximately $46,000, suggesting the average cost burden would be approximately 5.4 percent of revenues or 0.9 percent of AUM. Table B.4 reports the number of small entities, annualized cost, and compliance cost as a percentage of revenue and AUM for small advisers, broken down by adviser type. Table B.4. Average Annualized Cost of the Final Rule for Small Entities Number of Small Entities Average Annualized Cost 3 $3,000 <0.1% Compliance Cost as Percentage of Assets U oder Management or Total Gross Assets <0.1% 135 $30,000 3.6% 0.6% 8 $49,000 5.8% 0.9% 239 $47,000 5.5% 0.9% 385 $40,000 4.7% 0.8% Dual Registrants Affiliated or Other Advisers with a Moderate Number of AML/CFT Measures Affiliated Advisers with a Limited Number of AML/CFT Measures Other Advisers with a Limited Number of AML/CFT Measures All Small Entities ddrumheller on DSK120RN23PROD with RULES2 5. Duplicative, Overlapping, or Conflicting Federal Rules As described above in section V.A.2, there are no Federal rules that directly and fully duplicate, overlap, or conflict with the final rule. While some investment advisers implement AML/ CFT requirements because they are dually registered as broker-dealers, as a bank, or affiliated with a bank or brokerdealer, the majority of the investment adviser industry is not subject to any comprehensive AML/CFT requirements. FinCEN is aware that requirements within the Advisers Act and other Federal securities laws impose requirements upon investment advisers VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 that in some instances are similar to the requirements within this rule and perform similar roles (i.e., improving the integrity of the U.S. financial system and protecting customers). However, while these existing requirements may provide a supporting framework for implementing certain obligations in the final rule, they do not impose the specific AML/CFT measures in the final rule. 6. Significant Alternatives That Reduce Burden on Small Entities FinCEN considered the burden this approach would have on investment advisers subject to the final rule. FinCEN is mindful of the effect of new PO 00000 Frm 00106 Fmt 4701 Sfmt 4700 regulations on small businesses, given their critical role in the U.S. economy and the special consideration that Congress and successive administrations have mandated that Federal agencies should give to small business concerns. FinCEN considered an alternative scenario in the Impact Analysis above (Alternative 2) that would apply a much more limited information collection requirement to only those RIAs that advise private funds and ERAs. In this scenario, advisers to private funds would be required to conduct risk-based customer due diligence and to report beneficial ownership information. E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.055</GPH> Investment Adviser Type Compliance Cost as Percentage of Annual Revenue Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations 72261 Table B.5: Average Cost of Information Collection for Ongoing CDD Activity ddrumheller on DSK120RN23PROD with RULES2 Develop a Customer Risk Profile for a Legal Entity Collect Beneficial Ownership Information for a Legal Entity Collect Beneficial Ownership Information for a Pooled Investment Vehicle Based on the cost information in the table above and the number of legal entity and PIV customers of small entity RIAs identified in Table 3.7 of the Impact Analysis, FinCEN estimates that the cost of this alternative for each small entity would be less than $1,000 on average. Despite the significantly lower cost of this alternative, FinCEN determined that this alternative would not accomplish the objectives of the final rule. As noted above, the absence of a SAR filing requirement would limit the potential benefits to law enforcement to investigate financial crimes and the potential benefits to interagency cooperation on national security threats and their associated financial activity. Further, without being defined as financial institutions and thereby being able to receive and share information under sections 314(a) and 314(b), investment advisers would be unable to access useful information to help mitigate illicit finance risks. As another alternative to reduce the burden on small entities, FinCEN considered limiting the applicability of the final rule to investment advisers with AUM above a certain threshold, as reported on Form ADV. Investment advisers with AUM below the threshold would be exempt from the requirements of the final rule. FinCEN decided not to pursue this alternative because doing so would not apply a risk-based approach to the industry. AUM by itself, without considering the attributes of a particular customer (such as legal entity v. natural person, or U.S. v. foreign-located person), is not a useful indicator of VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 Total Hours Total Cost per Customer 100% $34.74 0.25 $8.68 100% $34.74 0.5 $17.37 100% $34.74 3.0 $104.22 potential risk.425 Such an exemption could also create a subset of ‘‘smaller’’ investment advisers who may actually be more vulnerable to illicit finance because they can offer the same services as other advisers, but without any AML/ CFT requirements. Electing instead to use a risk-based approach, for the final rule FinCEN has exempted RIAs that report $0 in AUM, or are mid-sized advisers, pension consultants, and multi-state advisers, as indicated by their reporting on Form ADV. FinCEN also notes that the AML/CFT requirements in the final rule are designed to be risk-based and their cost is largely based on factors unrelated to AUM, such as the number of customers and transactions, along with the risk level of its advisory activities and customers. For instance, according to the 2020 GAO BSA Report, the two most costly requirements for banks as a percentage of total AML/CFT compliance costs were the customer due diligence and SAR filing requirements, accounting for approximately 60 percent of total costs.426 The cost of other requirements in the final rule, such as employee training and designating an AML/CFT officer, are also likely to vary with the size of the business. The requirements of the final rule therefore have some inherent flexibility whereby small entities serving a smaller number of customers are likely to have lower costs. C. Paperwork Reduction Act The reporting requirements in the final rule have been approved by OMB 425 See supra note 98 and accompanying text. GAO BSA Report, supra note 347, at 3. 426 2020 PO 00000 Frm 00107 Fmt 4701 Sfmt 4700 in accordance with the Paperwork Reduction Act of 1995 (PRA) and assigned control number 1506–0081.427 Under the PRA, an agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by OMB. In accordance with requirements of the PRA, 44 U.S.C. 3506(c)(2), and its implementing regulations, 5 CFR part 1320, the following information concerns the collection of information as it relates to the final rule. The PRA analysis included herein is for the sections of the final rule requiring RIAs and ERAs to (a) establish AML/CFT programs, to include riskbased procedures for conducting ongoing customer due diligence; (b) report suspicious activity and file CTRs; (c) maintain records of originator and beneficiary information for certain transactions; (d) apply information sharing provisions with the government and between financial institutions; and (e) implement special due diligence requirements for correspondent and private banking accounts and special measures under section 311 of the USA PATRIOT Act. Reporting and Recordkeeping Requirements: The final rule would require RIAs and ERAs to develop and implement AML/CFT programs, file SARs and CTRs, record originator and beneficiary information for transactions, respond to section 314(a) requests, and implement special due diligence measures for correspondent and private banking accounts. The AML/CFT programs must be written (first year 427 44 E:\FR\FM\04SER2.SGM U.S.C. 3506(c)(2). 04SER2 ER04SE24.056</GPH> New Account Clerk % Hourly Time Cost 72262 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 only), and updated, stored, and made available for inspection by FinCEN and the SEC. The AML/CFT program must also be approved by the investment adviser’s board of directors or trustees. OMB Control Numbers: 1506–0081. Frequency: As required; varies depending on the requirement. Description of Affected Public: investment advisers, as defined in the final rule. Estimated Number of Respondents: 19,919 investment advisers. Of these, there are an estimated 14,073 SECregistered investment advisers and 5,846 exempt reporting advisers. 1,275,990 clients of investment advisers in the first year and up to 250,544 new clients in each subsequent year, although this figure will vary from year to year. Estimated Total Annual Reporting and Recordkeeping Burden: FinCEN estimates that during Year 1 the annual burden will be 6,851,861 hours for investment advisers and 478,496 hours for their clients. That burden will decrease after the first year because several information collection activities will only result in costs for these entities in Year 1. Specifically, investment advisers that do not already have a written AML/CFT program will have to develop one in the first year. In addition, entities that do not already conduct customer due diligence activities consistent with the requirements under the BSA will have to implement those information collection activities in the first year. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 FinCEN estimates that several of these costs will be incurred only in the first year of the regulation, but information collection activities related to understanding the nature and purpose of all existing customer accounts will likely be incurred over the first few years due to the large number of accounts—in this case, FinCEN assumes these costs will be spread over the first three years of the final rule. Furthermore, FinCEN assesses that the information collection burden associated with customer due diligence will increase over time because the total number of clients is expected to grow each year. The number of clients and therefore the total costs associated with due diligence measures are expected to grow over time. Thus, there will be stepwise decrease in burden hours in Year 2 and Year 4, but a gradual increase in burden hours in Year 3 and Years 5 through 10 due to growth in the number of clients. In Year 10, FinCEN estimates the annual burden of the final rule will be 4,883,961 hours for investment advisers and 93,954 hours for new clients, with no additional burden for existing clients. Estimated Total Annual Reporting and Recordkeeping Cost: As described in section 3, FinCEN calculated a weighted fully loaded hourly labor cost based on the roles, hourly wage rates, and burden distribution of staff involved in each information collection activity. FinCEN estimates that during Year 1 the annual cost will be $409,508,089 for investment advisers PO 00000 Frm 00108 Fmt 4701 Sfmt 4700 and $23,526,799 for their clients. In Year 10, FinCEN estimates the total cost of the final rule will be $278,696,966 for investment advisers and $4,619,547 for their clients. Table C.1 reports the total number of investment advisers, burden hours, and costs by information collection activity. Burden hours and costs are calculated by multiplying the number of entities by the hours/costs per entity for each information collection activity. Burden hours and costs are summarized for Year 1 and Year 10. Table C.2 reports the total number of clients, burden hours, and costs by information collection activity. Burden hours and costs are calculated by multiplying the number of clients by the hours per entity. Burden hours and costs are summarized for Year 1 and Year 10. Table C.3 reports the total cost of information collection by year. Tables C.4 through C.10 report additional detail for each subset of entities, including information on the distribution of the information collection burden across different groups. These tables summarize the number of entities, burden hours per entity, total burden hours, average cost per entity, and total cost. Table C.11 reports the total cost of information collection for the customers of investment advisers. This table summarizes the number of customers, burden hours per customer, total burden hours, average cost per customer, and total cost. E:\FR\FM\04SER2.SGM 04SER2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations 72263 Table C.1. Total Burden and Cost for Investment Advisers (in 2022 dollars) Develop AML/CFT Program Maintain and Update Written AML/CFT Program Store the Written AML/CFT Program Produce Written AML/CFT Program Upon Request Obtain Written Approval of AML/CFT Program Customer Identification and Verification SAR Case Review and Filing (1010.320) CTR Recordkeeping and Reporting (1010.315) Recordkeeping and Travel Requirements (1010 .410(a) through (c) and 1010.410(±)) Information Sharing Arrangements (1010.510) Special Due Diligence and Special Measures (1010.610 and 1010.620) Section 311 Special Measures TOTAL 1,473,120 $100,984,944 0 $0 229,290 $15,718,229 12,276 $841,541 0 $0 1,023 $70,128 0 $0 1,023 $70,128 63,550 $10,957,379 24,552 $4,233,290 586,003 $20,357,258 345,190 $11,991,599 2,908,926 $179,352,883 2,908,926 $179,352,883 0 $0 0 $0 974,950 $43,038,556 974,950 $43,038,556 474,476 $28,991,953 474,476 $28,991,953 24,552 $2,958,186 24,552 $2,958,186 116,994 $7,148,701 116,994 $7,148,701 6,851,861 $409,508,089 4,883,961 $278,696,966 478,496 478,496 $23,526,799 $23,526,799 93,954 93,954 $4,619,547 $4,619,547 ER04SE24.058</GPH> Provide Customer Information TOTAL VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 PO 00000 Frm 00109 Fmt 4701 Sfmt 4725 E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.057</GPH> ddrumheller on DSK120RN23PROD with RULES2 Table C.2. Total Burden and Cost for Clients (in 2022 dollars) 72264 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations Table C.3. Total Information Collection Cost by Year (in 2022 dollars) VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 PO 00000 7,330,357 5,337,243 5,357,427 4,793,526 4,817,728 4,844,228 4,873,247 4,905,022 4,939,816 4,977,915 52,176,509 Frm 00110 Fmt 4701 $433.0 $295.1 $295.9 $276.3 $277.3 $278.3 $279.4 $280.6 $281.9 $283.3 $2,981.0 Sfmt 4725 E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.059</GPH> ddrumheller on DSK120RN23PROD with RULES2 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 TOTAL ddrumheller on DSK120RN23PROD with RULES2 23:30 Sep 03, 2024 Jkt 262001 PO 00000 Frm 00111 Fmt 4701 Sfmt 4725 E:\FR\FM\04SER2.SGM 04SER2 Develop and Implement Written AML/CFT Program Maintain and Update Written AML/CFT Program Store the Written AML/CFT Program Produce Written AML/CFT Program U2on Reguest Obtain Written Approval of AML/CFT Program Customer Identification, Verification, and Recordkee2in SAR Case Review and Filing 1010.320} CTR Recordkeeping and Reporting 1010.315} Recordkeeping and Travel Requirements (1010.410(a) through {c} and 1010.410 Information Sharing Arrangements 1010.510} Special Due Diligence and Special Measures _{1010.610 and 1010.620) Section 311 Special Measures TOTAL I 0 I 0 I 30 I 12,600 I 0 I I 0 I I 0 I 0 I $0 I $0 I $2,056.55 I $863,752 I 0 I 0 I $0 I $0 0 I $0 I $0 I 0 I 0 I $0 I $0 I 0 I $0 I $0 I 0 I 0 I $0 I $0 0 I 0 I $0 I $0 I 0 I 0 I $0 I $0 I 0 I 0 I $0 I $0 I 0 I 0 I $0 I $0 I I 0 I 0 I $0 I $0 I 0 I 0 I $0 I $0 0 I 0 I $0 I $0 I 0 I 0 I $0 I $0 0 I 0 I $0 I $0 I 0 I 0 I $0 I $0 0 I 0 I $0 I $0 I 0 I 0 I $0 I $0 I I I $0 I $0 0 0 $0 $0 0 0 $0 $0 0 30.00 0 12,600 $0 $2,056.55 $0 $863,752 0 0 0 0 $0 $0 $0 $0 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations VerDate Sep<11>2014 Table C.4. Total Burden and Cost for Dual Registrants 72265 ER04SE24.060</GPH> ddrumheller on DSK120RN23PROD with RULES2 72266 23:30 Sep 03, 2024 Jkt 262001 PO 00000 Frm 00112 Fmt 4701 Sfmt 4725 E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.061</GPH> Develop and Implement Written AML/CFT Program Maintain and Update Written AML/CFT Program Store the Written AML/CFT Program Produce Written AML/CFT Program Upon Reguest Obtain Written Approval of AML/CFT Program Customer Identification, Verification, and I I 0 30 I I 0 157,620 I I $0 I $0 I 0 I 0 I $0 I $0 $2,056.55 I $10,805,126 I 0 I 0 I $0 I $0 $0.00 I $0 I 0 I 0 I $0 I $0 I 0.000 I 0 I 0.000 I 0 I 2 I 10,508 I $344.84 I $1,811,804 I 0 I 0 I $0 I $0 I 0 I 0 I $0 I $0 I 0 I 0 I $0 I $0 I I $0.00 I $0 I 0 I 0 I $0 I $0 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations VerDate Sep<11>2014 Table C.5. Total Burden and Cost for Affiliated and Other RIAs ddrumheller on DSK120RN23PROD with RULES2 23:30 Sep 03, 2024 Jkt 262001 PO 00000 Frm 00113 Fmt 4701 Sfmt 4725 E:\FR\FM\04SER2.SGM 04SER2 149.18 783,809 $9,198.06 $48,326,583 149.18 783,809 $9,198.06 $48,326,583 0 0 $0 $0 0 0 $0 $0 50 262,700 $2,207.22 $11,596,727 50 262,700 $2,207.22 $11,596,727 24.33 127,847 $1,486.84 $7,811,873 24.33 127,847 $1,486.84 $7,811,873 0 0 $0 $0 0 0 $0 $0 6 31,524 $366.62 $1,926,215 6 31,524 $366.62 $1,926,215 261.52 1,374,009 $15,660.13 $82,278,328 229.52 1,205,881 $13,258.74 $69,661,399 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations VerDate Sep<11>2014 SAR Case Review and Filing (1010.320) CTR Recordkeeping and Reporting (1010.315) Recordkeeping and Travel Requirements (1010.410(a) through (c) and 1010.410(±)) Information Sharing Arrangements (1010.510) Special Due Diligence and Special Measures (1010.610 and 1010.620) Section 311 Special Measures TOTAL 72267 ER04SE24.062</GPH> ddrumheller on DSK120RN23PROD with RULES2 Jkt 262001 I I I $4,285,855 I 0 I 0 I $0 I $0 1 I 521 I $68.55 I $35,715 I PO 00000 I Frm 00114 I I I $0 I I I I $0 I 0.083 I 43 I $5.71 I $2,976 I I $0 I 0.083 I 43 I $5.71 I $2,976 I I $359,326 I 2 I 1,042 I $344.84 I $179,663 $8,968,204 I 291.88 I 152,010 I $10,139.11 I $5,282,789 $4,792,181 I 149.18 I 11,125 I $9,198.06 I $4,792,187 $0 I 0 I 0 I $0 I $0 I I Fmt 4701 Sfmt 4725 E:\FR\FM\04SER2.SGM I I I 04SER2 I I ER04SE24.063</GPH> I I I $1,149,961 I 50 I 26,050 I $2,201.22 I $1,149,961 I I $774,645 I 24.33 I 12,618 I $1,486.84 I $774,645 I I $125,547 I 2 I 1,042 I $240.97 I $125,547 $191,008 6 3,126 $366.62 $191,008 $20,646,733 526.56 274,340 $24,064.24 $12,537,469 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations 23:30 Sep 03, 2024 Develop Written AML/CFT 120 $8,226.21 62,520 Program Maintain and Update 0 $0.00 0 Written AML/CFT Program Store the Written 0 0 $0.00 AML/CFT Program Produce Written AML/CFT 0 0 $0.00 Program U2on Reguest Obtain Written Approval of 4 2,084 $689.69 AML/CFT Program Customer Identification, Verification, and 1 495.51 1 258,158 1 $11,213.441 Recordkee2ing SAR Case Review and 149.18 11,125 $9,198.06 Filing (1010.320} CTR Recordkeeping and 0 0 $0 I I I Re2orting (1010.315} Recordkeeping and Travel Requirements (1010.410(a) $2,201.22 50 26,050 through (c) and 1010.410 Information Sharing 24.33 12,618 $1,486.84 Arrangements {1010.510} Special Due Diligence and 2 1,042 $240.97 Special Measures 1010.610 and 1010.620 Section 311 Special 3,126 $366.62 6 Measures TOTAL 851.02 443,383 $39,629.05 72268 VerDate Sep<11>2014 Table C.6. Total Burden and Cost for Affiliated RIAs with a Limited Number of AML/CFT Measures in Place ddrumheller on DSK120RN23PROD with RULES2 23:30 Sep 03, 2024 Jkt 262001 PO 00000 Frm 00115 Fmt 4701 Sfmt 4725 E:\FR\FM\04SER2.SGM 04SER2 I I 120 0 I I 950,640 0 I I $8,226.21 $0 I I $65,168,029 $0 I I 0 1 I I 0 7,922 I I $0 $68.55 I I $0 $543,067 I 0 I 0 I $0 I $0 I 0.083 I 660 I $5.71 I $45,256 I 0 I 0 I $0 I $0 I 0.083 I 660 I $5.71 I $45,256 I 4 I 31,688 I $689.69 I $5,463,689 I 2 I 15,844 I $344.84 I $2,731,844 I 41.13 I 325,867 I $1,428.98 I $11,320,354 I 24.23 I 191,955 I $841.75 I $6,668,341 I $9,198.06 I $72,866,995 I I $9,198.06 I $72,866,995 I 149.18 11,181,830 149.18 11,181,830 I 0 I 0 I $0 I $0 I 0 I 0 I $0 I $0 I 50 I 396,100 I $2,201.22 I $17,485,586 I 50 I 396,100 I $2,201.22 I $17,485,586 I 24.33 I 192,169 I $1,486.84 I $11,118,111 I 24.33 I 192,169 I $1,486.84 I $11,778,771 72269 Develop Written AML/CFT Program Maintain and Update Written AML/CFT Program Store the Written AML/CFT Program Produce Written AML/CFT Program U12on Reguest Obtain Written Approval of AML/CFT Program Customer Identification, Verification, and Recordkee12ing SAR Case Review and Filing (1010.320} CTR Recordkeeping and Reporting 1010.315 Recordkeeping and Travel Requirements (1010.410(a) through c} and 1010.410{ Information Sharing Arrangements 1010.510 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations VerDate Sep<11>2014 ER04SE24.064</GPH> Table C.7. Total Burden and Cost for Other RIAs with a Limited Number of AML/CFT Measures in Place ddrumheller on DSK120RN23PROD with RULES2 72270 VerDate Sep<11>2014 Jkt 262001 PO 00000 Frm 00116 Fmt 4701 Sfmt 4725 E:\FR\FM\04SER2.SGM 2 15,844 $240.97 $1,908,989 2 15,844 $240.97 $1,908,989 6 47,532 $366.62 $2,904,354 6 47,532 $366.62 $2,904,354 258.91 2,051,116 $14,766.28 $116,978,459 396.65 3,142,270 $23,844.58 $188,896,767 04SER2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations 23:30 Sep 03, 2024 ER04SE24.065</GPH> Special Due Diligence and Special Measures (1010.610 and 1010.620) Section 311 Special Measures TOTAL ddrumheller on DSK120RN23PROD with RULES2 VerDate Sep<11>2014 Jkt 262001 PO 00000 Frm 00117 Fmt 4701 Sfmt 4725 E:\FR\FM\04SER2.SGM 04SER2 I I I I I 0 I 0 $0 I $0 I 0 I 0 I $0 I $0 30 I 59,010 $2,056.55 I $4,049,351 I 0 I 0 I $0 I $0 0 I 0 $0 I $0 I 0 I 0 I $0 I $0 0 I 0 $0 I $0 I 0 I 0 I $0 I $0 3,938 $344.84 $678,995 I 0 I 0 I $0 I $0 $0 $0 I 0 I 0 I $0 I $0 I $18,110,911 I 149.18 I 293,742 I $9,198.06 I $18,110,971 2 I I I 0 I 0 I 149.18 I 293,742 I 0 I 0 $0 I $0 I 0 I 0 I $0 I $0 50 I 98,450 $2,201.22 I $4,346,o13 I 50 I 98,450 I $2,201.22 I $4,346,013 I 24.33 I 47,912 $1,486.84 I $2,927,594 I 24.33 I 47,912 I $1,486.84 I $2,927,594 I 0 I 0 $0 I $0 I 0 I 0 I $0 I $0 6 11,814 $366.62 $721,872 6 11,814 $366.62 $721,872 261.52 514,926 $15,660.13 $30,834,798 229.52 451,918 $13,258.74 $26,106,451 I I $9,198.06 I 72271 Develop Written AML/CFT Program Maintain and Update Written AML/CFT Program Store the Written AML/CFT Program Produce Written AML/CFT Program U2on Reguest Obtain Written Approval of AML/CFT Program Customer Identification, Verification, and Recordkee2ing SAR Case Review and Filing (1010.320} CTR Recordkeeping and Re2orting (1010.315} Recordkeeping and Travel Requirements (1010.410(a) through (c) and 1010.410 Information Sharing Arrangements {1010.510} Special Due Diligence and Special Measures 1010.610 and 1010.620 Section 311 Special Measures TOTAL Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations 23:30 Sep 03, 2024 ER04SE24.066</GPH> Table C.8. Total Burden and Cost for Affiliated and Other ERAs ddrumheller on DSK120RN23PROD with RULES2 72272 23:30 Sep 03, 2024 Jkt 262001 PO 00000 Frm 00118 Fmt 4701 Sfmt 4725 E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.067</GPH> Develop Written AML/CFT Program Maintain and Update Written AML/CFT Program Store the Written AML/CFT Program Produce Written AML/CFT Program U2on Reguest Obtain Written Approval of AML/CFT Program Customer Identification, Verification, and Recordkee2ing SAR Case Review and Filing 1010.320} CTR Recordkeeping and Re2orting {1010.315} Recordkeeping and Travel Requirements (1010.410(a) through {c} and 1010.410 Information Sharing Arrangements {1010.510} Special Due Diligence and Special Measures (1010.610 and 1010.620 Section 311 Special Measures TOTAL I 120 I 8,640 I $8,226.21 I $592,287 I 0 I 0 I 0 I $0 I $0 I 1 I I 0 72 I I $0 $68.55 I I $0 $4,936 I 0 I 0 I $0 I $0 I 0.083 I 6 I $5.71 I $411 I 0 I 0 I $0 I $0 I 0.083 I 6 I $5.71 I $411 I I 4 5.27 I I 288 379 I I $689.69 $182.96 I I $49,657 $13,173 I I 2 3.10 I I 144 223 I I $344.84 $107.78 I I $24,829 $7,760 I 149.18 I 10,741 I $9,198.06 I $662,260 I 149.18 I 10,741 I $9,198.06 I $662,260 I 0 I 0 I $0 I $0 I 0 I 0 I $0 I $0 I 50 I 3,600 I $2,201.22 I $158,920 I 50 I 3,600 I $2,201.22 I $158,920 1,752 I $1,486.84 I $101,053 I 24.33 1,752 I $1,486.84 I $101,053 144 I $240.97 I $17,350 I 2 144 I $240.97 I $17,350 I I I I 24.33 2 6 360.1s I I I I 432 2s,976 $366.62 $26,397 $22,598.57 $1,627,097 6 237.79 I I 432 17,121 $366.62 $14,032.31 $26,397 $1,010,326 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations VerDate Sep<11>2014 Table C.9. Total Burden and Cost for Affiliated ERAs with a Limited Number of AML/CFT Measures in Place ddrumheller on DSK120RN23PROD with RULES2 23:30 Sep 03, 2024 Jkt 262001 PO 00000 Frm 00119 Fmt 4701 Sfmt 4725 E:\FR\FM\04SER2.SGM 04SER2 I 120 I 451,320 I $8,226.21 I 0 I 0 I $0 I $0 I 1 I 3,761 I $68.55 I $257,823 I 0 I 0 I $0 I $0 I 0.083 I 313 I $5.71 I $21,485 I 0 I 0 I $0 I $0 I 0.083 I 313 I $5.71 I $21,485 4 I 15,044 I $689.69 I $2,593,907 I 2 I 7,522 I $344.84 I $1,296,954 I 0.42 I 1,598 I $14.76 I $55,527 I 0.25 I 942 I $8.70 I $32,709 I 149.18 I 561,019 I $9,198.06 I 561,019 I $9,198.06 I $34,593,887 0 I 0 I $0 50 I 188,050 I 24 33 • I 91,518 7,522 I I I I I 2 6 355.94 I 22,566 I $30,938,773 I 0 I 0 I $0 I $0 I $34,593,887 I 149.18 I $0 I 0 I 0 I $0 I $0 $2,201.22 I $8,301,349 I 50 I 188,050 I $2,201.22 I $8,301,349 I $1,486.84 I $5,592,011 I 24.33 I 91,518 I $1,486.84 I $5,592,017 I $240.97 I $906,300 I 2 I 7,522 I $240.97 I $906,300 $366.62 $1,378,853 1,338,697 $22,430.37 $84,360,613 6 22,566 $366.62 $1,378,853 234.93 883,586 $13,933.23 $52,402,862 72273 Develop Written AML/CFT Program Maintain and Update Written AML/CFT Program Store the Written AML/CFT Program Produce Written AML/CFT Program U2on Reguest Obtain Written Approval of AML/CFT Program Customer Identification, Verification, and Recordkee2ing SAR Case Review and Filing {1010.320} CTR Recordkeeping and Re2orting {l O10.315' Recordkeeping and Travel Requirements (1010.410(a) through (c) and 1010.410 Information Sharing Arrangements {1010.510\ Special Due Diligence and Special Measures 1010.610 and 1010.620 Section 311 Special Measures TOTAL Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations VerDate Sep<11>2014 ER04SE24.068</GPH> Table C.10. Total Burden and Cost for Other RIAs with a Limited Number of AML/CFT Measures in Place 72274 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations Table C.11. Total Burden and Cost for Clients Provide Customer Information Total 31 CFR Part 1032 UMRA (section 202(a)) requires Federal agencies to prepare a written statement, which includes an assessment of anticipated costs and benefits, before issuing ‘‘any rule that includes any Federal mandate that may result in the expenditure by State, local, and Tribal governments, in the aggregate, or by the private sector, of $100 million or more (adjusted annually for inflation) in any one year.’’ The current threshold after adjustment for inflation is $177 million, using the 2022 GDP price deflator.428 The final rule would result in an expenditure in at least one year that meets or exceeds this amount. The total annualized cost of the final rule is estimated to be approximately $980 million to the private sector in the first year. The annualized cost of the final rule after the first year is estimated to be approximately $710 million to the private sector. The final rule does not foreseeably impose costs or other compliance burden that would impact any State, local, or Tribal government. FinCEN believes that the Impact Analysis provides the analysis required by UMRA. Administrative practice and procedure, Anti-money laundering, Banks, Banking, Brokers, Brokerage, Investment advisers, Money laundering, Mutual funds, Reporting and recordkeeping requirements, Securities, Small business, Suspicious transactions, Terrorist financing. For the reason set forth in the preamble, FinCEN amends 31 CFR chapter X as follows: Pursuant to the Congressional Review Act (CRA), OMB’s Office of Information and Regulatory Affairs has determined that this rule meets the requirements of 5 U.S.C. 804(2). List of Subjects ddrumheller on DSK120RN23PROD with RULES2 31 CFR Part 1010 Administrative practice and procedure, Anti-money laundering, Banks, Banking, Brokers, Brokerage, Investment advisers, Money laundering, Mutual funds, Reporting and recordkeeping requirements, Securities, Suspicious transactions, Terrorist financing. 428 U.S. Bureau of Economic Analysis, National Income and Product Accounts Tables, Table 1.1.9. Implicit Price Deflators for Gross Domestic Product. 23:30 Sep 03, 2024 1. The authority citation for part 1010 continues to read as follows: ■ Authority: 12 U.S.C. 1829b and 1951–1959; 31 U.S.C. 5311–5314 and 5316–5336; title III, sec. 314, Pub. L. 107–56, 115 Stat. 307; sec. 701, Pub. L. 114–74, 129 Stat. 599; sec. 6403, Pub. L. 116–283, 134 Stat. 3388. 2. Section 1010.100 is amended by: a. Removing the word ‘‘or’’ at the end of paragraph (t)(9); ■ b. Removing the period at the end of paragraph (t)(10), and adding in its place ‘‘; or’’; and ■ c. Adding paragraphs (t)(11) and (nnn). The additions read as follows: ■ ■ § 1010.100 General definitions. * E. Congressional Review Act VerDate Sep<11>2014 PART 1010—GENERAL PROVISIONS Jkt 262001 * * * * (t) * * * (11) An investment adviser. * * * * * (nnn) Investment adviser. (1) Any person, other than a person identified in (ii), wherever located, who is registered or required to register with the SEC under section 203 of the Investment Advisers Act of 1940 (15 U.S.C. 80b– 3(a)), or any person who is exempt from SEC registration under section 203(l) or 203(m) of the Investment Advisers Act of 1940 (15 U.S.C. 80b–3(l), (m)). (2) For the purposes of this subpart, investment adviser does not include: (i) any person who is registered or required to register with the SEC under section 203 of the Investment Advisers Act of 1940 (15 U.S.C. 80b–3(a)) only because such person is an investment adviser that meets the conditions of (a) mid-sized adviser, as set forth in Section PO 00000 Frm 00120 Fmt 4701 Sfmt 4700 203A(a)(2)(B) of the Investment Advisers Act of 1940 (15 U.S.C. 80b– 3a(a)(2)(B)), (b) a pension consultant, as defined under 17 CFR 275–203A–2(a), or (c) multi-state adviser, as defined under 17 CFR 275–203A–2(d). (ii) any person who is registered or required to register with the SEC under section 203 of the Investment Advisers Act of 1940 (15 U.S.C. 80b–3(a)) and does not report any assets under management, as defined under Section 203A(a)(3) of the Act (15 U.S.C. 80b– 3a(a)(3)), on its most recently filed initial Form ADV or annual updating amendment to Form ADV (17 CFR 279.1). ■ 3. Section 1010.410 is amended by: ■ a. Removing the word ‘‘or’’ at the end of paragraph (e)(6)(i)(I); ■ b. Removing the word ‘‘and’’ at the end of paragraph (e)(6)(i)(J) and adding in its place ‘‘or’’; and ■ c. Adding paragraph (e)(6)(i)(K). The addition reads as follows: § 1010.410 Records to be made and retained by financial institutions. * * * * * (e) * * * (6) * * * (i) * * * (K) An investment adviser; and * * * * * ■ 4. Section 1010.605 is amended by: ■ a. Removing the word ‘‘and’’ at the end of paragraph (c)(2)(iii); ■ b. Removing the period at the end of paragraph (c)(2)(iv) and adding in its place ‘‘; and’’; ■ c. Adding paragraph (c)(2)(v); ■ d. Removing the word ‘‘and’’ at the end of paragraph (e)(1)(iii); ■ e. Adding the word ‘‘and’’ at the end of paragraph (e)(1)(iv); and ■ f. Adding paragraph (e)(1)(v). The additions read as follows: § 1010.605 Definitions. * * * * * (c) * * * (2) * * * (v) As applied to investment advisers (as set forth in paragraph (e)(1)(v) of this section) means any contractual or other business relationship established E:\FR\FM\04SER2.SGM 04SER2 ER04SE24.069</GPH> D. Unfunded Mandates Reform Act Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations between a person and an investment adviser to provide advisory services. * * * * * (e) * * * (1) * * * (v) An investment adviser except that an investment adviser shall not be considered a covered financial institution for the purposes of § 1010.230. * * * * * ■ 5. Section 1010.810 is amended by revising paragraph (b)(6) to read as follows: § 1010.810 Enforcement. * * * * * (b) * * * (6) To the Securities and Exchange Commission with respect to brokers and dealers in securities, investment advisers, and investment companies as that term is defined in the Investment Company Act of 1940 (15 U.S.C. 80a–1 et seq.); * * * * * ■ 6. Add part 1032 to read as follows: PART 1032—RULES FOR INVESTMENT ADVISERS Subpart A—General Provisions 1032.100 Definitions. 1032.110 Foreign-located investment adviser. 1032.111 Scope of application to foreignlocated investment advisers. 1032.112 Severability Subpart B—Programs 1032.200 General. 1032.210 Anti-money laundering/ countering the financing of terrorism programs for investment advisers. 1032.220 [Reserved] Subpart C—Reports Required To Be Made by Investment Advisers 1032.300 General. 1032.310 Reports of transactions in currency. 1032.311 Filing obligations. 1032.312 Identification required. 1032.313 Aggregation. 1032.314 Structured transactions. 1032.315 Exemptions. 1032.320 Reports by investment advisers of suspicious transactions. ddrumheller on DSK120RN23PROD with RULES2 Subpart D—Records Required To Be Maintained by Investment Advisers 1032.400 General. 1032.410 Recordkeeping. Subpart E—Special Information-Sharing Procedures To Deter Money Laundering and Terrorist Activity 1032.500 General. 1032.520 Special information-sharing procedures to deter money laundering and terrorist activity for investment advisers. 23:30 Sep 03, 2024 Subpart F—Special Standards of Diligence, and Special Measures for Investment Advisers 1032.600 General. 1032.610 Due diligence programs for correspondent accounts for foreign financial institutions. 1032.620 Due diligence programs for private banking accounts. Authority: 12 U.S.C. 1829b and 1951– 1959; 31 U.S.C. 5311–5314 and 5316–5336; title III, sec. 314, Pub. L. 107–56, 115 Stat. 307. Subpart A—General Provisions § 1032.100 Definitions. Refer to § 1010.100 of this chapter for general definitions not noted in this part. § 1032.110 adviser. Foreign-located investment A foreign-located investment adviser is an investment adviser whose principal office and place of business is outside the United States. § 1032.111 Scope of application to foreignlocated investment advisers. Sec. VerDate Sep<11>2014 1032.530 [Reserved] 1032.540 Voluntary information-sharing among financial institutions. Jkt 262001 (a) The requirements of this part 1032 apply to a foreign-located investment adviser only with respect to its advisory activities that: (1) Take place within the United States, including through involvement of U.S. personnel of the investment adviser, such as the involvement of an agency, branch, or office within the United States, or (2) Provide advisory services to a U.S. person or a foreign-located private fund with an investor that is a U.S. person. (3) For purposes of this § 1032.111, (i) ‘‘Foreign-located private fund’’ means any foreign-located issuer that is a private fund as that term is defined under 15 U.S.C. 80b–2(a)(29); (ii) ‘‘Investor’’ means any investor as that term is defined at 17 CFR 275.202(a)(30)–1(c)(2); and (iii) ‘‘U.S. person’’ means any U.S. person as that term is defined in 17 CFR 230.902(k). (b) For avoidance of doubt, upon request, a foreign-located investment adviser shall make records and reports required under this part, and any other records it has retained regarding the scope of its activities covered by this part, available for inspection by FinCEN or the Securities and Exchange Commission. § 1032.112 Severability If any provision of this part, or any provision of §§ 1010.100, 1010.410, PO 00000 Frm 00121 Fmt 4701 Sfmt 4700 72275 1010.605, or 1010.810 of this chapter referencing investment advisers, is held to be invalid, or the application thereof to any person or circumstance is held to be invalid, such invalidity shall not affect other provisions, or application of such provisions to other persons or circumstances, that can be given effect without the invalid provision or application. Subpart B—Programs § 1032.200 General. Investment advisers are subject to the program requirements set forth and cross-referenced in this subpart. Investment advisers should also refer to subpart B of part 1010 of this chapter for program requirements contained in that subpart that apply to investment advisers. § 1032.210 Anti-money laundering/ countering the financing of terrorism programs for investment advisers. (a) Anti-money laundering/countering the financing of terrorism program requirements for investment advisers. (1) Each investment adviser shall develop and implement a written antimoney laundering/countering the financing of terrorism (AML/CFT) program that is risk-based and reasonably designed to prevent the investment adviser from being used for money laundering, terrorist financing, or other illicit finance activities and to achieve and monitor compliance with the applicable provisions of the Bank Secrecy Act (as defined in 31 CFR 1010.100(e)) and the implementing regulations promulgated thereunder by the Department of the Treasury. The investment adviser may deem the requirements in this subpart satisfied for any: (i) Mutual fund (as defined in 31 CFR 1010.100(gg)), (ii) Collective investment fund that is subject to the requirements of 12 CFR 9.18 (or other applicable law that incorporates the requirements of 12 CFR 9.18), or (iii) Any other investment adviser (as defined in 31 CFR 1010.100(nnn)), provided that such mutual fund, collective investment fund, or other investment adviser is advised by the investment adviser and subject to an AML/CFT program requirement under this chapter. (2) Each investment adviser’s AML/ CFT program must be approved in writing by its board of directors or trustees, or if it does not have one, by its sole proprietor, general partner, trustee, or other persons that have functions similar to a board of directors. E:\FR\FM\04SER2.SGM 04SER2 72276 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations An investment adviser shall make its anti-money laundering/countering the financing of terrorism program available for inspection by FinCEN or the Securities and Exchange Commission. (b) Minimum requirements. The AML/ CFT program shall at a minimum: (1) Establish and implement internal policies, procedures, and controls reasonably designed to prevent the investment adviser from being used for money laundering, terrorist financing, or other illicit finance activities and to achieve compliance with the applicable provisions of the Bank Secrecy Act and implementing regulations in this chapter; (2) Provide for independent testing for compliance to be conducted by the investment adviser’s personnel or by a qualified outside party; (3) Designate a person or persons responsible for implementing and monitoring the operations and internal controls of the program; (4) Provide ongoing training for appropriate persons; and (5) Implement appropriate risk-based procedures for conducting ongoing customer due diligence, to include, but not be limited to: (i) Understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile; and (ii) Conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information. (c) Effective date. An investment adviser must develop and implement an AML/CFT program that complies with the requirements of this section on or before January 1, 2026. § 1032.220 [Reserved] Subpart C—Reports Required To Be Made by Investment Advisers ddrumheller on DSK120RN23PROD with RULES2 § 1032.300 General. (a) Investment advisers are subject to the reporting requirements set forth and cross-referenced in this subpart. Investment advisers should also refer to subpart C of part 1010 of this chapter for reporting requirements contained in that subpart that apply to investment advisers. The investment adviser may deem the requirements in this subpart satisfied for any: (i) mutual fund (as defined in 31 CFR 1010.100(gg)), (ii) collective investment fund that is subject to the requirements of 12 CFR 9.18 (or other applicable law that incorporates the requirements of 12 CFR 9.18), or (iii) any other investment adviser (as defined in 31 CFR VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 1010.100(nnn)), provided that such mutual fund, collective investment fund, or other investment adviser is advised by the investment adviser and subject to reporting requirements under this chapter. § 1032.310 currency. Reports of transactions in The reports of transactions in currency requirements for investment advisers are located in subpart C of part 1010 of this chapter and this subpart. § 1032.311 Filing obligations. Refer to § 1010.311 of this chapter for reports of transactions in currency filing obligations for investment advisers. § 1032.312 Identification required. Refer to § 1010.312 of this chapter for identification requirements for reports of transactions in currency filed by investment advisers. § 1032.313 Aggregation. Refer to § 1010.313 of this chapter for reports of transactions in currency aggregation requirements for investment advisers. § 1032.314 Structured transactions. Refer to § 1010.314 of this chapter for rules regarding structured transactions for investment advisers. § 1032.315 Exemptions. Refer to § 1010.315 of this chapter for exemptions from the obligation to file reports of transactions in currency for investment advisers. § 1032.320 Reports by investment advisers of suspicious transactions. (a) General. (1) Every investment adviser shall file with FinCEN, to the extent and in the manner required by this section, a report of any suspicious transaction relevant to a possible violation of law or regulation. An investment adviser may also file with FinCEN a report of any suspicious transaction that it believes is relevant to the possible violation of any law or regulation, but whose reporting is not required by this section. Filing a report of a suspicious transaction does not relieve an investment adviser from the responsibility of complying with any other reporting requirements imposed by the Advisers Act or the Securities and Exchange Commission. (2) A transaction requires reporting under this section if it is conducted or attempted by, at, or through an investment adviser; it involves or aggregates funds or other assets of at least $5,000; and the investment adviser knows, suspects, or has reason to suspect that the transaction (or a pattern PO 00000 Frm 00122 Fmt 4701 Sfmt 4700 of transactions of which the transaction is a part): (i) Involves funds derived from illegal activity or is intended or conducted in order to hide or disguise funds or assets derived from illegal activity (including, without limitation, the ownership, nature, source, location, or control of such funds or assets) as part of a plan to violate or evade any Federal law or regulation or to avoid any transaction reporting requirement under Federal law or regulation; (ii) Is designed, whether through structuring or other means, to evade any requirements of this chapter or any other regulations promulgated under the Bank Secrecy Act; (iii) Has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage, and the investment adviser knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction; or (iv) Involves use of the investment adviser to facilitate criminal activity. (3) More than one investment adviser may have an obligation to report the same transaction under this section, and other financial institutions may have separate obligations to report suspicious activity with respect to the same transaction pursuant to other provisions of this chapter. In those instances, no more than one report is required to be filed by the investment adviser(s) and other financial institution(s) involved in the transaction, provided that the report filed contains all relevant facts, including the name of each financial institution and the words ‘‘joint filing’’ in the narrative section, and each institution maintains a copy of the report filed, along with any supporting documentation. (b) Filing and notification procedures—(1) What to file. A suspicious transaction shall be reported by completing a Suspicious Activity Report (‘‘SAR’’) and collecting and maintaining supporting documentation as required by paragraph (c) of this section. (2) Where to file. The SAR shall be filed with FinCEN in accordance with the instructions to the SAR. (3) When to file. A SAR shall be filed no later than 30 calendar days after the date of the initial detection by the reporting investment adviser of facts that may constitute a basis for filing a SAR under this section. If no suspect is identified on the date of such initial detection, an investment adviser may delay filing a SAR for an additional 30 calendar days to identify a suspect, but E:\FR\FM\04SER2.SGM 04SER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations in no case shall reporting be delayed more than 60 calendar days after the date of such initial detection. (4) Mandatory notification to law enforcement. In situations involving violations that require immediate attention, such as suspected terrorist financing or ongoing money laundering schemes, an investment adviser shall immediately notify by telephone an appropriate law enforcement authority in addition to filing timely a SAR. (5) Voluntary notification to the Financial Crimes Enforcement Network or the Securities and Exchange Commission. Investment advisers wishing to voluntarily report suspicious transactions that may relate to terrorist activity may call the Financial Crimes Enforcement Network’s Financial Institutions Hotline at 1–866–556–3974 in addition to filing timely a SAR if required by this section. The investment adviser may also, but is not required to, contact the Securities and Exchange Commission to report in such situations. (c) Retention of records. An investment adviser shall maintain a copy of any SAR filed by the investment adviser or on its behalf (including joint reports), and the original (or business record equivalent) of any supporting documentation concerning any SAR that it files (or that is filed on its behalf) for a period of five years from the date of filing the SAR. Supporting documentation shall be identified as such and maintained by the investment adviser, and shall be deemed to have been filed with the SAR. An investment adviser shall make all supporting documentation available to FinCEN or any Federal, State, or local law enforcement agency, or any Federal regulatory authority that examines the investment adviser for compliance with the Bank Secrecy Act, upon request. (d) Confidentiality of SARs. A SAR, and any information that would reveal the existence of a SAR, are confidential and shall not be disclosed except as authorized in this paragraph (d). For purposes of this paragraph (d) only, a SAR shall include any suspicious activity report filed with FinCEN pursuant to any regulation in this chapter. (1) Prohibition on disclosures by investment advisers—(i) General rule. No investment adviser, and no current or former director, officer, employee, or agent of any investment adviser, shall disclose a SAR or any information that would reveal the existence of a SAR. Any investment adviser, and any current or former director, officer, employee, or agent of any investment adviser that is subpoenaed or otherwise requested to disclose a SAR or any VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 information that would reveal the existence of a SAR shall decline to produce the SAR or such information, citing this section and 31 U.S.C. 5318(g)(2)(A)(i), and shall notify FinCEN of any such request and the response thereto. (ii) Rules of construction. Provided that no person involved in any reported suspicious transaction is notified that the transaction has been reported, this paragraph (d)(1) shall not be construed as prohibiting: (A) The disclosure by an investment adviser, or any current or former director, officer, employee, or agent of an investment adviser of: (1) A SAR, or any information that would reveal the existence of a SAR, to FinCEN or any Federal, State, or local law enforcement agency, or any Federal regulatory authority that examines the investment adviser for compliance with the Bank Secrecy Act; or (2) The underlying facts, transactions, and documents upon which a SAR is based, including but not limited to, disclosures: (i) To another financial institution, or any current or former director, officer, employee, or agent of a financial institution, for the preparation of a joint SAR; or (ii) In connection with certain employment references or termination notices, to the full extent authorized in 31 U.S.C. 5318(g)(2)(B); or (B) The sharing by an investment adviser, or any current or former director, officer, employee, or agent of the investment adviser, of a SAR, or any information that would reveal the existence of a SAR, within the investment adviser’s corporate organizational structure for purposes consistent with Title II of the Bank Secrecy Act as determined by regulation or in guidance. (2) Prohibition on disclosures by government authorities. A Federal, State, local, territorial, or Tribal government authority, or any current or former director, officer, employee, or agent of any of the foregoing, shall not disclose a SAR, or any information that would reveal the existence of a SAR, except as necessary to fulfill official duties consistent with Title II of the Bank Secrecy Act. For purposes of this section, ‘‘official duties’’ shall not include the disclosure of a SAR, or any information that would reveal the existence of a SAR, in response to a request for disclosure of non-public information or a request for use in a private legal proceeding, including a request pursuant to 31 CFR 1.11. (e) Limitation on liability. An investment adviser, and any current or PO 00000 Frm 00123 Fmt 4701 Sfmt 4700 72277 former director, officer, employee, or agent of any investment adviser, that makes a voluntary disclosure of any possible violation of law or regulation to a government agency or makes a disclosure pursuant to this section or any other authority, including a disclosure made jointly with another institution, shall be protected from liability to any person for any such disclosure, or for failure to provide notice of such disclosure to any person identified in the disclosure, or both, to the full extent provided by 31 U.S.C. 5318(g)(3). (f) Compliance. Investment advisers shall be examined by FinCEN or its delegates for compliance with this section. Failure to satisfy the requirements of this section may be a violation of the Bank Secrecy Act and of this chapter. Subpart D—Records Required To Be Maintained by Investment Advisers § 1032.400 General. Investment advisers are subject to the recordkeeping requirements set forth and cross referenced in this subpart. Investment advisers should also refer to subpart D of part 1010 of this chapter for recordkeeping requirements contained in that subpart which apply to investment advisers. The investment adviser may deem the requirements in this subpart satisfied for any: (i) mutual fund (as defined in 31 CFR 1010.100(gg)), (ii) collective investment fund that is subject to the requirements of 12 CFR 9.18 (or other applicable law that incorporates the requirements of 12 CFR 9.18), or (iii) any other investment adviser (as defined in 31 CFR 1010.100(nnn)), provided that such mutual fund, collective investment fund, or other investment adviser is advised by the investment adviser and subject to recordkeeping requirements under this chapter. § 1032.410 Recordkeeping. For regulations regarding recordkeeping, refer to § 1010.410 of this chapter. Subpart E—Special InformationSharing Procedures To Deter Money Laundering and Terrorist Activity § 1032.500 General. Investment advisers are subject to the special information-sharing procedures to deter money laundering and terrorist activity requirements set forth and cross-referenced in this subpart. Investment advisers should also refer to subpart E of part 1010 of this chapter for special information-sharing procedures to deter money laundering and terrorist E:\FR\FM\04SER2.SGM 04SER2 72278 Federal Register / Vol. 89, No. 171 / Wednesday, September 4, 2024 / Rules and Regulations activity contained in that subpart which apply to investment advisers. The investment adviser may deem the requirements in this subpart satisfied for any: (i) mutual fund (as defined in 31 CFR 1010.100(gg)), (ii) collective investment fund that is subject to the requirements of 12 CFR 9.18 (or other applicable law that incorporates the requirements of 12 CFR 9.18), or (iii) any other investment adviser (as defined in 31 CFR 1010.100(nnn)), provided that such mutual fund, collective investment fund, or other investment adviser is advised by the investment adviser and subject to special information sharing procedures under this chapter. § 1032.520 Special information-sharing procedures to deter money laundering and terrorist activity for investment advisers. ddrumheller on DSK120RN23PROD with RULES2 For regulations regarding special information-sharing procedures to deter money laundering and terrorist activity for investment advisers, refer to § 1010.520 of this chapter. VerDate Sep<11>2014 23:30 Sep 03, 2024 Jkt 262001 § 1032.530 [Reserved] § 1032.540 Voluntary information-sharing among financial institutions. For regulations regarding voluntary information-sharing among financial institutions, refer to § 1010.540 of this chapter. Subpart F—Special Standards of Diligence, and Special Measures for Investment Advisers § 1032.600 General. Investment advisers are subject to the special standards of diligence, prohibitions, and special measures requirements set forth and cross referenced in this subpart. Investment advisers should also refer to subpart F of part 1010 of this chapter for special standards of diligence, prohibitions, and special measures contained in that subpart, all of which apply to investment advisers. The investment adviser may deem the requirements in this subpart satisfied for any: (i) mutual fund (as defined in 31 CFR 1010.100(gg)), (ii) collective investment fund that is subject to the requirements of 12 CFR 9.18 (or other applicable law that incorporates the requirements of 12 PO 00000 Frm 00124 Fmt 4701 Sfmt 9990 CFR 9.18), or (iii) any other investment adviser (as defined in 31 CFR 1010.100(nnn)), provided that such mutual fund, collective investment fund, or other investment adviser is advised by the investment adviser and subject to special standards of diligence and special measures under this chapter. §1032.610 Due diligence programs for correspondent accounts for foreign financial institutions. For regulations regarding due diligence programs for correspondent accounts for foreign financial institutions, refer to § 1010.610 of this chapter. § 1032.620 Due diligence programs for private banking accounts. For regulations regarding due diligence programs for private banking accounts, refer to § 1010.620 of this chapter. Andrea M. Gacki, Director, Financial Crimes Enforcement Network. [FR Doc. 2024–19260 Filed 8–28–24; 8:45 am] BILLING CODE 4810–02–P E:\FR\FM\04SER2.SGM 04SER2

Agencies

[Federal Register Volume 89, Number 171 (Wednesday, September 4, 2024)]
[Rules and Regulations]
[Pages 72156-72278]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-19260]



[[Page 72155]]

Vol. 89

Wednesday,

No. 171

September 4, 2024

Part II





Department of the Treasury





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Financial Crimes Enforcement Network





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31 CFR Parts 1010 and 1032





Financial Crimes Enforcement Network: Anti-Money Laundering/Countering 
the Financing of Terrorism Program and Suspicious Activity Report 
Filing Requirements for Registered Investment Advisers and Exempt 
Reporting Advisers; Final Rule

Federal Register / Vol. 89 , No. 171 / Wednesday, September 4, 2024 / 
Rules and Regulations

[[Page 72156]]


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DEPARTMENT OF THE TREASURY

Financial Crimes Enforcement Network

31 CFR Parts 1010 and 1032

RIN 1506-AB58


Financial Crimes Enforcement Network: Anti-Money Laundering/
Countering the Financing of Terrorism Program and Suspicious Activity 
Report Filing Requirements for Registered Investment Advisers and 
Exempt Reporting Advisers

AGENCY: Financial Crimes Enforcement Network (FinCEN), Treasury.

ACTION: Final rule.

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SUMMARY: FinCEN, a bureau of the U.S. Department of the Treasury 
(Treasury), is issuing a final rule to include certain investment 
advisers in the definition of ``financial institution'' under the Bank 
Secrecy Act (BSA), prescribe minimum standards for anti-money 
laundering/countering the financing of terrorism (AML/CFT) programs to 
be established by certain investment advisers, require certain 
investment advisers to report suspicious activity to FinCEN pursuant to 
the BSA, and make several other related changes to FinCEN regulations. 
These regulations will apply to certain investment advisers who may be 
at risk for misuse by money launderers, terrorist financers, or other 
actors who seek access to the U.S. financial system for illicit 
purposes and who threaten U.S. national security.

DATES: This rule is effective January 1, 2026.

FOR FURTHER INFORMATION CONTACT: The FinCEN Regulatory Support Section 
at 1-800-767-2825 or email [email protected].

SUPPLEMENTARY INFORMATION:

I. Introduction

    In this final rule, FinCEN is adding certain investment advisers to 
the definition of ``financial institution'' to regulations issued 
pursuant to the BSA, prescribing minimum standards for AML/CFT programs 
to be established by certain investment advisers, requiring certain 
investment advisers to report suspicious activity to FinCEN pursuant to 
the BSA, and making several other related changes to FinCEN's 
regulations that implement the BSA. This final rule follows FinCEN's 
notice of proposed rulemaking on AML/CFT program and suspicious 
activity report (SAR) requirements for investment advisers released on 
February 15, 2024 (referred to as the IA AML NPRM or proposed rule).\1\
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    \1\ FinCEN, Anti-Money Laundering/Countering the Financing of 
Terrorism Program and Suspicious Activity Report Filing Requirements 
for Registered Investment Advisers and Exempt Reporting Advisers, 
Notice of Proposed Rulemaking, 89 FR 12108 (Feb. 15, 2024).
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    This rule aims to address and prevent money laundering, terrorist 
financing, and other illicit finance activity through the investment 
adviser industry. As detailed in an investment adviser illicit finance 
risk assessment (Risk Assessment) published concurrently with the 
release of the IA AML NPRM, Treasury has identified several illicit 
finance threats involving investment advisers.\2\ Investment advisers 
have served as an entry point into the U.S. financial system and 
economy for illicit proceeds associated with foreign corruption, fraud, 
and tax evasion, as well as billions of dollars ultimately controlled 
by sanctioned entities including Russian oligarchs and their 
associates. Investment advisers--including those exempt from Securities 
and Exchange Commission (SEC) registration--and their private funds, 
particularly venture capital funds, are also being used by foreign 
states, most notably the People's Republic of China (PRC) and Russia, 
to access certain technology and services with long-term national 
security implications through investments in early-stage companies. 
Finally, there are numerous examples of investment advisers defrauding 
their customers and stealing their funds.
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    \2\ See Treasury, US Sectoral Illicit Finance Risk Assessment 
Investment Advisers (also titled 2024 Investment Adviser Risk 
Assessment) (2024), available at https://home.treasury.gov/about/offices/terrorism-and-financial-intelligence/terrorist-financing-and-financial-crimes/office-of-strategic-policy-osp.
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    To address these risks, this rule adds ``investment adviser'' to 
the definition of ``financial institution'' at 31 CFR 1010.100(t) and 
defines investment advisers to be SEC-registered investment advisers 
(RIAs) and exempt reporting advisers (ERAs). However, FinCEN is 
narrowing the definition of ``investment adviser'' from the proposed 
rule to exclude RIAs that register with the SEC solely because they are 
(i) mid-sized advisers, (ii) multi-state advisers, or (iii) pension 
consultants, as well as (iv) RIAs that do not report any assets under 
management (AUM) on Form ADV. For investment advisers subject to this 
rule that have their principal office and place of business outside the 
United States, FinCEN is clarifying that the rule applies only to their 
activities that (i) take place within the United States, including 
through the involvement of U.S. personnel of the investment adviser, 
such as the involvement of an agency, branch, or office within the 
United States or (ii) provide services to a U.S. person or a foreign-
located private fund with an investor that is a U.S. person. Given that 
the risk of money laundering, terrorist financing, and other illicit 
finance activity is generally lower for State-registered advisers, 
FinCEN, as proposed in the IA AML NPRM, is not applying this rule to 
State-registered advisers at this time. However, FinCEN will continue 
to monitor activity involving State-registered investment advisers for 
indicia of money laundering, terrorist financing, or other illicit 
finance activity, and may take appropriate steps to mitigate any such 
activity. As in the proposed rule, this final rule also does not cover 
foreign private advisers or family offices.
    With respect to the minimum standards for an investment adviser's 
AML/CFT program, FinCEN is adopting the minimum requirements largely as 
proposed in the IA AML NPRM, with several changes. In line with the 
proposed rule, the final rule maintains the exclusion of mutual funds 
from the requirements of an investment adviser's AML/CFT program 
requirements. It includes modified text, however, to permit an 
investment adviser to categorically exclude any mutual fund from an 
investment adviser's AML/CFT program requirements without obligating 
the adviser to verify that such mutual fund has implemented an AML/CFT 
program. Additionally, FinCEN is expanding the exclusion from the AML/
CFT program to also apply to (i) bank- and trust company-sponsored 
collective investment funds that comply with the requirements of 12 CFR 
9.18 or a similar applicable law that incorporates the requirements of 
12 CFR 9.18, and (ii) any other investment adviser subject to this rule 
that is advised by the investment adviser. With respect to the 
requirement to establish, maintain, and enforce a financial 
institution's AML/CFT program that is the responsibility of, and must 
be performed by, persons in the United States who are accessible to, 
and subject to oversight and supervision by, the Secretary of the 
Treasury and the appropriate Federal functional regulator (the Duty 
Provision), as discussed further below, FinCEN has determined to not 
include this requirement in this final rule.
    With respect to this rule's other requirements, FinCEN is adopting 
the SAR filing provisions largely as proposed. The final rule does not 
exempt investment advisers from the requirements to file Currency 
Transaction Reports (CTRs), adhere to

[[Page 72157]]

the Recordkeeping and Travel Rules, or other general recordkeeping 
requirements.\3\ Following the proposed application of the information 
sharing provisions of sections 314(a) and 314(b) under the USA PATRIOT 
Act,\4\ the final rule is applying both requirements as proposed, but 
is clarifying that investment advisers may deem these requirements 
satisfied for any mutual funds, bank- and trust company-sponsored 
collective investment fund, or any other investment adviser they advise 
subject to this rule that is already subject to AML/CFT program 
requirements. With respect to the proposal to implement special due 
diligence requirements for correspondent and private banking accounts 
and special measures under section 311 of the USA PATRIOT Act,\5\ 
investment advisers may deem these requirements satisfied for any 
mutual fund, bank- and trust company-sponsored collective investment 
fund, or any other investment adviser they advise subject to this rule 
that is already subject to AML/CFT program requirements. FinCEN is also 
extending the proposed date for compliance to January 1, 2026, meaning 
that no later than this date, investment advisers must have implemented 
AML/CFT programs, commenced filing SARs when required, and begun 
complying with the other reporting and recordkeeping requirements in 
this final rule.
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    \3\ See 31 CFR 1010.310 through 1010.315 (CTR), 31 CFR 
1010.410(e) and (f) (Recordkeeping and Travel Rules), and 31 CFR 
1010.415 through 110.440.
    \4\ See 31 CFR 1010.520, 1010.540.
    \5\ As discussed further below, in addition to special measures 
under section 311 of the Uniting and Strengthening America by 
Providing Appropriate Tools Required to Intercept and Obstruct 
Terrorism Act of 2001 (USA PATRIOT Act), investment advisers must 
also comply with actions taken under section 9714(a) of the 
Combating Russian Money Laundering Act, codified as a note to 31 
U.S.C. 5318A, and section 7213A of the Fentanyl Sanctions Act, 
codified at 21 U.S.C. 2313a. See infra Section III.G.2.
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II. Background

A. Statutory Authority

    Enacted in 1970, the Currency and Foreign Transactions Reporting 
Act--which, along with its amendments and the other statutes relating 
to the subject matter, is generally referred to as the BSA--is designed 
to combat money laundering, the financing of terrorism and other 
illicit finance activity, and to safeguard the national security of the 
United States.\6\ This includes ``through the establishment by 
financial institutions of reasonably designed risk-based programs to 
combat money laundering and the financing of terrorism,'' as well as 
``to facilitate the tracking of money that has been sourced through 
criminal activity or is intended to promote criminal or terrorist 
activity.'' \7\ The Secretary of the Treasury (Secretary) is authorized 
to administer the BSA and to require financial institutions to keep 
records and file reports that ``are highly useful in . . . criminal, 
tax, or regulatory investigations, risk assessments, or proceedings'' 
or ``intelligence or counterintelligence activities, including 
analysis, to protect against terrorism.'' \8\ The Secretary may also 
``establish appropriate frameworks for information sharing among 
financial institutions and service providers, their regulatory 
authorities, associations of financial institutions, the [Treasury], 
and law enforcement authorities to identify, stop, and apprehend money 
launderers and those who finance terrorists.'' \9\ The Secretary 
delegated the authority to implement, administer, and enforce the BSA 
and its implementing regulations to the Director of FinCEN.\10\
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    \6\ See 31 U.S.C. 5311. Certain parts of the Currency and 
Foreign Transactions Reporting Act, its amendments, and the other 
statutes relating to the subject matter of that Act, have come to be 
referred to as the BSA. The BSA is codified at 12 U.S.C. 1829b, 12 
U.S.C. 1951-1960, and 31 U.S.C. 310, 5311-5314, 5316-5336, and 
including notes thereto, with implementing regulations at 31 CFR 
Chapter X.
    \7\ 31 U.S.C. 5311(2), (3).
    \8\ 31 U.S.C. 5311(1).
    \9\ 31 U.S.C. 5311(5).
    \10\ Treasury Order 180-01, paragraph 3(a) (Jan. 14, 2020), 
available at https://home.treasury.gov/about/general-information/orders-and-directives/treasury-order-180-01; see also 31 U.S.C. 
310(b)(2)(I) (providing that FinCEN Director ``[a]dminister the 
requirements of subchapter II of chapter 53 of this title, chapter 2 
of title I of Public Law 91-508, and section 21 of the Federal 
Deposit Insurance Act, to the extent delegated such authority by the 
Secretary.''
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    Pursuant to this authority, FinCEN may define a business or agency 
as a ``financial institution'' if such business or agency engages in 
any activity determined by regulation ``to be an activity which is 
similar to, related to, or a substitute for any activity'' in which a 
``financial institution'' as defined by the BSA is authorized to 
engage.\11\ Additionally, the BSA requires financial institutions to 
establish programs to combat money laundering and the financing of 
terrorism that include certain minimum standards. The BSA explicitly 
authorizes the Secretary--and thereby FinCEN--to ``prescribe minimum 
standards'' for such AML/CFT programs.\12\ Similarly, under the BSA, 
Treasury--and thereby FinCEN--``may require any financial institution . 
. . to report any suspicious transaction relevant to a possible 
violation of law or regulation.'' \13\ This provision authorizes FinCEN 
to require the filing of SARs.\14\ FinCEN also has authority under the 
BSA to authorize the sharing of financial information by financial 
institutions \15\ in specified circumstances, and to require financial 
institutions to keep records and maintain procedures to ensure 
compliance with the BSA and its implementing regulations or to guard 
against money laundering, terrorist financing, or other illicit finance 
activity.\16\
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    \11\ 31 U.S.C. 5312(a)(2)(Y).
    \12\ 31 U.S.C. 5318(h)(1), (2).
    \13\ 31 U.S.C. 5318(g)(1).
    \14\ 31 U.S.C. 5318(g)(1).
    \15\ See USA PATRIOT Act, Public Law 107-56, sec. 314(a), (b).
    \16\ See 12 U.S.C. 1953; 31 U.S.C. 5318(a)(2).
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B. Investment Adviser Industry and Regulation

1. Investment Adviser Industry
    The investment adviser industry in the United States consists of a 
wide range of business models geared towards providing advisory 
services to many different types of customers.\17\ The Investment 
Advisers Act of 1940 (Advisers Act) and its implementing rules and 
regulations form the primary Federal framework governing investment 
advisory activity, along with other Federal securities laws and their 
implementing rules and regulations, such as the Investment Company Act 
of 1940 (15 U.S.C. 80a et seq.) (Company Act), the Securities Act of 
1933 (15 U.S.C. 77a et seq.) (Securities Act), and the Securities 
Exchange Act of 1934 (15 U.S.C. 78a et seq.) (Exchange Act). The 
Advisers Act also defines an investment adviser as a person or firm 
that, for compensation, is engaged in the business of providing advice 
to others or issuing reports or analyses regarding securities.\18\
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    \17\ This final rule uses the term ``customers'' for those 
natural and legal persons who enter into an advisory relationship 
with an investment adviser. This is consistent with the terminology 
in the BSA and FinCEN's implementing regulations. FinCEN 
acknowledges that the Advisers Act and its implementing regulations 
primarily use the term ``clients,'' and so that term is used in 
specific reference to Advisers Act requirements; otherwise, the term 
``customers'' is used.
    \18\ See 15 U.S.C. 80b-2(a)(11) for this definition of 
``investment adviser.'' The statute excludes some persons and firms: 
certain banks, certain professionals, certain broker-dealers, news 
publishers, persons who advise on or analyze only Treasury-
designated exempt securities, statistical ratings agencies, and 
family offices. See 15 U.S.C. 80b-2(a)(11)(A)-(G).
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    Since the Advisers Act was amended in 1996 and 2010, generally only 
investment advisers who have at least $100 million in AUM or advise a

[[Page 72158]]

registered investment company \19\ may register with the SEC.\20\ 
Advisers solely to private funds are only required to register with the 
SEC if they have least $150 million in AUM in the United States.\21\ 
Advisers to only venture capital funds are exempt from registration 
with the SEC regardless of the amount of AUM. Other investment advisers 
typically register with the State in which the adviser maintains its 
principal place of business.
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    \19\ See 15 U.S.C. 80a-3 (defining investment company). If an 
investment company meets the definition of an investment company 
under 15 U.S.C. 80a-3(a) and cannot rely on an exception or an 
exemption from the definition of investment company, generally it 
must register with the SEC under the Company Act and must register 
its public offerings under the Securities Act.
    \20\ Investment advisers with more than $100 million AUM may 
register with the SEC, and investment advisers with more than $110 
million in AUM must register with the SEC, unless eligible for an 
exception. See 17 CFR 275.203A-1.
    \21\ See 15 U.S.C. 80b-3(m)(1); 17 CFR 275.203(m)-1(a), (b).
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    SEC-Registered Investment Advisers. Unless eligible to rely on an 
exemption, investment advisers that manage more than $110 million AUM 
must register with the SEC, as well as submit a Form ADV and update it 
at least annually.\22\ Besides having AUM above $110 million, 
additional criteria may require an investment adviser to register with 
the SEC.\23\ Unless a different exception applies, investment advisers 
with AUM under $100 million are prohibited from registering with the 
SEC,\24\ but must register instead with the relevant State securities 
regulator. The SEC administers and enforces the Federal securities laws 
applicable to such RIAs. As of July 31, 2023, there were 15,391 RIAs, 
reporting approximately $125 trillion in AUM for their clients.\25\
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    \22\ See 17 CFR 275.203A-1.; 17 CFR 275.204-1; see also 15 
U.S.C. 80b-3(1) (venture capital fund adviser exemption), 15 U.S.C. 
80b-3(m) (private fund adviser exemption). Investment advisers 
register with the SEC by filing Form ADV and are required to file 
periodic updates. Form ADV collects certain information about the 
adviser, including (depending on the adviser's registration status) 
its AUM, ownership, number of clients, number of employees, business 
practices, custodians of client funds, and affiliations, as well as 
certain disciplinary or material events of the adviser or its 
employees. A detailed description of Form ADV's requirements is 
available at https://www.sec.gov/oiea/investor-alerts-bulletins/ib_formadv.html.
    \23\ Other exceptions to the prohibition on SEC registration 
include: (1) an adviser that would be required to register with 15 
or more States (the multi-State exemption); (2) an adviser advising 
a registered investment company; (3) an adviser affiliated with an 
RIA; and (4) a pension consultant. Persons satisfying these criteria 
and the definition of ``investment adviser'' are required to 
register as investment advisers with the SEC. See Form ADV: 
Instructions for Part IA, Item 2. Advisers with a principal office 
and place of business in New York and over $25 million AUM are 
required to register with the SEC.
    \24\ 17 CFR 275.203A-1. Note that if an RIA's AUM falls below 
$90 million as of the end of such RIA's fiscal year then it must 
withdraw its registration with the SEC, unless otherwise eligible 
for an exception to the prohibition on SEC registration. Id.
    \25\ The number of RIAs and corresponding AUM, and the number of 
ERAs, are based on a Treasury review of Form ADV information filed 
as of July 31, 2023, as described in the IA AML NPRM. This Form ADV 
data is available at Frequently Requested FOIA Document: Information 
About Registered Investment Advisers and Exempt Reporting Advisers, 
https://www.sec.gov/foia/docs/invafoia.htm. The $125 trillion in AUM 
includes approximately $22 trillion in assets managed by mutual 
funds, which are advised by RIAs and are subject to AML/CFT 
obligations under the BSA and its implementing regulations. FinCEN 
reviewed investment adviser Form ADV filings through June 4, 2024, 
to assess whether to update the industry data used in the IA AML 
NPRM. FinCEN found approximately 10 fewer RIAs and ERAs as of June 
4, 2024 compared to July 31, 2023. Out of approximately 19,900 
entities subject to the final rule, this is not a substantial 
change.
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    Exempt Reporting Advisers. An ERA is an investment adviser that 
would be required to register with the SEC but is statutorily exempt 
from that requirement \26\ because: (1) it is an adviser solely to one 
or more venture capital funds; \27\ or (2) it is an adviser solely to 
one or more private funds and has less than $150 million AUM \28\ in 
the United States.\29\ Private funds are privately offered investment 
vehicles that pool capital from one or more investors to invest in 
securities and other investments.\30\ Private funds do not register 
with the SEC, and advisers to these funds often categorize the fund by 
the investment strategy they pursue. These include hedge funds, private 
equity funds, and venture capital funds, among others. Even though they 
are not required to register with the SEC, ERAs must still file an 
abbreviated Form ADV--they are required to answer fewer client-related 
questions and provide less information about the services they 
provide--and the SEC maintains authority to examine ERAs. As of July 
31, 2023, there were 5,846 ERAs with total gross assets of $5.2 
trillion that were exempt from registering with the SEC but had filed 
an abbreviated Form ADV.\31\
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    \26\ An adviser that is eligible to file reports as an ERA may 
nonetheless elect to register with the SEC as an RIA so long as it 
meets the criteria for registration. An investment adviser that 
relies on one of these exemptions must still evaluate the need for 
State registration.
    \27\ See 17 CFR 275.203(l)-1 (defining ``venture capital 
fund'').
    \28\ Form ADV uses the term ``regulatory assets under 
management'' (RAUM) instead of ``assets under management.'' Form ADV 
describes how advisers must calculate RAUM and states that in 
determining the amount of RAUM, an adviser should ``include the 
securities portfolios for which [it] provide[s] continuous and 
regular supervisory or management services as of the date of 
filing'' the form. See Form ADV, Instructions for Part 1A, 
Instruction 5.b.
    \29\ See sections 203(l) and 203(m) of the Advisers Act and 17 
CFR 275.203(m)-1, respectively. ERAs are exempt from registration 
with the SEC, but are required to file reports on Form ADV with the 
SEC and are subject to certain rules under the Advisers Act.
    \30\ Section 202(a)(29) of the Advisers Act defines the term 
``private fund'' as an issuer that would be an investment company, 
as defined in section 3 of the Company Act (15 U.S.C. 80a-3), but 
for section 3(c)(1) or 3(c)(7) of that Act. Section 3(c)(1) excludes 
from the definition of investment company a privately-offered issuer 
having fewer than a certain number of beneficial owners. Section 
3(c)(7) excludes from the definition of investment company a 
privately-offered issuer the securities of which are owned 
exclusively by ``qualified purchasers'' (generally, persons and 
entities owning a specific amount of investments).
    \31\ The number of ERAs is derived from a Treasury review of 
Form ADV information filed as of July 31, 2023. See supra note 25. 
ERAs do not report assets under management on Form ADV, but instead 
report gross assets for each private fund they advise.
---------------------------------------------------------------------------

    State-Registered Investment Advisers. State-registered investment 
advisers are generally prohibited from registering with the SEC and 
instead register with and are supervised by the relevant State 
authority, unless they meet certain exceptions or their State does not 
supervise these entities.\32\ State-registered investment advisers also 
file a Form ADV, which they submit to the relevant State regulator. As 
of December 31, 2022, there were 17,063 State-registered investment 
advisers reporting approximately $420 billion in AUM.\33\
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    \32\ See 17 CFR 275.203A-2; see also supra note 23.
    \33\ See North American Security Administrators Association, 
NASAA Investment Adviser Section 2023 Annual Report 3, available at 
https://www.nasaa.org/wp-content/uploads/2023/09/2023-IA-Section-Report-FINAL.pdf.
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    Foreign-Located Investment Advisers. Foreign-located advisers whose 
principal offices and places of business are outside the United States, 
but who solicit or advise ``U.S. persons,'' are subject to the Advisers 
Act and must register with the SEC unless eligible for an exemption. 
One of those exemptions is the ``foreign private adviser'' exemption, 
and an adviser relying on this exemption is not required to make any 
filings with the SEC.\34\ The SEC does not apply the substantive 
provisions of the Advisers Act to a non-U.S. investment adviser that is 
registered with the SEC with respect to its non-U.S. clients.\35\ Non-
U.S.

[[Page 72159]]

investment advisers may also file with the SEC as ERAs if they meet the 
requirements to report as ERAs.
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    \34\ The ``foreign private adviser'' exemption is available to 
an adviser that (i) has no place of business in the United States; 
(ii) has, in total, fewer than 15 clients in the United States and 
investors in the United States in private funds advised by the 
adviser; (iii) has aggregate assets under management attributable to 
such clients and investors of less than $25 million; and (iv) does 
not hold itself out generally to the public in the United States as 
an investment adviser. See 15 U.S.C. 80b-2(a)(30), 80b-3(b)(3).
    \35\ See SEC, Exemptions for Advisers to Venture Capital Funds, 
Private Fund Advisers With Less Than $150 Million in Assets Under 
Management, and Foreign Private Advisers, Final Rule, Investment 
Advisers Act Release No. 3222 (Jun. 22, 2011); 76 FR 39645, 39667 
(Jul. 6, 2011).
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2. Investment Adviser Regulation
    Oversight of the investment adviser industry by Federal and State 
securities regulators is focused on protecting investors and the 
overall securities market from fraud and manipulation. Most investment 
advisers are subject to certain reporting requirements and the extent 
of those requirements depends on whether the investment adviser is an 
RIA, registered at the State level, exempt from registration as an ERA, 
or otherwise not required to register with the SEC or State securities 
regulator.\36\ RIAs are subject to the Advisers Act and various SEC 
rules and regulations thereunder that govern, among other things, their 
marketing and disclosures to clients, best execution for client 
transactions, reporting of AUM, a code of ethics requirement (including 
reporting of securities holdings), and ownership in public securities, 
ensuring compliance with SEC rules governing trading, and disclosures 
of conflicts of interest and disciplinary information. State-registered 
investment advisers may have similar requirements under State 
securities laws and regulations.\37\ While ERAs are not required to 
register with the SEC, they must still file an abbreviated Form ADV 
with the SEC, and the SEC maintains authority to examine ERAs. ERAs are 
not subject to some of the Advisers Act provisions that apply to RIAs. 
However, ERAs have fiduciary responsibilities to their clients and must 
abide by certain other compliance requirements applicable to all 
investment advisers, including anti-fraud requirements of the Advisers 
Act.\38\ Investment advisers, depending on their registration status, 
are also generally subject to examination by the SEC or State 
securities regulators. In some circumstances, Federal securities, tax, 
or other rules and regulations may impose on investment advisers' 
information collection or disclosure obligations similar to some AML/
CFT measures.
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    \36\ For instance, an investment adviser may be exempt from both 
Federal and State registration requirements if it had less than $25 
million AUM and fewer than six clients in a State. Such advisers are 
not required to register, nor are they ERAs.
    \37\ For example, in California, the California Corporation Code 
assigns to the Commissioner of the Department of Financial 
Protection and Innovation authority to issue specific rules and 
regulations. See Cal. Corp. Code, Ch.3, sec. 25230-25238; Cal. Code 
Regs. tit. 10, sec. 260.230-260.238.
    \38\ See 15 U.S.C. 80b-6. See also 17 CFR part 275.206(4)-8 
(prohibiting fraudulent practices by an investment adviser to a 
pooled investment vehicle with respect to any investor or 
prospective investor in the pooled investment vehicle).
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    While some of these obligations mitigate illicit finance risks to 
the investment adviser industry, these obligations are not explicitly 
designed for that purpose, and the SEC generally does not have existing 
authority to apply AML/CFT specific requirements to investment 
advisers. Some investment advisers may nonetheless already apply AML/
CFT requirements, for example, if they are also banks (or are bank 
subsidiaries), are registered as brokers and dealers in securities 
(broker-dealers), or advise mutual funds, but this is not consistent 
across the industry.\39\ Further, some investment advisers have 
voluntarily implemented certain AML/CFT measures. But implementation of 
such measures is generally not subject to comprehensive enforcement or 
examination. This means that providers of the same financial services 
may be subject to different AML/CFT obligations (if any), and an 
investor or customer seeking to obscure the origin of its funds or 
identity can choose an investment adviser that does not apply AML/CFT 
measures to its customers and activities.\40\
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    \39\ Investment advisers that are banks (or bank subsidiaries) 
subject to the jurisdiction of the Office of the Comptroller of the 
Currency (OCC), the Board of Governors of the Federal Reserve System 
(FRB), the Federal Deposit Insurance Corporation (FDIC), and the 
National Credit Union Administration (collectively, the Federal 
Banking Agencies, or FBAs) are accordingly also subject to 
applicable FBA regulations imposing AML/CFT requirements on banks. 
See, e.g., 12 CFR 5.34(e)(3) and 5.38(e)(3) (OCC requirements 
governing operating subsidiaries of national banks and Federal 
savings associations).
    \40\ For instance, FinCEN research identified two investment 
advisers with a focus on Russian customers that advertised 
investment structures that would allow customers to avoid ``know 
your customer'' procedures.
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    Overall, there is currently no comprehensive set of obligations 
directly applicable to most investment advisers that is explicitly 
designed to address illicit finance risks in this industry.

C. Illicit Finance Risk

    As noted above, concurrent with the publication of the IA AML NPRM, 
Treasury released the Risk Assessment.\41\ The Risk Assessment found 
that, while the degree of risk is not uniform across the sector, RIAs 
and ERAs pose a material risk of misuse for illicit finance.\42\
---------------------------------------------------------------------------

    \41\ See Risk Assessment, supra note 2.
    \42\ Id. at 32.
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    First, as already noted, the lack of comprehensive AML/CFT 
regulations directly and categorically applicable to investment 
advisers means they are not required to understand their customers' 
ultimate sources of wealth or identify and report potentially illicit 
activity to law enforcement. The term ``investment adviser'' is not 
presently included in the definition of ``financial institution'' under 
the BSA or its implementing regulations. This means that, although they 
have obligations to report cash transactions above $10,000 via the 
FinCEN/Internal Revenue Service Form 8300, investment advisers are 
typically not subject to most of the AML/CFT program, recordkeeping, or 
reporting obligations that apply to banks, broker-dealers, and certain 
other financial institutions. Investment advisers that are not dually 
registered as a bank or a broker-dealer are not required to maintain an 
AML/CFT program nor satisfy customer due diligence (CDD) or customer 
identification program (CIP) obligations.\43\ Investment advisers, 
because they are not defined as a ``financial institution'' under the 
BSA, are also prevented from participating in the USA PATRIOT Act 
314(a) and 314(b) information sharing programs, meaning investment 
advisers cannot provide useful information on suspected illicit finance 
activity to law enforcement or to other financial institutions 
participating in 314(b) information sharing associations. As they are 
not presently included in the BSA definition of ``financial 
institution,'' investment advisers are also not afforded the protection 
from liability (safe harbor) that applies to financial institutions 
when filing SARs.\44\ Even though investment advisers are currently 
able to file voluntary SARs, without the safe harbor they could face 
increased legal risk from customers or other counterparties. The 
current patchwork of AML/CFT program implementation by some RIAs and 
ERAs may also create arbitrage opportunities for illicit actors by 
allowing them to find RIAs and ERAs with weaker or non-existent 
customer diligence procedures when these actors seek to access the U.S. 
financial system.
---------------------------------------------------------------------------

    \43\ See infra Section II.E (providing a summary of the proposed 
rule to apply CIP requirements to RIAs and ERAs).
    \44\ 31 U.S.C. 5318(g)(3)(A).
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    Second, where AML/CFT obligations apply to investment adviser 
activities, the obliged entities (such as custodian banks, broker-
dealers, and some fund administrators providing services to investment 
advisers and the private funds that they advise) do not necessarily 
have a direct relationship with the customer or, in the private fund 
context, the underlying investor in

[[Page 72160]]

the private fund.\45\ Further, these entities may be unable to collect 
relevant investor information from the RIA or ERA to comply with the 
entities' existing obligations (either because the adviser is unwilling 
to provide, or has not collected, such information). Additionally, an 
adviser may use multiple custodians or broker-dealers, so that these 
entities may not have a complete picture of transactional activity 
facilitated by the investment adviser for their customers. Investment 
advisers, while not taking possession of financial assets, often have 
the most direct relationship with the customers they advise and thus 
may be best positioned to obtain the necessary documentation and 
information. In some cases, an investment adviser may be the only 
person or entity with a complete understanding of the source of a 
customer's invested assets.
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    \45\ FinCEN notes that, in the private fund context, the 
adviser's customer is typically the private fund itself, and not 
underlying investors in that private fund. However, in many cases an 
adviser has a relationship (in some cases contractual) with 
underlying investors and has access to information about underlying 
investors. Indeed, the SEC requires RIAs and ERAs to report 
information regarding underlying investors. For instance, Question 
13 on SEC Form ADV asks an investment adviser for the approximate 
number of the private fund's beneficial owners. See SEC Form ADV, 
Part 1A at 51 (Aug. 2022). In addition, Question 16(m) on SEC Form 
PF requires SEC-registered private fund advisers to identify, with 
respect to each private fund it advises, the approximate percentage 
of the private fund's equity that is beneficially owned by different 
types of investors, including ``Investors that are United States 
persons,'' ``Investors that are not United States persons,'' and, 
acknowledging that an adviser may not have complete beneficial 
ownership information in certain circumstances, ``Investors that are 
not United States persons and about which the foregoing beneficial 
ownership information is not known and cannot reasonably be obtained 
because the beneficial interest is held through a chain involving 
one or more third-party intermediaries.'' SEC Form PF, Section 1b, 
at 7 (Dec. 2023) (emphasis original). In addition, Congress, in the 
Corporate Transparency Act (enacted into law on January 1, 2021, as 
part of the Anti-Money Laundering Act of 2020), recognized that 
advisers to private funds file information related to private fund 
ownership on Form ADV and accordingly that private fund advisers 
have such information. See 31 U.S.C. 5336(a)(10) and (11)(B)(xi), 
(xviii).
---------------------------------------------------------------------------

    Third, the existing Federal securities laws and regulations are not 
designed to comprehensively detect illicit proceeds or other illicit 
activity that is ``integrating'' into the U.S. financial system through 
an RIA or ERA.\46\ These laws and regulations are not designed to 
explicitly address the risk that an RIA or ERA may be used to move 
proceeds or funds tied to money laundering, terrorist financing, or 
other illicit activity. They do not incorporate AML/CFT purposes, do 
not require an understanding of relevant illicit finance risks and 
activity, and do not include requirements for processes to report 
suspicious activity. In turn, existing laws do not provide any Federal 
regulatory body with comprehensive authority to monitor whether 
investment advisers are meeting any AML/CFT objectives.
---------------------------------------------------------------------------

    \46\ Generally, money laundering involves three stages, known as 
placement, layering, and integration. At the ``placement'' stage, 
proceeds from illegal activity or funds intended to promote illegal 
activity are first introduced into the financial system. The 
``layering'' stage involves the distancing of illegal proceeds from 
their criminal source through a series of financial transactions to 
obfuscate and complicate their traceability. ``Integration'' occurs 
when illegal proceeds previously placed into the financial system 
are made to appear to have been derived from a legitimate source.
---------------------------------------------------------------------------

    Fourth, RIAs and ERAs routinely rely on third parties, some of whom 
may be located outside of the United States, for administrative and 
compliance activities. These entities--particularly offshore entities--
are subject to varying levels of AML/CFT regulation. The due diligence 
and verification practices of these fund administrators are not uniform 
and may vary based upon the requirements of the local regulatory regime 
as well as the requirements imposed by the fund's adviser.
    Fifth, particularly for private funds, it is routine for investors 
to invest through layers of legal entities that may be registered or 
organized outside of the United States, making it challenging--under 
existing frameworks--to collect information relevant to understanding 
illicit finance risks.\47\
---------------------------------------------------------------------------

    \47\ For examples of how these private funds are structured, see 
Risk Assessment, supra note 2, at 8-10. In its review of law 
enforcement cases and BSA reporting conducted for the Risk 
Assessment, FinCEN found several instances where advisers to private 
funds had ongoing contact or relationships with underlying investors 
in those funds, to include discussing investment strategies or fund 
distributions.
---------------------------------------------------------------------------

    Regarding investment adviser-related illicit finance risks and 
threats, Treasury's analysis showed that 15.4 percent of RIAs and ERAs 
were associated with or referenced in at least one SAR filed between 
2013 and 2021.\48\ The number of SAR filings associated with or 
referencing an RIA or ERA increased by approximately 400 percent 
between 2013 and 2021--a far greater increase than was observed in 
relation to sectors with a SAR filing obligation.\49\ This analysis, 
along with a review of law enforcement cases and other information 
available to the U.S. government, identified cases of the investment 
adviser industry having served as an entry point into the U.S. 
financial system for illicit proceeds associated with foreign 
corruption, fraud, and tax evasion. The analysis further showed that 
certain advisers manage billions of dollars ultimately controlled by 
sanctioned entities including Russian oligarchs and their associates 
who help facilitate Russia's illegal and unprovoked war of aggression 
against Ukraine.\50\
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    \48\ Id. at 16. SARs are not themselves conclusive evidence of 
illicit conduct but can generate important information about 
potential criminal activity that can prompt or assist a law 
enforcement investigation or support the identification of threats 
or vulnerabilities in the U.S. financial system.
    \49\ Id
    \50\ Id.
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    Finally, certain RIAs and ERAs and the private funds they advise 
are also being used by foreign states, most notably the PRC and Russia, 
to access certain technology and services with long-term national 
security implications through investments in early-stage companies.\51\
---------------------------------------------------------------------------

    \51\ Id. Foreign state-funded investment vehicles may seek to 
hide their involvement in an effort to gain access to sensitive 
technology, processes, or knowledge that can enhance their domestic 
development of microelectronics, artificial intelligence, 
biotechnology and biomanufacturing, quantum computing, and advanced 
clean energy, among others. See Risk Assessment, supra note 2, at 
21. Exploitation of this access can advance foreign-state economic 
and military capabilities at the expense of the United States. See 
Safeguarding Our Innovation, National Counterintelligence and 
Security Center 1 (Jul. 24, 2024), available at https://www.dni.gov/files/NCSC/documents/products/FINALSafeguardingOurInnovationBulletin.pdf.
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D. IA AML NPRM

    In the IA AML NPRM released on February 15, 2024, FinCEN proposed 
to designate certain investment advisers as ``financial institutions'' 
under the BSA and subject them to AML/CFT program requirements and SAR 
filing obligations, as well as other BSA requirements.\52\ 
Specifically, the IA AML NPRM would have added ``investment adviser'' 
to the definition of ``financial institution'' at 31 CFR 1010.100(t), 
and then would have defined investment advisers to mean RIAs registered 
or required to register with, or ERAs that report to, the SEC. 
Accordingly, RIAs and ERAs would have then been required to comply with 
several AML/CFT requirements.
---------------------------------------------------------------------------

    \52\ See 89 FR 12108 (Feb. 15, 2024).
---------------------------------------------------------------------------

    The proposed rule would also have required RIAs and ERAs to keep 
records relating to the transmittal of funds (Recordkeeping and Travel 
Rules) and to meet other obligations of financial institutions under 
the BSA. The proposed rule would also have applied information-sharing 
provisions between and among FinCEN, law enforcement, government 
agencies, and certain financial institutions, and would have subjected 
investment advisers to certain ``special measures'' imposed by FinCEN

[[Page 72161]]

pursuant to section 311 of the USA PATRIOT Act.\53\
---------------------------------------------------------------------------

    \53\ See also section 9714(a) of the Combating Russian Money 
Laundering Act; 21 U.S.C. 2313a.
---------------------------------------------------------------------------

    In the IA AML NPRM, FinCEN did not propose to include a CIP 
requirement for investment advisers, nor did it propose to require 
investment advisers to collect beneficial ownership information for 
legal entity customers. FinCEN has proposed to apply CIP requirements 
to investment advisers via a joint rulemaking with the SEC (described 
below, Section II.E) and intends to address the requirement to collect 
beneficial ownership information for legal entity customers in a 
subsequent rulemaking.
    The proposed rule would have allowed an investment adviser to 
exclude any mutual fund that it advised from the investment adviser's 
AML/CFT program and SAR filing requirements, provided that the mutual 
fund had developed and implemented an AML/CFT program compliant with 
the relevant regulations governing mutual funds.\54\ The proposed rule 
would also have removed the existing requirement that investment 
advisers file reports for the receipt of more than $10,000 in cash and 
negotiable instruments using Form 8300. Investment advisers would have 
instead been required to file a CTR for a transaction involving a 
transfer of more than $10,000 in currency by, through, or to the 
investment adviser, unless subject to an applicable exemption.
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    \54\ As used in this release, ``mutual fund'' has the same 
definition as in FinCEN's regulations, and refers to an ``investment 
company'' (as the term is defined in section 3 of the Company Act 
(15 U.S.C. 80a-3)) that is an ``open-end company'' (as that term is 
defined in section 5 of the Company Act (15 U.S.C. 80a-5)) that is 
registered or is required to register with the SEC under section 8 
of the Company Act (15 U.S.C. 80a-8). See 31 CFR 1010.100(gg). 
Exchange-traded funds (ETFs) are a type of exchange-traded 
investment product that must register with the SEC under the Company 
Act and are generally organized as either an open-end company 
(``open-end fund'') or unit investment trust. The SEC's ETF Rule 
(rule 6c-11 under the Company Act), issued in 2019, clarified ETFs 
are issuing ``redeemable securit[ies]'' and are generally 
``regulated as open-end funds within the meaning of section 5(a)(1) 
of the [Investment Company] Act.'' FinCEN's definition of a mutual 
fund under 1010.100(gg) applies to an ETF that is registered as an 
``open-end company'' (as the term is defined in section 5 of the 
Company Act).
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    Finally, FinCEN proposed to delegate its examination authority to 
the SEC given the SEC's expertise in the regulation of investment 
advisers and the existing delegation to the SEC of authority to examine 
broker-dealers and certain investment companies for AML/CFT compliance.

E. Customer Identification Program NPRM

    In the IA AML NPRM, FinCEN noted that it intended to address the 
application of a CIP requirement for investment advisers through a 
joint rulemaking with the SEC.\55\ On May 21, 2024, FinCEN and the SEC 
published a joint NPRM to apply CIP requirements to RIAs and ERAs (IA 
CIP NPRM).\56\
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    \55\ 89 FR at 12129.
    \56\ See FinCEN and SEC, Customer Identification Programs for 
Registered Investment Advisers and Exempt Reporting Advisers, Notice 
of Proposed Rulemaking, 89 FR 44571 (May 21, 2024).
---------------------------------------------------------------------------

    As proposed in the IA CIP NPRM, RIAs and ERAs would be required to 
establish, document, and maintain written CIPs appropriate for their 
respective sizes and businesses. The CIPs would include risk-based 
procedures to identify and verify the identity of their customers \57\ 
to the extent reasonable and practicable within a reasonable time 
before or after the customer's account is opened. The procedures would 
have to enable RIAs and ERAs to form a reasonable belief that the 
adviser knows the true identity of their customers. RIAs and ERAs would 
be required to obtain certain identifying information with respect to 
each customer, such as the customer's name, date of birth or date of 
formation, address, and identification number. The proposed rule would 
also require procedures for, among other things, maintaining records of 
the information used to verify the person's identity, notifying 
customers that the adviser is requesting information to verify their 
identifies, and consulting lists of known or suspected terrorists or 
terrorist organizations provided to the RIA or ERA financial 
institution by any government agency to determine whether a person 
seeking to open an account appears on any such list.\58\ CIP 
requirements are a long-standing, foundational component of a financial 
institution's AML/CFT requirements and they are required for banks, 
broker-dealers, futures commission merchants and introducing brokers in 
commodities, and mutual funds.
---------------------------------------------------------------------------

    \57\ The IA CIP NPRM proposed to define a customer as a person 
who opens a new account with an investment adviser. Id. at 44573.
    \58\ The IA CIP NPRM proposed to define ``account'' for these 
purposes as ``any contractual or other business relationship between 
a person and an investment adviser under which the investment 
adviser provides investment advisory services,'' with limited 
exclusions. Id.
---------------------------------------------------------------------------

    The comment period for the IA CIP NPRM closed on July 22, 2024, and 
FinCEN and the SEC received 36 comments. Treasury and the SEC are 
reviewing comments and are working toward finalizing the CIP rule. As 
FinCEN and the SEC noted in the IA CIP NPRM, adoption of CIP 
requirements for RIAs and ERAs would depend on--and not occur unless--
investment advisers are first designated as ``financial institutions'' 
for purposes of the BSA.\59\
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    \59\ Id. at 44572, note 11.
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F. General Summary of Comments

    FinCEN received 49 comments on the IA AML NPRM. Of the 49 comments, 
16 were from individual commenters; 16 were from trade associations 
representing various financial services entities (including seven that 
were a form letter provided by one association); six were from think-
tanks or non-governmental organizations (NGOs); and five were from 
RIAs. For the remainder, one comment letter was from a law firm, one 
comment letter was from a self-regulatory organization, one comment 
letter was from an association of state securities regulators, one 
comment letter was from a service provider to investment advisers, one 
comment letter was from an office within another federal government 
agency, and one comment letter was from seven U.S. Senators.
    Several commenters noted support for the proposed rule and the 
application of comprehensive AML/CFT requirements to RIAs and ERAs, 
noting that it would address illicit finance risks or other illicit 
activity involving investment advisers. Several other commenters, 
including a self-regulatory organization, an association of state 
securities regulators, seven U.S. Senators, several financial 
transparency NGOs and a think-tank, and some financial services trade 
associations, supported adoption of the proposed rule, but had 
suggested changes. These changes included expanding the scope of 
coverage to include State-registered investment advisers, family 
offices, and foreign private advisers, as well as modifying certain 
exemptions or requirements in the proposed rule. Other commenters who 
generally supported the rule requested that FinCEN apply CIP 
requirements and the obligation to collect beneficial ownership 
information for legal entity customers as soon as possible. These 
proposed changes are discussed below.
    Another group of commenters, including several financial services 
trade associations and some RIAs, noted that they generally supported 
the objectives of the proposed rule, but thought that the rule as 
drafted was overly broad and/or too prescriptive and would impose 
significant costs on investment advisers without a corresponding 
benefit to efforts to

[[Page 72162]]

combat illicit finance. They suggested several more significant changes 
that would exempt certain categories of advisers or advisory activities 
from the proposed rule and instead focus on what they considered 
higher-risk activities. They also suggested not applying certain 
requirements that may be duplicative of obligations applied by other 
financial institutions, such as broker-dealers and banks, which are 
involved in advisory activities, as well as modifying requirements of 
the proposed rule in the context of private funds activity. These 
commenters' proposed changes are discussed below.
    Several commenters opposed the rule, primarily highlighting the 
potential burden on investment advisers and that the requirements in 
the proposed rule were duplicative of AML/CFT requirements imposed on 
broker-dealers and custodians that facilitate transactions for 
investment advisers and their clients. One commenter noted that AML/CFT 
measures, along with measures related to sanctions issued by Treasury's 
Office of Foreign Assets Control (OFAC), were implemented by the fund 
administrator for their hedge fund. Another commenter indicated that 
foreign-located fully regulated RIAs and ERAs are already subject to 
extensive AML/CFT and anti-bribery requirements by their home country 
regulators.
    Regarding the burden, one commenter noted that advisers, especially 
those that advise private funds, were already facing additional costs 
to implement recently finalized or proposed SEC requirements. Other 
commenters also highlighted the potential costs for smaller investment 
advisers.
    Two commenters noted their opposition to applying the proposed rule 
to venture capital advisers. One of those commenters stated that the 
requirements of the proposed rule would have a significant and adverse 
effect on venture capital advisers and the innovative start-ups they 
advise. The other commenter claimed that the identified risks did not 
justify applying AML/CFT rules to venture capital advisers, would 
produce less valuable information because of the limited interactions 
that venture capital advisers have with limited partner investors, and 
would not lead to a more effective AML/CFT regime.
    One commenter reasoned that, given the focus on the risks posed by 
private funds, the rule should be narrowed to address those higher-risk 
activities, and not apply to advisers that manage assets for individual 
investors. Two commenters requested that FinCEN address concerns raised 
in the comments with respect to private fund advisers and venture 
capital advisers, respectively, and issue a revised NPRM.

III. Discussion of Final Rule

A. Illicit Finance Risk

    Commenters expressed varying views on the illicit finance risks 
associated with RIAs and ERAs that were discussed in the IA AML NPRM 
and Risk Assessment. Several commenters agreed that illicit actors, 
including corrupt officials, have exploited the U.S. investment adviser 
sector, particularly the private funds sector, to hide or obscure 
illicit proceeds, and that the lack of AML/CFT requirements for 
investment advisers presented illicit finance and national security 
risks. One commenter described how corrupt officials had exploited the 
U.S. private investment industry and would continue to do so unless 
effective and robust AML/CFT controls were applied. Another commenter 
concurred with the findings of the Risk Assessment and wrote that it 
was consistent with the commenter's own research, which found 
significant foreign ownership in private funds that are managed by 
advisers who report to the SEC. This commenter's research suggests that 
this level of foreign ownership in private funds presents a challenge 
to the United States' ability to effectively monitor foreign 
investment. Other commenters agreed with the national security risks 
identified and provided additional examples of misuse, including 
narcotics trafficking and laundering proceeds of corruption or funds 
from authoritarian regimes.
    One commenter observed that while broker-dealers may hold or trade 
assets controlled by an investment adviser, they may have no 
independent knowledge of the investment adviser's customers, and that 
investment advisers are often in the best position to obtain 
information about their customers that is relevant for AML/CFT 
purposes. Finally, another commenter, a non-profit coalition, agreed 
that, given the growth of the private funds industry and investment 
advisers' role in critical sectors of the economy, investment advisers 
should be held to the same standard as other financial market 
participants.
    However, several other commenters took issue with the findings 
regarding the level of illicit finance risk facing investment advisers. 
Several commenters disagreed that the case examples cited provided 
adequate support for the rulemaking, noting that the examples involved 
concealment of ownership, complicit actors whose activity would not be 
addressed by the requirements of the proposed rule (but that were 
addressed by laws criminalizing money laundering, or anti-fraud 
provisions of the Federal securities laws), or compliance failures at 
financial institutions already subject to AML/CFT requirements. They 
also claimed that the case examples were too few to justify the cost 
associated with the proposed rule's requirements. One commenter said 
that the cases also demonstrated that BSA requirements for banks and 
broker-dealers were already identifying illicit activity. One commenter 
questioned the accuracy of the analysis of SARs included in the Risk 
Assessment and felt that they lacked context or that findings tied to 
SARs were not proof of illicit activity.
    Other commenters noted that existing OFAC sanctions requirements 
addressed the examples and data on illicit finance tied to Russian 
oligarchs, and that the blocking of assets owned by sanctioned Russian 
parties demonstrated those sanctions were effective in mitigating this 
illicit finance risk. Another commenter stated that most investments 
made by Russian oligarchs occurred prior to their designation, that 
there was nothing illegal about their investments in U.S. assets, and 
that the proposed requirements would thus not have addressed the AML/
CFT risks arising from Russia's invasion of Ukraine.
    Regarding risks associated with private funds, one commenter 
claimed that private funds generally present a low risk of money 
laundering and terrorist financing due to several key factors, 
including the long-term nature of the investments made in such funds 
and the existing due diligence by funds into potential investors 
(including sanctions screening). Another commenter disagreed with the 
money laundering risk associated with hedge funds, noting that, at the 
hedge fund where they worked, the transfer agent would ``perform KYC 
[know your customer procedures] and check OFAC and sanctions lists 
before admitting a new investor or paying a redemption'' and ``are 
required to report suspicious activities.''
    Regarding venture capital funds, in particular, two commenters 
stated that none of the examples in the preamble of incidents in which 
illicit finance was uncovered included venture capital funds or 
advisers and therefore such examples do not illustrate the need for the 
adoption of AML/CFT programs by venture capital advisers. These 
commenters claimed that illiquidity and long-term focus are standard 
features of venture capital funds that make them poor targets for money 
launderers. One commenter argued that FinCEN

[[Page 72163]]

acknowledges this in the release accompanying the proposed rule, but 
nevertheless proposes AML requirements for venture capital advisers. 
One commenter alleged that the proposed rule does not focus on the use 
of venture capital funds by foreign actors (including foreign 
governments) to facilitate illicit finance activity, but on attempts to 
access sensitive or dual-use technology by potentially hostile foreign 
state interests. The commenter claimed that this threat would not be 
addressed through the application of AML/CFT requirements to venture 
capital funds, and are more appropriately addressed through other 
government authorities, such as the Committee on Foreign Investment in 
the United States (CFIUS). One commenter indicated that FinCEN does not 
provide evidence or disclose essential facts that might support a 
decision to extend the AML/CFT program requirement to venture capital 
advisers and that such inclusion would amount to an arbitrary and 
capricious application of the rule.
    Regarding the vulnerabilities discussed in the IA AML NPRM, some 
commenters stated that investment advisers were much less likely to 
serve as channels to the U.S. financial system that can be taken 
advantage of by criminal actors, as compared to other financial 
institutions that are already subject to AML/CFT requirements under the 
BSA.
    Several commenters noted that RIAs and ERAs rely heavily on banks, 
broker-dealers, custodians, and other financial institutions that are 
already subject to AML/CFT requirements to custody customer and 
investor monies, process funds transfers, or effect securities 
transactions on behalf of advisers. Commenters also noted that banks 
and broker-dealers regularly request AML/CFT and sanctions-related 
representations and affirmations from RIAs and ERAs as part of their 
diligence processes. One commenter also noted that RIAs and ERAs and 
their affiliates already maintain robust records of the types of 
transactions that would be captured by the proposed rule, such as 
adviser or broker-dealer requirements applicable to maintaining 
transaction records related to financial transactions between advisers' 
customers and those customers' investors. Another commenter opined that 
``a failure to conduct adequate due diligence or to otherwise fail in 
complying with applicable AML laws could . . . expose a Covered IA to a 
fund to accusations that it failed to satisfy its fiduciary duties [to 
the fund] . . . [and] given the risk that an AML error or oversight 
could create claims of fiduciary breach, Covered IAs are already 
strongly incentivized to develop and maintain robust AML policies and 
procedures.''
    FinCEN responds below to these comments. Following consideration of 
comments, for the reasons discussed below, FinCEN continues to assess 
that there is a material risk that RIAs and ERAs can be abused for 
illicit finance activity, although the degree of risk is not uniform 
across the sector. Regarding the case examples, as FinCEN noted in the 
IA AML NPRM, some of the examples both in the NPRM and in the Risk 
Assessment involve complicit individuals at a financial 
institution.\60\ FinCEN notes that other commenters provided additional 
research confirming the risks associated with foreign investors in 
private funds that were identified in the Risk Assessment, as well as 
additional examples of misuse.\61\ Further, the Financial Industry 
Regulatory Authority (FINRA), a Self-Regulatory Organization (SRO) 
responsible for regulating member broker-dealers, conducted a review of 
referrals that its specialized insider trading, market fraud, and 
offering review teams made to other regulators and law enforcement 
between January 1, 2023 and March 14, 2024. This review suggests that 
at least 14.5 percent of those referrals related to investment advisers 
or their customers.
---------------------------------------------------------------------------

    \60\ See 89 FR at 12114-12115.
    \61\ Several commenters from think tanks and non-governmental 
organizations provided additional examples of misuse, while one 
commenter provided a report titled Private Investments, Public Harm: 
How the Opacity of the Massive U.S. Private Investment Industry 
Fuels Corruption and Harms National Security. The report is 
available at https://thefactcoalition.org/wp-content/uploads/2021/12/TI_Private-Investments-Public-Harm-10.pdf.
---------------------------------------------------------------------------

    These cases are intended to be illustrative, and, as FinCEN noted 
in the proposed rule, ``an investment adviser may be unwittingly 
complicit in this type of activity if they are not required to 
understand the origin of funds or nature of their owner. A customer 
wishing to launder money could ask an investment adviser to establish a 
private fund to certain specifications without informing the adviser of 
the customer's broader scheme.'' \62\ In addition, the IA AML NPRM 
referenced the comprehensive Treasury review contained in the Risk 
Assessment, which included substantial information beyond the case 
examples, including a review of BSA reporting, materials derived from 
civil enforcement actions, analysis provided by U.S. government 
agencies, and other non-public information that demonstrated investment 
advisers could be misused to help launder illicit proceeds. What the 
case examples in the IA AML NPRM and Risk Assessment demonstrate is 
that a range of illicit actors view investment advisers as potential 
entry points into the U.S. financial system, and have sought to exploit 
them.
---------------------------------------------------------------------------

    \62\ See 89 FR at 12115.
---------------------------------------------------------------------------

    Further, without an AML/CFT program requirement or an obligation to 
file SARs, an investment adviser has no obligation to evaluate the risk 
of money laundering, terrorist financing, or other illicit finance 
activity associated with its advisory customers and activities. As 
discussed below, FinCEN understands, as some commenters have explained, 
that investment advisers often conduct certain due diligence and screen 
against sanctions lists, that they may provide AML/CFT and sanctions-
related representations and affirmations regarding their clients at the 
request of banks or broker-dealers, and that an adviser's fiduciary 
duty requires it to act in the best interest of its clients. At the 
same time, FinCEN notes that investment advisers to private funds are 
most commonly compensated based on a combination of (i) management fees 
that are based on total AUM invested in (or committed to be invested 
in) the private fund and (ii) performance-based compensation based on 
the private fund's performance. These compensation arrangements 
incentivize private fund advisers to add new investors and grow their 
private fund assets.\63\ This incentive may lead to some advisers 
refraining from voluntarily conducting a robust review of illicit 
finance risk, as such review could lead to the adviser turning away 
certain AUM, and thus lead to less compensation for the adviser. As 
described in the IA AML NPRM, this can lead an investment adviser to 
unwittingly assist in illicit finance activity.\64\
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    \63\ Other investment advisers, who are often compensated as a 
percentage of AUM even if they do not also receive performance-based 
compensation, are similarly incentivized in general to increase 
their assets under management.
    \64\ See 89 FR at 12115.
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    This rule will require investment advisers to adopt a risk-based 
approach pursuant to which they must ask questions and analyze 
potential money laundering, terrorist financing, and other illicit 
finance risks--steps that will make it more likely that an investment 
adviser will detect illicit finance activity. The reporting and 
recordkeeping requirements of the BSA, especially SAR filing 
obligations, are intended, among other things, to assist federal law 
enforcement in the enforcement of existing money laundering statutes, 
including by identifying instances of money

[[Page 72164]]

laundering activity to help facilitate investigation and prosecution. 
In addition, AML/CFT requirements can serve as a separate basis for 
civil or criminal enforcement action.
    The Risk Assessment's conclusions were also supported by an 
analysis of SARs. This analysis included approximately 12,000 SARs 
filed over seven years where the investment adviser was identified 
either as a subject of the SAR or in the narrative section of the SAR 
(with the number of SAR filings in the analysis increasing 400 percent 
over the review period). FinCEN agrees with the statement made by one 
commenter that SARs are not by themselves proof of illegal activity, 
but are intended to assist law enforcement in identifying potential 
violations of law. FinCEN also notes that the SAR trend and pattern 
analysis undertaken to support development of the Risk Assessment can 
be valuable in helping the public and private sectors identify and 
address illicit finance trends and systemic vulnerabilities. For 
example, in section 6206 of the Anti-Money Laundering Act of 2020 (AML 
Act), Congress mandated that FinCEN publish semiannual threat pattern 
and trend information derived from BSA filings.\65\ Such efforts will 
only be enhanced by requiring investment advisers to file SARs as well, 
which will provide additional relevant information for FinCEN to 
analyze.
---------------------------------------------------------------------------

    \65\ See 31 U.S.C. 5318(g)(6). See also FinCEN's Financial Trend 
Analyses, issued pursuant to section 6206 of the AML Act of 2020, 
available at https://www.fincen.gov/resources/financial-trend-analyses.
---------------------------------------------------------------------------

    Regarding illicit finance tied to Russian oligarchs, FinCEN 
recognizes that, as noted by some commenters, many of these investments 
were made prior to the designation of these individuals and entities by 
OFAC. Many investment advisers, along with other financial 
institutions, took action to freeze assets linked to designated Russian 
individuals and entities. However, even prior to their designation, 
many of these individuals and entities were publicly known to be linked 
to corruption, other criminal activity, or Russian malign influence 
campaigns; yet they were still able to make investments through the 
U.S. financial system.\66\ By engaging in such activities these 
individuals and entities may be violating U.S. law and engaging in 
sanctionable conduct even if they are not yet designated. Additional 
AML/CFT requirements may have helped identify--or even mitigate the 
extent of--assets or accounts that were owned, controlled, or otherwise 
linked to criminal or sanctionable activities before the relevant 
individuals were designated by forcing investment advisers to adopt a 
risk-based approach to working with these individuals. More broadly, 
such AML/CFT requirements are likely to help identify additional assets 
or accounts that are owned, controlled, or otherwise linked to 
designated persons, in turn supporting effective sanctions enforcement 
efforts.\67\
---------------------------------------------------------------------------

    \66\ See 89 FR at 12115-12116.
    \67\ See FIN-2023-Alert002, FinCEN Alert on Potential U.S. 
Commercial Real Estate Investments by Sanctioned Russian Elites, 
Oligarchs, and Their Proxies (Jan. 25, 2023) (noting that investors 
seeking to evade sanctions may lower their interest in an investment 
fund to just below the threshold set by a financial institution's 
CDD standards to avoid detection).
---------------------------------------------------------------------------

    FinCEN agrees with the point raised by some commenters that certain 
characteristics of private funds, such as longer lock-up periods or 
limited opportunities to make withdrawals, may make these funds less 
attractive for certain illicit finance activity that seeks to rapidly 
enter and exit a financial product. However, as noted in the NPRM, 
these requirements are unlikely to deter certain illicit actors who 
have a medium- to long-term investment horizon and do not need 
immediate access to invested capital, such as corrupt foreign 
officials, financial facilitators for transnational criminal networks, 
or those acting on behalf of designated persons, especially because of 
the potential for high returns in these private funds.\68\ In addition, 
some illicit actors may see private fund investments, in combination 
with the use of a trust or other legal arrangement, as an alternative 
if they are unable to launder or obscure funds directly through a bank 
or brokerage account.\69\ FinCEN acknowledges that while private fund 
advisers may perform sanctions or politically exposed person (PEP) 
screening as part of their investor diligence, such efforts are only 
one part of effective AML/CFT compliance. In addition, because such 
advisers are not subject to consistent supervision for AML/CFT 
compliance measures they may undertake, such measures may not be 
applied consistently, and any deficiencies in these measures may not be 
identified or remediated.
---------------------------------------------------------------------------

    \68\ For instance, one subset of SARs analyzed for the Risk 
Assessment found that RIAs that advised private funds were 
associated with or referenced in SARs at twice the rate of RIAs that 
did not advise private funds. The higher rate of filing tied to 
private funds may result from custodians and other entities with SAR 
filing obligations lacking insight into the identity and source of 
wealth of underlying investors in the fund, even where those filers 
may pursue additional diligence.
    \69\ See Risk Assessment, supra note 2, at 16 & 27.
---------------------------------------------------------------------------

    For venture capital funds in particular, FinCEN notes that the 
threat of misuse is not only for purposes of illicit technology 
transfer through investments in portfolio companies of venture capital 
funds, but also to facilitate the laundering and growth of illicit 
proceeds. As noted in the IA AML NPRM and Risk Assessment, a Treasury 
review of select BSA reporting filed between January 2019 and June 2023 
identified more than 20 private fund advisers located in the United 
States where the adviser was identified as having significant ties to 
Russian oligarch investors or Russian-linked illicit activities. The 
vast majority of those private fund advisers advised investment funds 
that held themselves out as pursuing a venture capital strategy. Some 
of these Russian oligarch-linked investors may have been attracted to 
investing in venture capital funds because, like other venture capital 
investors, they had a medium-to-long term investment horizon and were 
willing to accept higher risk for higher investment returns.\70\
---------------------------------------------------------------------------

    \70\ A Treasury review of select BSA reporting identified 
several U.S. venture capital firms with significant ties to Russian 
oligarch investors that invested in firms developing emerging 
technologies with national security applications. These include 
autonomous vehicle technology and artificial intelligence systems, 
as well as contractors to the U.S. military, intelligence, and other 
government agencies. See Risk Assessment at 21-22.
---------------------------------------------------------------------------

    FinCEN also notes that while the BSA and its reporting and 
recordkeeping requirements were originally developed to combat money 
laundering, Congress has added to the purpose of the BSA over time an 
objective to combat terrorism,\71\ as well as addressing other threats 
to U.S. national security.\72\ Illicit technology transfer--that is, 
the transfer of technology in violation of sanctions, export controls, 
or other applicable laws--is both a threat to national security and may 
be linked to money laundering and other forms of illicit finance. For 
instance, in 2022 and 2023 FinCEN issued a series of joint alerts with 
the Department of Commerce's Bureau of Industry and Security (BIS) to 
assist financial institutions in detecting transactions linked to 
Russian attempts

[[Page 72165]]

to acquire military or dual-use technology.\73\ These alerts reflect 
the reality that money laundering and other forms of illicit finance 
may be part of illicit technology transfer because adversaries must 
conceal their illegal attempts to obtain technology. FinCEN assesses 
that applying AML/CFT measures to RIAs and ERAs will assist in 
combating these and other threats to the U.S. financial system and 
national security.
---------------------------------------------------------------------------

    \71\ See 31 U.S.C. 5311(2) (preventing the financing of 
terrorism). Section 358 of the USA PATRIOT Act added to the purposes 
of the BSA to require reporting or recordkeeping highly useful in 
``intelligence or counterintelligence activities, including 
analysis, to protect against international terrorism.'' Public Law 
107-56, sec. 358(a).
    \72\ See 31 U.S.C. 5311(4) (safeguarding the national security 
of the United States). Section 6101 of the AML Act amended the 
purposes of the BSA to include ``assess the money laundering, 
terrorism finance, tax evasion, and fraud risks to financial 
institutions, products, or services to . . . safeguard the national 
security of the United States.'' Public Law 116-283, Div. F, sec. 
6101(a).
    \73\ See FIN-2022-Alert003, FinCEN and the U.S. Department of 
Commerce's Bureau of Industry and Security Urge Increased Vigilance 
for Potential Russian and Belarusian Export Control Evasion Attempts 
(Jun. 28, 2022); see also FIN-2023-Alert004, Supplemental Alert: 
FinCEN and the U.S. Department of Commerce's Bureau of Industry and 
Security Urge Continued Vigilance for Potential Russian Export 
Control Evasion Attempts (May 19, 2023).
---------------------------------------------------------------------------

    FinCEN does not believe that the comments regarding the absence 
thus far of an adviser to a venture capital fund engaging in illicit 
finance in the IA AML NPRM requires any change to the final rule. The 
examples cited in the preamble are meant only to be illustrative of the 
risks and do not lay out the full evidence available to FinCEN, and 
these comments rely upon a particularly narrow framing of the evidence 
presented in the IA AML NPRM. The IA AML NPRM states that ``according 
to the FBI, the PRC government routinely conceals its ownership or 
control of investment funds to disguise efforts to steal technology or 
knowledge and avoid notice to CFIUS.'' \74\ As one commenter 
acknowledges, the IA AML NPRM discusses state-guided or -owned venture 
capital funds acting on behalf of the PRC and Russia.\75\ Furthermore, 
as noted by other commenters, there are public reports of specific 
venture capitalists with ties to Russian oligarchs or Russian 
government-backed institutions.\76\ Indeed, a recent bulletin published 
by the National Counterintelligence and Security Center highlights how 
foreign threat actors can exploit venture capital and other private 
investment to undermine U.S. national security.\77\ For these reasons, 
FinCEN's assessment that venture capital funds pose illicit finance 
risk is supported by the available evidence.
---------------------------------------------------------------------------

    \74\ 89 FR at 12116.
    \75\ Id.
    \76\ See, e.g., Joseph Menn et al., From Russia with money: 
Silicon Valley distances itself from oligarchs, Washington Post 
(Apr. 1, 2022); Giacomo Tognini, Russian Oligarch Roman Abramovich 
Invested In Startups That Received U.S. Government Contracts, Forbes 
(June 9, 2023).
    \77\ See Safeguarding Our Innovation at 1, supra note 51. This 
bulletin highlighted common tools that foreign threat actors use to 
penetrate the U.S. financial system, including complex ownership 
structures, investments through intermediaries, and limited partner 
investments. Id. at 2. For example, one firm identified in the 
bulletin that had been added to the Department of Defense's list of 
``Chinese military companies'' in January 2024 is an ERA that has 
made investments in more than 1,600 companies, including several 
U.S. firms.
---------------------------------------------------------------------------

    In response to the suggestion that these threats would be better 
addressed through other government authorities like CFIUS, FinCEN seeks 
to clarify fundamental differences between the CFIUS process and the 
AML/CFT obligations set out in this rule. FinCEN notes that CFIUS 
reviews are focused on certain transactions involving foreign 
investment in the United States and certain real estate transactions by 
foreign persons, in order to determine the effect of such transactions 
on the national security of the United States.\78\ Whereas CFIUS 
reviews lawful investments, this rule is aimed at combating illicit 
activity, whether in the form of money laundering and other illicit 
finance, or in the form of technology transfer in violation of 
applicable law. CFIUS jurisdiction has well-established limits, and 
many common financial transactions, such as certain loans or passive 
fund investments, are not subject to CFIUS jurisdiction.\79\ By 
Executive Order, CFIUS mitigation agreements may only address national 
security risks ``not adequately addressed by other provisions of law,'' 
such as the BSA.\80\ Within its jurisdiction, CFIUS has a broad mandate 
to assess the effect of a covered transaction on national security; it 
need not find any violation of law in order to recommend the 
transaction to the President who has the authority to block or unwind a 
transaction, as appropriate under CFIUS legal authorities.\81\ The 
connection between CFIUS and the final rule would therefore be limited: 
SARs identifying potential unlawful activity will assist CFIUS in 
identifying transactions linked to such activity that may raise 
national security concerns, and recordkeeping and other requirements 
may facilitate the collection of additional information on certain 
participants in CFIUS transactions who may seek to obscure their role 
through private funds.
---------------------------------------------------------------------------

    \78\ See Executive Order (E.O.) 11,858, as amended, sec. 6(b), 
73 FR 4677, 4678 (Jan. 23, 2008) (``The Committee shall undertake an 
investigation of a transaction in any case . . . in which . . . the 
transaction threatens to impair the national security of the United 
States and that the threat has not been mitigated.'').
    \79\ 31 CFR 800.302(b), 800.306(a).
    \80\ 50 U.S.C. 4565(d)(4)(B); E.O. 11858, sec. 7(a) as amended 
by E.O. 13456.
    \81\ See, e.g., 50 U.S.C. 4565(b), (d).
---------------------------------------------------------------------------

    In the IA AML NPRM and Risk Assessment, FinCEN considered the 
existing requirements under the Advisers Act and its implementing 
regulations, the extent to which AML/CFT requirements were applied to 
advisory activities, and how other rules and regulations, such as those 
issued by OFAC to implement sanctions requirements,\82\ may mitigate 
the identified illicit finance risks. While AML/CFT obligations for 
banks, broker-dealers, and other financial institutions can assist in 
detecting some illicit activity, these entities may not directly 
interact with an adviser's underlying customers. Moreover, these 
entities may not be in the best position to obtain the necessary 
documentation and information about the customers that is relevant for 
AML/CFT purposes, such as the source of customers' assets, the 
customers' backgrounds, and the customers' investment objectives. One 
commenter observed that in connection with oversight of broker-dealers 
for compliance with AML/CFT requirements, investment advisers often 
have the sole or most direct relationship with customers and possess 
knowledge of the full spectrum of transactions effected through broker-
dealers and other custodians that may present money laundering or other 
illicit finance risks. Another commenter noted that investment advisers 
in some cases already provide other financial institutions with AML/CFT 
and sanctions-related representations and affirmations regarding 
customers they advise (including private funds), which underscores the 
fact that advisers often have more information on their customers than 
banks or broker-dealers have. Further, requiring RIAs and ERAs to apply 
AML/CFT measures may lead to earlier notification of illicit finance 
activity via SAR filings, and reduce the time law enforcement needs to 
receive relevant information and take action against illicit actors.
---------------------------------------------------------------------------

    \82\ While OFAC sanctions requirements are separate from AML/CFT 
requirements, investment advisers, like other U.S. persons, must 
comply with OFAC sanctions. AML/CFT requirements and OFAC sanctions 
also share a common national security goal, apply a risk-based 
approach, and rely on similar recordkeeping and reporting 
requirements to ensure compliance. For this reason, many financial 
institutions view compliance with OFAC sanctions as related to AML/
CFT compliance obligations and may include sanctions compliance and 
AML/CFT compliance in a single enterprise-wide compliance program.
---------------------------------------------------------------------------

    While existing requirements under the Advisers Act and its 
implementing regulations, including recordkeeping, compliance, and 
reporting requirements, can assist in implementation of AML/CFT 
measures, they do not require the collection of the same information as 
do the AML/CFT requirements. The illicit finance risks

[[Page 72166]]

documented in the IA AML NPRM and Risk Assessment remain, despite such 
existing requirements and the assertions in comments about existing 
fiduciary duty, and thus FinCEN has determined that the final rule is 
necessary and appropriate to mitigate those risks. Further, while 
FinCEN recognizes that an adviser involved in facilitating illicit 
finance activity could face contractual liability on a variety of 
bases, these violations generally result in civil liability to private 
parties. This is not an adequate substitute for the comprehensive 
government civil and criminal enforcement mechanisms available for 
violations of AML/CFT laws, and the range of effective, proportionate, 
and dissuasive penalties that can be applied. These measures are 
necessary to address the public harm resulting from illicit finance 
activity that may occur through investment advisers.

B. Definition of ``Financial Institution'' and ``Investment Adviser''

1. Defining Investment Advisers as ``Financial Institutions''
    Proposed Rule: FinCEN proposed to add ``investment adviser'' to the 
definition of ``financial institution'' under the regulations 
implementing the BSA because FinCEN has determined that investment 
advisers engage in activities that are ``similar to, related to, or a 
substitute for'' financial services that other BSA-defined financial 
institutions are authorized to engage in.
    Comments Received: FinCEN received comments that both supported and 
did not support including investment advisers within the definition of 
``financial institution'' under the regulations implementing the BSA 
and including RIAs and ERAs within the definition of ``investment 
adviser.'' Three commenters noted that the proposed definition is a 
proactive step to address gaps in existing AML/CFT framework and called 
for FinCEN to retain a comprehensive definition in the final rule. One 
commenter called for FinCEN to also include foreign private advisers, 
family offices, and advisers to real estate investment funds within 
this definition.
    Nine commenters disagreed with adding ``investment adviser'' to the 
definition of ``financial institution'' in the regulations issued 
pursuant to the BSA. Several of these commenters asserted that doing so 
would apply redundant and unnecessary AML/CFT requirements to 
investment advisers, as the entities that process cash and securities 
transactions, such as broker-dealers and banks, are already subject to 
AML/CFT requirements.
    One commenter claimed that as investment advisers are not 
specifically enumerated in the statutory definition of ``financial 
institution'' under the BSA, FinCEN may not have the authority to 
define investment advisers as ``financial institutions'' under the BSA 
without additional Congressional action. This commenter also disagreed 
with FinCEN's determination that investment advisers engaged in 
activities that were ``similar to, related to, or a substitute for'' 
activities in which any of the enumerated financial institutions are 
authorized to engage. The commenter stated that BSA-defined financial 
institutions, such as banks and broker-dealers, are required to apply 
AML/CFT requirements because of their status as banks and broker-
dealers, and not because they engage in particular activities.
    This commenter also asked whether FinCEN intended to include within 
the definition of ``financial institution'' other professions or 
entities that are authorized to make investment or other financial 
decisions on behalf of a principal. The commenter argued that the 
proposed rule could raise questions about whether trustees, attorneys, 
executors of estates, receivers in bankruptcy proceedings, or others 
similarly situated are substituting for the activities of BSA-defined 
financial institutions and are covered by the proposed rule.
    Another commenter stated that entities defined as ``financial 
institutions'' under the BSA have in common the fact that they have 
custody over customer's funds. The commenter noted that investment 
advisers, by contrast, do not take custody of a customer's funds, and 
must act in conjunction with other financial institutions to transact 
on behalf of their clients. The commenter suggested that if the 
proposed rule were to be finalized, the definition of ``investment 
adviser'' must be narrowed to capture only advisers who engage in 
activities that arguably more closely resemble financial institution 
activities. Another commenter suggested that FinCEN apply AML/CFT 
requirements to private funds rather than to the investment advisers to 
those funds, noting that the fund itself has the contractual 
relationship with the investor and receives customer due diligence 
information.
    Two other commenters raised questions about the impact of including 
``investment adviser'' in the definition of ``financial institution'' 
in the regulations that implement the BSA. These two commenters 
indicated that FinCEN must account for the differences in the roles and 
functions of investment advisers from banks and broker-dealers in 
existing and future BSA rulemakings, and should consult with investment 
advisers before applying general AML/CFT requirements for ``financial 
institutions'' to investment advisers.
    Final Rule: For the reasons described in the IA AML NPRM, FinCEN is 
adding ``investment adviser'' to the definition of ``financial 
institution'' under the regulations implementing the BSA, as proposed, 
because FinCEN has determined that investment advisers engage in 
activities that are ``similar to, related to, or a substitute for'' 
financial services that other BSA-defined financial institutions are 
authorized to engage in.
    While the BSA has an enumerated list of entities that are 
``financial institutions,'' \83\ the statute also explicitly provides 
the Secretary of the Treasury with the authority to add entities to 
that list upon determining, ``by regulation,'' that any business or 
agency is engaged in ``an activity similar to, related to, or a 
substitute for any activity'' in which any of the enumerated financial 
institutions are authorized to engage.\84\ This language provides 
Treasury with the statutory authority to define additional entities as 
financial institutions as business and organizational structures, and 
risks, in financial services evolve and illicit actors seek to exploit 
potential gaps in AML/CFT regulation, as FinCEN has observed with 
respect to investment advisers.
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    \83\ 31 U.S.C. 5312(a)(2), (c)(1).
    \84\ 31 U.S.C. 5312(a)(2)(Y) (emphasis added). FinCEN may also 
designate businesses ``whose cash transactions have a high degree of 
usefulness in criminal, tax, or regulatory matters'' as financial 
institutions. 31 U.S.C. 5312(a)(2)(Z).
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    FinCEN continues to see ample evidence that investment advisers 
engage in activities ``similar to, related to, or a substitute for'' 
activities in which other financial institutions are authorized to 
engage. As noted in the IA AML NPRM, investment advisers work closely 
with financial institutions when they direct broker-dealers to purchase 
or sell client securities, and therefore engage in activities that are 
closely related to the activities of covered financial institutions. An 
RIA must use a qualified custodian--such as a bank or broker-dealer--to 
take custody of client assets, even when advising private funds.\85\ In 
addition, investment

[[Page 72167]]

advisers are frequently owned by or under common ownership with banks, 
broker-dealers, and other financial institutions. Broker-dealers may 
conduct certain similar advisory activities for their customers \86\ 
and investment advisers must compete with other financial institutions 
that provide investment opportunities, such as banks and broker-
dealers, to attract investor funds.
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    \85\ See 17 CFR 275.206(4)-2; see also 12 CFR 225.125(a) (FRB 
determining that investment adviser activities ``to be so closely 
related to banking or managing or controlling banks as to be a 
proper incident thereto'').
    \86\ See 15 U.S.C. 80b-2(a)(11)(C).
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    There is ample evidence that RIAs and ERAs who advise private funds 
engage in activities ``similar to, related to, or a substitute for'' 
activities in which other financial institutions are authorized to 
engage. The services provided by RIAs and ERAs advising private funds 
are closely related to the services provided by broker-dealers who buy 
and sell securities on their behalf. Private fund advisers may be under 
common ownership with banks, broker-dealers, or other financial 
institutions. Broker-dealers, like RIAs or ERAs advising private funds 
pursuant to the Advisers Act, may ``advis[e] others . . . as to the 
value of securities or as to the advisability of investing in, 
purchasing, or selling securities.'' \87\ And an RIA or ERA advising 
private funds must also compete with other financial institutions that 
offer investment opportunities for investor assets.
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    \87\ 15 U.S.C. 80b-2(a)(11). See also SEC, Commission 
Interpretation Regarding the Solely Incidental Prong of the Broker-
Dealer Exclusion From the Definition of Investment Adviser, 
Interpretation, 84 FR 33681 (Jul. 12, 2019).
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    FinCEN's statutory authority to designate investment advisers as 
financial institutions is confirmed by clear evidence of Congressional 
intent. The legislative history during the drafting of the USA PATRIOT 
Act supports that Congress viewed RIAs as sufficiently similar to 
certain other financial institutions that Treasury could require them 
to file SARs.\88\ Congress reaffirmed this view more recently when, in 
connection with appropriations legislation passed in December 2022, 
Congress highlighted the illicit finance concerns associated with 
``investment advisers such as hedge fund managers'' and encouraged 
FinCEN ``to update and finalize its 2015 investment adviser rule as 
soon as possible.'' \89\
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    \88\ House Report 107-250(I), Financial Anti-Terrorism Act of 
2001, 2001 WL 1249988 at *66 (Oct. 17, 2001); see also Public Law 
107-31, Title III, sec. 321 (Oct. 26, 2001) (section of USA PATRIOT 
Act adding futures commission merchants, commodity trading advisors, 
and commodity pool operators to the definition of ``financial 
institutions'' for purposes of 31 U.S.C. 5312(a)).
    \89\ See Consolidated Appropriations Act, 2023, Public Law 117-
328, 136 Stat. 4459, Joint Explanatory Statement (Division E), 
p.1156, available at https://www.congress.gov/117/cprt/HPRT50347/CPRT-117HPRT50347.pdf.
---------------------------------------------------------------------------

    FinCEN also notes that having custody or directly holding customer 
funds is not a prerequisite for being included within the definition of 
``financial institution'' in the regulations issued pursuant to the 
BSA. For example, the BSA defines an ``investment company'' and an 
``operator of a credit card system,'' as a ``financial institution,'' 
and neither of these institutions routinely custody or directly hold 
customer funds.\90\ In addition, an ``investment banker'' and ``persons 
involved in real estate closings and settlements'' are also defined in 
the BSA as financial institutions, but may not directly receive, send, 
or transmit any customer funds. While broker-dealers and banks provide 
custodial services to their customers, they are also authorized to 
engage in a range of other financial services--such as extending 
credit--that do not involve taking custody of client funds, but are 
nonetheless subject to AML/CFT requirements. In sum, the statutory 
language authorizes Treasury to define as a financial institution any 
business that engages in activity similar to any activity in which the 
enumerated financial institutions are authorized to engage, not just 
specific activities involving the transfer or custody of customer 
funds.
---------------------------------------------------------------------------

    \90\ 31 U.S.C. 5312(a)(2)(L), (M).
---------------------------------------------------------------------------

    In response to the comment asking whether FinCEN intends to 
regulate other entities or professions that act as agents for a 
principal and whether this would create ambiguity for those entities 
and professions, FinCEN notes that the rule would only apply to RIAs 
and ERAs, categories of entities that are clearly defined under the 
Advisers Act. If FinCEN were to regulate such other entities or 
professions in the same manner as in the final rule, this would occur 
through a new rulemaking on which any affected person could comment. An 
attorney, trustee, executor, or other person in a principal-agent 
relationship therefore has no reason to find the scope of the final 
rule ambiguous as applied to them; they merely need to know if they 
have registered (or are required to register) or have filed with the 
SEC as an RIA or ERA.
    Regarding whether to apply AML/CFT obligations to private funds 
rather than the advisers to those funds, FinCEN notes that in many 
cases the adviser to a private fund will have a relationship (in some 
cases contractual) with underlying investors and has access to 
information about underlying investors. Indeed, the SEC requires RIAs 
and ERAs to report information regarding underlying investors on Form 
ADV and Form PF.\91\ Further, private funds also typically lack 
employees, and are reliant upon their service providers, such as their 
advisers, to satisfy the private fund's legal and compliance 
obligations. Accordingly, the adviser, rather than the fund, is best 
positioned to apply the full range of AML/CFT measures beyond customer 
due diligence. FinCEN also acknowledges the point made by commenters 
that there are AML/CFT requirements that may be applied to all BSA-
defined financial institutions, which if amended, would also change the 
obligations of investment advisers.\92\ If FinCEN were to amend these 
AML/CFT requirements, it anticipates considering the specific 
attributes of investment advisers when deciding whether and how to 
apply such requirements to investment advisers.
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    \91\ See supra note 45.
    \92\ For instance, FinCEN did not include ``investment adviser'' 
in the proposed rule to amend the AML/CFT program requirements for 
other types of BSA-defined financial institutions. See FinCEN, Anti-
Money Laundering and Countering the Financing of Terrorism Programs, 
Notice of Proposed Rulemaking, 89 FR 55428 (Jul. 3, 2023).
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2. Registered Investment Advisers
    Proposed Rule: FinCEN proposed to include SEC-registered investment 
advisers (RIAs) in its definition of investment adviser with regard to 
the proposed changes to the definition of financial institution under 
31 CFR 1010.100.
    Comments Received: Six commenters commented on the proposed 
definition of ``investment adviser'' and the impact it would have on 
smaller RIAs. One commenter stated that smaller advisers generally pose 
less illicit finance risk and should be excluded for the same reasons 
that FinCEN had proposed to exclude State-registered advisers, namely 
their lower AUM, fewer customers, and that their customers tend to be 
localized. Another commenter asserted that the reliance on AUM as the 
sole determinant for regulatory thresholds overlooks the practical 
considerations of the size and capacity of RIAs, particularly smaller 
firms, and that AUM may not accurately reflect the complexity or scale 
of a firm, especially when AUM is primarily derived from a small number 
of clients. They suggested that regulatory thresholds be evaluated 
based on a combination of factors, including the number of employees 
and average AUM per client.

[[Page 72168]]

    Two commenters suggested advisers with fewer than 20 employees 
should be exempt from the requirements of the proposed rule, while one 
commenter suggested that firms with fewer than 100 employees should be 
exempt from the requirements of the proposed rule. These commenters 
claimed that smaller advisers would need to divert resources from 
client-servicing functions and other compliance requirements to invest 
in building out an AML/CFT program, and would need to outsource the 
independent testing requirement to a third party, which would create 
additional burden.
    One commenter requested that investment advisers who do not manage 
client assets be excluded from the proposed rule. That commenter 
contended that applying AML/CFT requirements to these investment 
advisers would produce no valuable information for law enforcement or 
regulators, as these advisers are not involved in the management of 
client assets or funds transfer activity. Another commenter suggested 
that RIAs whose client's investments are held by an account custodian 
should be exempt from the proposed regulation.
    Final Rule: FinCEN is modifying the definition of ``investment 
adviser'' from the proposed rule to exempt certain types of RIAs in 
response to comments.\93\ Accordingly, these types of RIAs will not be 
subject to the final rule. FinCEN recognizes the concerns raised by 
commenters regarding the impact of the proposed rule on smaller RIAs, 
based on AUM or other applicable criteria. As noted in the IA AML NPRM, 
FinCEN is mindful of the effect of new regulations on small businesses, 
given their critical role in the U.S. economy and the special 
consideration that Congress and successive administrations have 
mandated that Federal agencies should give to small business concerns. 
FinCEN would like to reiterate that the AML/CFT requirements in this 
rule are designed to be risk-based and that their cost will vary with 
the size of the business, along with the risk level of its advisory 
activities and customers. This means that smaller advisers would be 
expected to adopt AML/CFT programs that are consistent with their 
(often) simpler, more centralized organizational structures and so 
would be more likely to have lower implementation-related costs, absent 
other high-risk attributes for illicit finance risks.
---------------------------------------------------------------------------

    \93\ These changes reflect, in part, comments received in 
response to the IA AML NPRM.
---------------------------------------------------------------------------

    In reviewing the comments that addressed this issue, FinCEN sought 
to identify an approach that would balance concerns about the burden on 
smaller RIAs as well as ensure that such an approach is easily 
understood by advisers subject to the final rule, systematically 
addresses illicit finance risk in the investment adviser sector, and is 
administrable in practice by FinCEN and the SEC (and other relevant 
regulators). Regarding the proposal to exempt advisers with fewer than 
either 20 or 100 employees, FinCEN notes that the number of employees 
that an adviser has is not necessarily aligned with the types of 
advisory customers, activities, or other factors relevant to the 
illicit finance risk of an adviser. Some advisers may manage 
significant assets from a small number of customers, while other 
advisers may manage small accounts held by a large number of customers, 
requiring additional employees to service those accounts. To create a 
threshold for application of AML/CFT requirements based on employee 
numbers alone would be inconsistent with Treasury's understanding of 
risk in the sector. For example, an adviser managing significant 
assets, but with few employees, is of greater risk of being used by 
malign actors to launder large sums of money than an adviser with more 
employees but a small amount of assets under management. Further, 
imposing such a threshold could lead to perverse outcomes where RIAs 
are incentivized to hirer fewer non-revenue staff, such as those 
responsible for AML/CFT compliance. A threshold could also raise 
questions with respect to other BSA-defined financial institutions, 
which typically do not have such thresholds. FinCEN therefore declines 
to apply the proposed exemption for RIAs with fewer than either 20 or 
100 employees.
    However, FinCEN has sought to appropriately tailor the scope of 
entities covered by the final rule to balance commenters' concerns 
about the potential burden on smaller advisers with the investment 
adviser sector-wide identified illicit finance risks. FinCEN also 
sought to, while considering the diversity of business models in the 
advisory business, fashion the rule in a way that can be clearly 
applied and examined by the SEC, and that is transparent to RIAs and 
ERAs subject to the rule. Therefore, FinCEN is exempting from the 
definition of ``investment adviser'' RIAs that register with the SEC 
because they are (i) Mid-Sized Advisers, (ii) Multi-State Advisers, and 
(iii) Pension Consultants, as well as (iv) RIAs that do not report any 
AUM on Form ADV. The final rule's exemptions apply, however, only to 
investment advisers that are registered with the SEC on only one or 
more of the above listed bases, and have no other basis for 
registration.\94\ For example, an investment adviser that registers (or 
could register) with the SEC both because: (a) it has AUM of more than 
$110 million (and so registers as a ``large advisory firm'' on Form 
ADV) and (b) it would otherwise be required to register with more than 
15 states, will not be eligible for the exemption.
---------------------------------------------------------------------------

    \94\ See 31 CFR 1010.100(nnn)(ii)(1) (exempting an investment 
adviser that is registered ``only'' because it meets the conditions 
of being is either a mid-sized adviser, a pension consultant, or a 
multi-state adviser). For the avoidance of doubt, an investment 
adviser that is registered because it meets the conditions of more 
than one of these exemptions, but that is not otherwise required to 
register, is also exempt from the definition of ``investment 
adviser.''
---------------------------------------------------------------------------

    As described below and in the Risk Assessment, FinCEN assessed 
State-registered advisers as generally lower-risk for money laundering, 
terrorist financing, or other illicit finance activity. Therefore, 
FinCEN has chosen not to apply the proposed rule to State-registered 
advisers at this time. At the same time, FinCEN notes that there are 
certain types of RIAs that resemble State-registered advisers because 
they would otherwise be prohibited from registering with the SEC but 
are required to or choose to do so because they satisfy the conditions 
of certain exemptions from the prohibition on SEC registration.
    First, there are certain RIAs who have AUM between $25 million and 
$100 million but who either: (i) are not required to be registered as 
an adviser with the state securities authority in the state where they 
maintain their principal office and place of business; or (ii) are not 
subject to examination as an adviser by the state in which they 
maintain their principal offices and places of business (Mid-Sized 
Advisers).\95\ These Mid-Sized Advisers are required to register with 
the SEC.\96\ According to a review of information filed on Form ADV, 
there are 468 Mid-Sized Advisers who, on average, have $54.6 million in 
AUM, 6 employees, and 129 customers, 97 percent of which are natural 
persons.\97\
---------------------------------------------------------------------------

    \95\ See 15 U.S.C. 80b-3a(a)(2). On Form ADV, these Mid-Sized 
Advisers check the box in Item 2.A noting they are a ``mid-sized 
advisory firm.'' See Form ADV, Instructions for Part 1A, available 
at https://www.sec.gov/about/forms/formadv-instructions.pdf.
    \96\ See 15 U.S.C. 80b-3a(a)(2); Form ADV, Instructions for Part 
1A, available at https://www.sec.gov/about/forms/formadv-instructions.pdf.
    \97\ This information is derived from a Treasury review of Form 
ADV information filed as of July 31, 2023. See supra note 25.
---------------------------------------------------------------------------

    Second, advisers who would otherwise be required to register in 
more

[[Page 72169]]

than 15 states, but have less than $100 million in AUM, can choose 
instead to register with the SEC (Multi-State Advisers).\98\ According 
to a review of the information filed on Form ADV, in 2023 there were 90 
Multi-State Advisers who, on average, have $27.6 million in AUM, 28 
employees, and 1,300 customers.\99\ While the majority of Multi-State 
Advisers' customers are legal entities, approximately 90 percent of 
these customers are United States persons. These firms have a larger 
number of employees and customers than the average State-registered 
adviser, but relatively small AUM.\100\ FinCEN has decided to exempt 
these two categories of advisers because their advisory activities and 
customers are generally lower-risk,\101\ more closely resembling State-
registered advisers than RIAs who satisfy the general requirements for 
registration, to address some of the concerns regarding possible burden 
on smaller advisers that were raised by commenters.
---------------------------------------------------------------------------

    \98\ See 17 CFR 275.203A-2(d).
    \99\ This information is derived from a Treasury review of Form 
ADV information filed as of July 31, 2023. See supra note 25.
    \100\ This exemption was designed to allocate regulatory 
responsibility to the SEC for larger investment advisers, whose 
activities are likely to affect national markets, and to relieve 
these advisers of the burdens associated with multiple state 
regulations. See SEC, Exemption for Investment Advisers Operating in 
Multiple States; Revisions to Rules Implementing Amendments to the 
Investment Advisers Act of 1940; Investment Advisers with Principal 
Offices and Places of Business in Colorado or Iowa, Final Rule, 63 
FR 39708, 39709 (Jul. 24, 1998).
    \101\ This determination is based on the tailored BSA analysis 
on this subset of RIAs described infra.
---------------------------------------------------------------------------

    Along with these two categories of RIAs, FinCEN also identified two 
categories of RIAs that do not directly manage client assets and, as 
discussed below, pose little or no risk of being used as an entry point 
into the U.S. financial system for illicit proceeds. First, there are 
some RIAs who do not manage client assets as part of their advisory 
activities, and report zero AUM on Form ADV.\102\ According to 
information derived from Form ADV, as of July 2023 there were 655 RIAs 
who report zero AUM on Form ADV.\103\ These RIAs have, on average, 73 
employees and 640 customers, and 90 percent of their customers were 
United States persons.\104\ Services provided by these advisers may 
include non-discretionary financial planning (such as fee-only advice) 
and publication of securities-related newsletters, ``model 
portfolios,'' or research reports.
---------------------------------------------------------------------------

    \102\ See supra note 28 (for additional information on how AUM 
is calculated). The Form ADV instructions provide general criteria 
for determining whether an investment adviser provides continuous 
and regular supervisory or management services. For example, the 
instructions to Item 5.F state that an investment adviser provides 
such services if it has ``discretionary authority over and 
provide[s] ongoing supervisory or management services,'' and the 
Form ADV Glossary of Terms defines ``discretionary authority'' for 
these purposes. The Form ADV instructions are available at https://www.sec.gov/about/forms/formadv-instructions.pdf.
    \103\ This information is derived from a Treasury review of Form 
ADV information filed as of July 31, 2023. See supra note 25.
    \104\ Id.
---------------------------------------------------------------------------

    FinCEN agrees with commenters that such advisers are generally 
unlikely to have sufficient information about a customer's source of 
funds, background, and investment objectives to detect suspicious 
financial activity, and, in some instances, may lack even the names of 
individual customers. While these advisers may have more employees and 
customers than the average State-registered adviser, as described 
above, these advisers' activities are unlikely to be used for illicit 
finance activity, these advisers may not be able to provide useful 
information to law enforcement or other government authorities, and, to 
the extent their customers effect financial transactions in the United 
States on the basis of the services received from the investment 
adviser (e.g., trading based on reading research reports), they likely 
do so as direct customers of a BSA-regulated financial institution, 
such as through a brokerage account.
    FinCEN also identified 186 RIAs who register with the SEC because 
they are ``pension consultants'' as that term is defined under the 
Advisers Act regulations.\105\ According to a review of information 
filed on Form ADV, these RIAs have, on average, 334 employees, and over 
20,000 customers.\106\ Advisers registered as pension consultants 
advise at least $200 million in assets held by certain employee benefit 
plans subject to, or described in, the Employee Retirement Income 
Security Act of 1974 (ERISA).\107\ As FinCEN understands, many of these 
advisers do not exercise investment discretion over assets they advise, 
but generally assist other investment advisers or ERISA plan 
fiduciaries in designing investment lineups for employee benefit 
plans.\108\ In addition, as noted by commenters, employee benefit plans 
are generally subject to strict contribution and withdrawal limits, are 
usually available to only employees of a participating company, and are 
subject to other requirements under ERISA (or similar state laws) and/
or the Internal Revenue Code (IRC).\109\
---------------------------------------------------------------------------

    \105\ An investment adviser is a ``pension consultant'' for 
purposes of rule 203A-2(a)(2) if it provides investment advice to 
(i) any employee benefit plan described in section 3(3) of ERISA, 
(ii) any governmental plan described in section 3(32) of ERISA, or 
(iii) any church plan described in section 3(33) of ERISA (29 U.S.C. 
1002(33)). 17 CFR 275.203A-2(a)(2).
    \106\ This information is derived from a Treasury review of Form 
ADV information filed as of July 31, 2023. See supra note 25.
    \107\ 17 CFR 275.203A-2(a)(1).
    \108\ See Rules Implementing Amendments to the Investment 
Advisers Act of 1940, Final Rule, 76 FR 42950, 42959 (Jul. 19, 2011) 
(``[P]ension consultants typically do not have ``assets under 
management,'' but we have required these advisers to register with 
[the SEC] because their activities have a direct effect on the 
management of large amounts of pension plan assets.''); Rules 
Implementing Amendments to the Investment Advisers Act of 1940, 
Final Rule, 62 FR 28112, 28117 n. 60 (May 22, 1997) (``[A] pension 
consultant has substantially less control over client assets than an 
adviser that has assets under management.''). See also SEC, Staff 
Report Concerning Examinations of Select Pension Consultants, 1 (May 
16, 2005), available at https://www.sec.gov/news/studies/pensionexamstudy.pdf.
    \109\ See, e.g., 29 CFR 2520 (rules and regulations for 
reporting and disclosure for ERISA plans).
---------------------------------------------------------------------------

    While these are not, on average, ``smaller'' advisers, they 
exclusively engage in certain activities that are less likely to be 
used for, or to generate useful information for law enforcement about, 
illicit finance activity. For instance, their advisory activities on 
behalf of these employee benefit plans are subject to additional 
disclosures and restrictions on compensation arrangements under ERISA 
and other relevant statutes that limit their incentive to facilitate 
the movement of illicit proceeds. While the misuse of employee benefit 
plans has been linked to certain types of financial crime, such as 
fraud or account takeover activity,\110\ these plans, whether defined 
benefit plans or defined contribution plans, are less likely to be 
misused to obscure illicit proceeds generated from a separate criminal 
scheme. While defined benefit plans may invest plan assets in private 
funds, there is not the same uncertainty as to beneficial ownership and 
source of wealth as with other private fund investors.\111\ For defined 
benefit plans, the funds are typically derived from the employer 
contributions to the defined benefit plan. In addition, these advisers 
are less

[[Page 72170]]

likely to have unique information or knowledge about plan activities or 
assets to identify and report suspicious activity. As such, FinCEN 
assesses that these advisers will likely not generate relevant 
information to assist government authorities in combating illicit 
finance and subjecting these advisers to the rule's coverage would not 
meaningfully advance the rule's objectives.
---------------------------------------------------------------------------

    \110\ See, e.g., FBI, IC3 2023 Elder Fraud Report, at 14, 19, 
available at https://www.ic3.gov/Media/PDF/AnnualReport/2023_IC3ElderFraudReport.pdf.
    \111\ For the avoidance of doubt, the absence of uncertainty as 
to beneficial ownership and source of wealth is the case only when 
the investment in a private fund comes from a defined benefit plan. 
When an investment adviser directs investment into a private fund, 
the risk of any other investments directed into the private fund 
must be evaluated separately. An investment adviser who is not a 
pension consultant and advises a private fund that receives 
investments from a defined benefit plan may not exclude such private 
fund from its obligations under this rule, although, as explained 
below, such an adviser may account for the source of such investment 
in determining which policies, procedures, and controls to apply to 
the fund on a risk basis.
---------------------------------------------------------------------------

    FinCEN, in coordination with federal law enforcement, reviewed BSA 
reporting associated with these four groups of RIAs (i.e., Mid-Sized 
Advisers, Multi-State Advisers, pension consultants, and advisers who 
report zero AUM on Form ADV). This analysis found that 5.5 percent of 
these RIAs were associated with, or referenced in, at least one SAR 
(i.e., they were identified either as a subject or in the narrative 
section of the SAR) between 2013 and 2023. That is substantially less 
than the 15.4 percent of all RIAs and ERAs that were associated with or 
referenced in at least one SAR between 2013 and 2021. When considering 
this information with other information on illicit finance threats 
available to FinCEN, and the structural factors discussed above that 
may make these subgroups of RIAs less vulnerable to misuse for illicit 
finance, FinCEN has determined that exempting these groups of RIAs from 
the final rule would be consistent with the objective of this rule.
    Therefore, for all of the reasons noted above, FinCEN has 
determined to exempt from the definition of ``investment adviser'' 
investment advisers that register with the SEC solely on the basis that 
they are Mid-Sized Advisers, Multi-State Advisers, pension consultants, 
and advisers who report zero AUM on Form ADV. FinCEN notes that, should 
the registration status of an RIA change such that the RIA would no 
longer be exempt from the definition of ``investment adviser,'' the 
adviser will become subject to the AML/CFT requirements in this rule as 
of its next annual updating amendment to Form ADV.\112\ The scope of 
such advisers exempted from the final rule's definition of ``investment 
adviser'' is reflected in the regulatory text added at 
1010.100(nnn)(ii).
---------------------------------------------------------------------------

    \112\ Under the Instructions to Form ADV, Item 2 of Part 1A, 
which addresses an investment adviser's basis for registration with 
the SEC, must be updated annually.
---------------------------------------------------------------------------

3. Exempt Reporting Advisers
    Proposed Rule: FinCEN proposed to include Exempt Reporting Advisers 
(ERAs) in its definition of ``investment adviser'' with regard to the 
proposed changes to the definition of financial institution under 31 
CFR 1010.100.
    Comments Received: Four commenters supported FinCEN's proposal to 
include ERAs in the definition of ``investment adviser,'' noting the 
significant illicit finance risks present in this subset of the 
investment adviser sector and the ``loophole'' that would be created by 
subjecting RIAs but not ERAs to the proposed regulations. Some of these 
commenters noted that the Risk Assessment found that the risks were 
higher amongst ERAs than RIAs. One commenter stated that ERAs should be 
subject to the requirements in the proposed rule because they were 
already subject to rules and prohibitions under the Federal securities 
laws designed to root out misconduct in financial markets, and that the 
rationale for applying these requirements supports applying AML/CFT 
requirements to ERAs.
    However, other commenters were generally opposed to the rule's 
scoping-in of ERAs, with one commenter asserting the outsized 
regulatory impact of the proposed regulation on ERAs was not merited 
given the low number of examples provided regarding illicit finance 
risk amongst ERAs. Another commenter stated that FinCEN lacked 
statutory authority to include ERAs in the scope of the proposed 
regulation. One commenter claimed that FinCEN had failed to put forward 
an adequate reason for the expansion of AML/CFT requirements to ERAs 
beyond citation to the Risk Assessment and further claimed that the 
Risk Assessment does not identify ERAs as particularly vulnerable to 
illicit finance risks. One commenter suggested that ERAs below a 
certain threshold of U.S. AUM be exempt from the proposed rule, and 
that this AUM threshold should be measured similar to the private fund 
adviser exemption in the Advisers Act and its implementing regulations. 
The commenter claimed that this would be consistent with the goal of 
the SEC to avoid imposing U.S. regulatory and operational requirements 
on a foreign-located adviser's foreign-located advisory business.
    Final Rule: FinCEN is implementing this part of the definition of 
``investment adviser'' without change from the proposed rule. 
Accordingly, each ERA will be subject to the final rule. For the 
reasons stated above, in Section III.B.1, FinCEN has determined that it 
has legal authority to determine that ERAs are ``financial 
institutions'' for BSA purposes. Including ERAs in scope of the 
regulation, as proposed, is supported by the findings of the Risk 
Assessment as well as the responses from several commenters supporting 
inclusion of ERAs demonstrating the illicit finance and national 
security risks posed by ERAs. As noted by a commenter, while ERAs are 
not subject to certain requirements under Federal securities laws, they 
are subject to many of the requirements designed to prevent misconduct 
in financial markets, for instance. In addition, FinCEN agrees with the 
point made by several commenters that exempting ERAs could create a 
loophole through which illicit actors would be able to access a range 
of private funds without being directly subject to AML/CFT 
requirements. The Risk Assessment found that, within the investment 
adviser sector, ERAs bear the highest risks as they solely advise 
either private funds or venture capital funds, both of which were found 
in the Risk Assessment to be involved in illicit finance and other 
criminal investigations carried out by U.S. law enforcement.\113\ In 
addition, private funds are more likely than other types of customers 
to be based in jurisdictions with weaker and less effective AML/CFT 
controls, making it more difficult for the ERA to assess the risk posed 
by the relationship or prevent abuse.\114\
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    \113\ See supra note 47 and accompanying text (discussing the 
analysis of BSA reporting linked to private fund advisers). See also 
Risk Assessment, supra note 2, at 20-22, 26-28 (noting that private 
funds, including those advised by ERAs, have served as an entry 
point into the U.S. financial system for sanctioned Russian 
oligarchs and their associates, and as back door for hostile nation-
state actors to acquire assets of interest in the United States, 
such as equity stakes in companies developing critical or emerging 
technologies).
    \114\ Only 52 percent of the total net asset value of private 
funds managed by U.S. investment advisers is held by funds domiciled 
in the United States. Of the remaining 48 percent held in offshore 
funds, most is held by funds domiciled in the Cayman Islands (33 
percent) and the remainder is held by funds in Luxembourg (5 
percent), Ireland (4 percent), Bermuda (1 percent), British Virgin 
Islands (1 percent), United Kingdom (1 percent), and other 
jurisdictions (4 percent). See SEC, Private Fund Statistics, Third 
Calendar Quarter 2023, Page 13, Table 11, https://www.sec.gov/files/investment/2023q3-private-funds-statistics-20240331.pdf. These 
figures come from publicly available data provided by the SEC 
aggregating periodic filings made on Form PF. While this data 
represents only the subset of RIAs required to file Form PF (RIAs 
that manage at least $150 million in private fund AUM), this 
accounts for a substantial amount of overall private fund assets and 
FinCEN assesses the geographic distribution of fund domiciles is 
generally consistent for ERAs. See also 89 FR at 12114 (discussion 
on the effectiveness of foreign AML/CFT supervision for private 
funds domiciled in certain jurisdictions).
---------------------------------------------------------------------------

    Through the course of its advisory activities, an ERA may collect 
information about either the private fund it advises (the customer of 
the ERA) or the underlying investors in that private fund that may 
alert the ERA to illicit activity. FinCEN has also assessed

[[Page 72171]]

that ERAs, along with RIAs advising private funds, are exposed to 
higher money laundering, terrorist financing, or other illicit finance 
risks compared to advisers who do not advise private funds.\115\ Adding 
ERAs to the definition of ``investment adviser'' is therefore 
consistent with the categorization of other entities as a financial 
institution and with FinCEN's authority to make changes to the list of 
financial institutions under FinCEN's regulations implementing the BSA 
in order to combat illicit activity.
---------------------------------------------------------------------------

    \115\ See supra Section III.A; Risk Assessment, supra note 2, at 
20-22, 32.
---------------------------------------------------------------------------

    FinCEN also declines to limit the applicability of the proposed 
rule to only certain ERAs with assets exceeding a specified threshold, 
such as $100 million AUM, as was proposed by one commenter. FinCEN 
considered setting such a threshold and understands that many RIAs 
below this threshold will not be subject to the rule, given the rule's 
definition of ``investment adviser.'' However, as noted above, FinCEN 
has concerns that such a threshold would mean that ERAs advising funds 
with fewer assets but carrying material illicit finance risks would 
remain out of scope of AML/CFT controls. The Risk Assessment and some 
of the underlying examples analyzed for the Risk Assessment show that 
private funds with relatively small AUM may still bear substantial 
illicit finance risk.\116\ Such a threshold would also be challenging 
to administer; for example, ERAs do not currently report AUM on Form 
ADV.\117\ In addition, a threshold based on AUM or similar metric would 
mean that an ERA hovering just above or below the threshold would come 
in and out of coverage based on market returns, making it more 
challenging for the SEC and FinCEN to accurately assess systemic money 
laundering, terrorist financing, or other illicit finance risk among 
ERAs.
---------------------------------------------------------------------------

    \116\ See Risk Assessment, supra note 2, at 18, 20, and 31 
(noting the highest illicit finance risk in the sector is for ERAs). 
Several of the 20 private fund advisers identified as having 
significant ties to Russian oligarch investors or Russian-linked 
illicit activities managed private funds with less than $100 million 
in AUM.
    \117\ ERAs do not report AUM on Form ADV, but instead report 
gross assets for each private fund they advise. However, they only 
report gross assets for a private fund if that fund is not reported 
by an RIA or ERA in its own Form ADV; therefore, some ERAs report 
zero gross assets because all of the funds they advise are also 
reported by an RIA or ERA. See Form ADV, Instructions for Part 1A.
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    FinCEN also declines to categorically exclude ERAs reporting zero 
private fund assets on Form ADV. FinCEN notes that ERAs do not report 
regulatory AUM on Form ADV, and that the information they do report--
gross assets of each private fund they advise--does not necessarily 
distinguish between ERAs that manage client assets from those that do 
not. ERAs that report zero gross assets for private funds they advise 
may still have discretion for customer assets and thus present the risk 
of being misused for illicit finance activities.\118\ FinCEN therefore 
declines to exclude ERAs reporting zero gross assets for private funds 
they advise from the requirements of the final rule.
---------------------------------------------------------------------------

    \118\ See 17 CFR 275.203(m)-1(d)(1) (excluding from the 
calculation of regulatory AUM, for purposes of the private fund 
adviser exemption, assets associated with certain types of private 
funds). See also Risk Assessment, supra note 2, at 18, 20.
---------------------------------------------------------------------------

    Regarding the applicability of the requirements of the final rule 
to the activities of foreign-located ERAs, those are discussed in the 
next section. FinCEN notes the concerns raised by some commenters about 
the specific burden that may apply to ERAs but reiterates that the AML/
CFT requirements in this rule are designed to be risk-based and their 
cost will vary with the size of the business, along with the risk level 
of its advisory activities and customers. FinCEN will work with the SEC 
staff so that any examinations of ERAs for compliance with requirements 
of the final rule take into account the risk-based nature of AML/CFT 
programs.
4. Foreign-Located Investment Advisers
    Proposed Rule: In the proposed rule, FinCEN noted that the proposed 
definition of ``investment adviser'' would include certain foreign-
located investment advisers that are physically located abroad (i.e., 
whose principal office and place of business is outside the United 
States) but nonetheless are: (i) registered or required to register 
with the SEC (for RIAs), or (ii) file reports with the SEC on Form ADV 
(for ERAs). FinCEN therefore proposed that the rule's requirements 
would ``apply on the same basis'' to such foreign-located advisers as 
to domestic advisers.\119\ FinCEN requested comment on any challenges 
for foreign-located advisers in taking this approach, including any 
potential conflicts with domestic or foreign law.
---------------------------------------------------------------------------

    \119\ 89 FR at 12130.
---------------------------------------------------------------------------

    Comments Received: FinCEN received eight comments regarding the 
application of the proposed rule to foreign-located investment 
advisers. One commenter stated that the proposed scope of application 
of the proposed rule conflicts with Congress' intent during its 
original passage of the BSA in 1970. Other commenters raised concerns 
about the application of the proposed rule deviating from past 
positions of FinCEN regarding BSA regulation and the SEC regarding 
Advisers Act regulation. One commenter suggested an AUM threshold for 
foreign-located ERAs that would draw from the SEC's AUM thresholds for 
RIAs and its approach to measuring AUM for foreign-located private fund 
RIAs, specifically suggesting that foreign-located ERAs with less than 
$100 million of U.S. AUM be exempt from the proposed rule.
    Several commenters raised concerns that foreign-located investment 
advisers will face significant challenges in adhering to the proposed 
BSA requirements. First, commenters indicated that obligations under 
the BSA may not be consistent with local privacy rules and other 
requirements, potentially creating ``conflict-of-laws and compliance 
challenges.'' Another commenter suggested that applying this rule to 
foreign-located advisers would ``deprive U.S. clients and investors 
from [sic] the expertise of foreign-located investment advisers'' due 
to additional compliance burdens and ``make it less likely that non-
U.S. investment advisers hire U.S.-based employees or engage in other 
economic activity in the United States.'' One commenter noted that the 
substantive provisions of the Advisers Act do not apply to ``a non-U.S. 
adviser's relationship with its non-U.S. clients and non-U.S. funds 
(including funds with U.S. investors)'' and recommended that for non-
U.S. advisers, this rule not apply ``with respect to their non-U.S. 
clients, including non-U.S. private funds, even if such non-U.S. 
private funds have U.S. investors.''
    Commenters called for FinCEN to provide clarification on the reach 
of the proposed rule to foreign-located advisers. One commenter called 
on FinCEN to clarify that application of the proposed rule would be 
confined to investment advisers ``organized and operating in the U.S., 
or to foreign-based or foreign-organized [investment advisers] only to 
the extent they are operating in the U.S.'' One commenter called for 
foreign-located ERAs from Financial Action Task Force (FATF)-compliant 
jurisdictions to be excluded from the rule and another raised concerns 
about the proposal's application to foreign-located subadvisers. 
Several commenters called for FinCEN to fully exempt foreign-located 
advisers from the proposed rule.
    Final Rule: FinCEN is applying the requirements of the proposed 
rule to foreign-located investment advisers, and is clarifying the 
scope of their advisory activities that are subject to the

[[Page 72172]]

requirements in the final rule. Accordingly, the final rule will define 
``investment adviser'' to include foreign-located investment advisers 
that are registered or required to register with the SEC (RIAs, subject 
to the exemptions set forth in 1010.100(nnn)(ii) for certain types of 
RIAs) or that file reports with the SEC on Form ADV (ERAs). Including 
foreign-located investment advisers in this final rule is consistent 
with the BSA's express authorization for the Secretary to, by 
regulation, determine new types of financial institutions \120\ as well 
as the BSA's intelligence, national security, and counter-intelligence 
purposes, which are inherently international in nature.\121\ Moreover, 
this interpretation of authority granted by the BSA is aligned with 
FinCEN's existing approach applying BSA obligations to certain types of 
foreign-located BSA-defined financial institutions that have a nexus to 
the United States. FinCEN has considered the illicit finance risks 
arising from foreign-located investment advisers and the funds they 
advise, as well as the alternatives for mitigating these risks 
consistent with the purposes of the BSA enumerated at 31 U.S.C. 5311. 
For these reasons, FinCEN has determined that the requirement of a U.S. 
nexus provides a lawful basis for this rule to apply to foreign-located 
investment advisers.
---------------------------------------------------------------------------

    \120\ 31 U.S.C. 5312(a)(2)(Y).
    \121\ See 31 U.S.C. 5311.
---------------------------------------------------------------------------

    Section 1032.110 of the final rule defines a ``foreign-located 
investment adviser'' as an ``investment adviser whose principal office 
and place of business is outside the United States.'' Section 1032.111 
of the final rule sets forth the scope of a foreign-located investment 
adviser's obligations, stating that the requirements of part 1032 apply 
to a foreign-located investment adviser only with respect to its 
advisory activities that (i) take place within the United States, 
including through involvement of U.S. personnel of the investment 
adviser, such as the involvement of an agency, branch, or office within 
the United States, or (ii) provide advisory services to a U.S. person 
or a foreign-located private fund with an investor that is a U.S. 
person.\122\ With respect to services provided to a foreign-located 
private fund with an investor that is a U.S. person, as described 
below, the rule incorporates SEC definitions and standards for 
identifying investors that are U.S. persons in foreign-located private 
funds.
---------------------------------------------------------------------------

    \122\ In contrast, an adviser with its principal office and 
place of business in the United States must comply with the final 
rule with respect to all of its advisory activities.
---------------------------------------------------------------------------

    To determine whether an investment adviser is a foreign-located 
investment adviser (as defined at section 1032.110), the adviser must 
look to its ``principal office and place of business,'' which FinCEN 
considers to be the executive office of the investment adviser from 
which the officers, partners, or managers of the investment adviser 
direct, control, and coordinate the activities of the investment 
adviser.\123\ RIAs and ERAs are required to identify their principal 
office and place of business on Form ADV, making it clear which 
investment advisers consider themselves to be ``foreign-located 
investment advisers'' for the purposes of this final rule.
---------------------------------------------------------------------------

    \123\ This definition is consistent with that used by the SEC in 
regulations applicable to investment advisers. See 17 CFR 275-
222.1(b).
---------------------------------------------------------------------------

    Moreover, all foreign-located advisers subject to the final rule 
have a U.S. nexus with certain advisory activities such that they are 
required to or have chosen to register with or file reports with the 
SEC, and therefore are subject to SEC regulation. The Advisers Act 
requires registration of investment advisers that have a minimum amount 
of assets under management \124\ and who ``make use of the mails or any 
means or instrumentality of interstate commerce in connection with his 
or its business as an investment adviser,'' unless subject to an 
exemption, such as ERAs,\125\ and the scope of the registration 
requirement has been further refined in SEC regulations and guidance as 
discussed above. Moreover, de minimis ties to the United States do not 
automatically make a foreign-located investment adviser subject to the 
final rule, particularly because foreign private advisers as defined 
pursuant to the Advisers Act are not subject to the requirements of the 
final rule. An adviser may be a foreign private adviser if it: (i) has 
no place of business in the United States; (ii) has, in total, fewer 
than 15 clients in the United States and investors in the United States 
in private funds advised by the adviser; (iii) has aggregate assets 
under management attributable to these clients and investors of less 
than $25 million; and (iv) does not hold itself out generally to the 
public in the United States as an investment adviser.\126\ Foreign-
located RIAs and ERAs covered by the final rule therefore not only have 
sufficient nexus to the United States to trigger SEC registration or 
filing requirements, but also a U.S. nexus too great to qualify as a 
foreign private adviser (or have voluntarily chosen to be regulated as 
RIAs or ERAs).\127\
---------------------------------------------------------------------------

    \124\ Certain other investment advisers that make use of the 
mails or any means or instrumentality of interstate commerce in 
connection with their business as an investment adviser may also be 
permitted or required to register with the SEC. See footnote 23, 
supra.
    \125\ 15 U.S.C. 80b-3(a), (l), (m).
    \126\ See 15 U.S.C. 80b-2(a)(30), 80b-3(b)(3).
    \127\ Certain RIAs or ERAs may opt to register or report to the 
SEC despite the fact that they could rely on the foreign private 
adviser definition; such investment advisers have chosen to subject 
themselves to the U.S. regulatory requirements and supervision 
applicable to such advisers, and so will be subject to this final 
rule.
---------------------------------------------------------------------------

    As noted above, a foreign-located investment adviser's advisory 
activities must also have a U.S. nexus to be subject to the 
requirements of the final rule. Under section 1032.111, foreign-located 
investment adviser's advisory activities are subject to the 
requirements of the rule if the advisory activities: (i) take place 
within the United States, including through involvement of U.S. 
personnel of the investment adviser, such as the involvement of an 
agency, branch, or office within the United States, or (ii) provide 
advisory services to a U.S. person or a foreign-located private fund 
with an investor that is a U.S. person (subject to specified 
definitions of ``foreign-located private fund,'' ``investor,'' and 
``U.S. person'').
    For the purposes of section 1032.111, U.S. personnel means, 
regardless of citizenship, any director, officer, employee, or agent of 
the investment adviser conducting advisory activities from a U.S. 
agency, branch, or office of the investment adviser. U.S. personnel 
would be involved in advisory activities if, for example, an employee 
of the investment adviser manages assets of a client from a U.S. office 
or other U.S. workplace of the investment adviser, or if the employee 
works remotely from the United States on a regular basis. Conversely, a 
U.S. citizen employee of the investment adviser managing assets of a 
client from a non-U.S. office of the foreign-located investment adviser 
would generally not constitute U.S. personnel involved in advisory 
activities for this purpose.\128\ The term ``agency, branch, or 
office'' of the investment adviser is not exclusive, and the rule would 
apply to any location in the United States from which U.S. personnel of 
the foreign-located investment adviser perform advisory activity. For 
the avoidance of doubt, personnel that perform activity that is

[[Page 72173]]

clerical or administrative in nature are not involved in advisory 
activity for purposes of the final rule.\129\
---------------------------------------------------------------------------

    \128\ However, a U.S. employee (of a foreign-located investment 
adviser) whose advisory activities are undertaken from a non-U.S. 
office for the purpose of evading the final rule or as part of a 
course of conduct the employee undertook while based in the United 
States, would constitute U.S. personnel involved in advisory 
activities and be covered by the final rule.
    \129\ This discussion of ``clerical or administrative'' activity 
is intended to apply to foreign-located investment advisers only and 
is not intended to apply for any other purpose. This is because it 
aligns with the reporting of ``clerical workers'' on Item 5.A of 
Form ADV with which investment advisers are already familiar and 
enhances consistency with SEC regulation in a portion of the final 
rule that references several SEC regulations.
---------------------------------------------------------------------------

    For a foreign-located investment adviser, the final rule also 
applies to the provision of advisory services to a U.S. person or a 
foreign-located private fund with an investor that is a U.S. person. 
This includes, but is not limited to, providing investment advice to a 
U.S. person, regardless of the location from which such investment 
advice is provided. A foreign-located investment adviser would be 
providing advisory services to a U.S. person if, for example, the 
investment adviser manages assets from an office outside of the United 
States on behalf of an individual U.S. person.
    For purposes of determining a foreign-located investment adviser's 
activities subject to this rule, the final rule defines ``U.S. person'' 
as a person meeting the definition in 17 CFR 230.902(k), which is part 
of Regulation S under the Securities Act. The SEC relied on this 
definition for purposes of the foreign private adviser exemption 
because it provides specific rules when applied to various types of 
legal structures.\130\ FinCEN adopts the Regulation S definition for 
this reason, consistency with other SEC regulations cross-referenced in 
section 1032.111, and administrability because this definition is 
already familiar to investment advisers. This definition also includes 
an element designed to mitigate potential evasion concerns.\131\
---------------------------------------------------------------------------

    \130\ See 76 FR 39645, 39697-39678 (Jul. 6, 2011).
    \131\ 17 CFR 230.902(k)(1)(viii) (encompassing any corporation 
or partnership formed by a U.S. person principally for the purpose 
of investing in unregistered securities unless owned or incorporated 
by accredited investors who are not natural persons, estates or 
trusts).
---------------------------------------------------------------------------

    With respect to a foreign-located investment adviser's advisory 
activities to a foreign-located private fund, the final rule requires a 
foreign-located investment adviser to determine whether any foreign-
located private fund that it advises has at least one investor who is a 
U.S. person.\132\ This determination must be made with respect to every 
investor in that foreign-located private fund in accordance with SEC 
requirements familiar to private fund advisers. If a foreign-located 
private fund has at least one U.S. person investor, the foreign-located 
investment adviser must apply the final rule with respect to that 
foreign-located private fund. This standard is designed to be both 
administrable--it incorporates SEC standards for identifying investors 
that are U.S. persons in private funds--and tailored to address risks 
to the U.S. financial system through foreign-located private funds, 
which FinCEN has identified as presenting significant illicit finance 
risk.
---------------------------------------------------------------------------

    \132\ A U.S.-located private fund advised by a foreign-located 
investment adviser is itself a U.S. person under this definition, 
and so a foreign-located investment adviser will also be required to 
apply the final rule with respect to any U.S.-located private fund 
it advises, irrespective of the presence or absence of any U.S. 
person investors in such U.S.-located private fund.
---------------------------------------------------------------------------

    The final rule defines ``foreign-located private fund'' by 
reference to section 202(a)(29) of the Advisers Act, which defines 
``private fund'' to mean ``an issuer that would be an investment 
company, as defined in section 3 of the [Company Act] (15 U.S.C. 80a-
3), but for section 3(c)(1) or 3(c)(7) of that Act.'' The ``foreign-
located'' aspect of the definition refers to a fund that is a legal 
entity or arrangement that is incorporated or organized outside the 
United States and therefore is not a U.S. person for purposes of the 
final rule. This definition therefore covers the types of foreign-
located private funds advised by ERAs and that FinCEN has identified as 
giving rise to illicit finance risks. It is also commonly used by 
investment advisers in complying with the federal securities laws, 
including, for example, in completing multiple portions of Form 
ADV.\133\
---------------------------------------------------------------------------

    \133\ See Form ADV Glossary, defining Private Fund to mean ``An 
issuer that would be an investment company as defined in section 3 
of the Investment Company Act of 1940 but for section 3(c)(1) or 
3(c)(7) of that Act.''
---------------------------------------------------------------------------

    The final rule defines ``investor'' by reference to Advisers Act 
Rule 202(a)(30)-1(c)(2), under which a foreign private adviser can 
determine whether private funds it advises have more than 14 
``investors in the United States.'' That rule, in turn, refers to 
sections 3(c)(1) and 3(c)(7) of the Company Act, which generally 
exclude certain issuers from the definition of investment company based 
on the number of beneficial owners or qualifications of their security 
holders, respectively.\134\ Consistent with statements by the SEC and 
its staff and the SEC's underlying authorities,\135\ depending upon the 
facts and circumstances, persons other than the nominal holder of a 
security issued by a private fund may be counted as the beneficial 
owner under section 3(c)(1), or be required to be a qualified purchaser 
under section 3(c)(7).\136\ For purposes of section 3(c)(1), if a 
company owns 10 percent or more of the outstanding voting securities of 
the issuer (the prospective private fund), and is, or but for section 
3(c)(1) or 3(c)(7) of the Company Act, would be an investment company, 
the issuer must ``look through'' that investing company to the holders 
of the company's securities.\137\ In the context of this rule, a 
foreign-located investment adviser is required to perform the same look 
through with respect to any private fund it advises that relies on 
section 3(c)(1) of the Company Act with two modifications: (1) the 
foreign-located investment adviser must count beneficial owners of a 
private fund's commercial paper as investors (consistent with Advisers 
Act Rule 202(a)(30)-1(c)(2)); and (2) a person who is considered a 
beneficial owner for purposes of section 3(c)(1) will be considered an 
``investor'' in the private fund despite holding its interests 
indirectly. If this look through results in a U.S. person being 
considered an investor in the private fund, the foreign-located private 
adviser must apply the requirements of the final rule to that fund.
---------------------------------------------------------------------------

    \134\ Section 3(c)(1), 15 U.S.C. 80a-3(c)(1), excludes from the 
definition of investment company a privately-offered issuer having 
fewer than a certain number of beneficial owners. Section 3(c)(7), 
15 U.S.C. 80a-3(c)(7) excludes from the definition of investment 
company a privately-offered issuer the securities of which are owned 
exclusively by ``qualified purchasers'' (generally, persons and 
entities owning investments whose value exceeds a specified 
threshold).
    \135\ See, e.g., 76 FR 39645, 39676 (Jul. 6, 2011); Privately 
Offered Investment Companies, Final Rule, 62 FR 17512, 17519, 17524 
(Apr. 9, 1997) (``The Commission understands that there are other 
forms of holding investments that may raise interpretative issues 
concerning whether a Prospective Qualified Purchaser `owns' an 
investment. For instance, when an entity that holds investments is 
the `alter ego' of a Prospective Qualified Purchaser (as in the case 
of an entity that is wholly owned by a Prospective Qualified 
Purchaser who makes all the decisions with respect to such 
investments), it would be appropriate to attribute the investments 
held by such entity to the Prospective Qualified Purchaser.''); see 
also Cornish & Carey Commercial, Inc., SEC Staff No-Action Letter 
(June 21, 1996) (staff discussed the application of section 
3(c)(1)(A) to an issuer relying on section 3(c)(1)), available at 
https://www.sec.gov/divisions/investment/noaction/1996/cornishcarey022696.pdf.
    \136\ Section 3(c)(1)(A) of the Company Act requires a private 
fund relying on section 3(c)(1) to ``look through'' any company that 
owns 10 percent or more of the company's voting securities. ``Voting 
security'' is defined in section 2(a)(42) of the Company Act, 15 
U.S.C. 80a2(a)(42). In contrast, this 10 percent look-through is not 
required for purposes of section 3(c)(7).
    \137\ See 15 U.S.C. 80a-3(c)(1)(A).
---------------------------------------------------------------------------

    Similarly, for purposes of both section 3(c)(1) and section 
3(c)(7), a foreign-located investment adviser will be required to 
``look through'' any entity

[[Page 72174]]

that is formed for the purpose of investing in a foreign-located 
private fund it advises.\138\ For purposes of the final rule, if a 
foreign-located investment adviser determines that an investing entity 
has been formed for purposes of investment in the private fund, such an 
adviser must look through the entity to determine whether it has U.S. 
person investors. Consistent with statements by the staff of the SEC 
and the SEC's underlying authorities,\139\ a foreign-located investment 
adviser's determination that an entity is formed for the specific 
purpose of investing in a foreign-located private fund will depend upon 
an analysis of all of the surrounding facts and circumstances 
(including any knowledge that the foreign-located adviser has regarding 
the identity of its customers). Thus, to the extent that a foreign-
located investment adviser determines that there is an underlying U.S. 
person investor (by conducting a look-through or because of other 
information available to the foreign-located investment adviser), the 
foreign-located investment adviser must apply the final rule with 
respect to the foreign-located private fund in which the U.S. person is 
indirectly invested.
---------------------------------------------------------------------------

    \138\ See, e.g., 17 CFR 270.2a51-3(a) (discussing an entity 
formed for the purpose of acquiring securities of an issuer relying 
on section 3(c)(7)); Cornish & Carey Commercial, Inc., SEC Staff No-
Action Letter (June 21, 1996) (staff discussing an entity formed for 
the purpose of acquiring securities of an issuer relying on section 
3(c)(1)), available at https://www.sec.gov/divisions/investment/noaction/1996/cornishcarey022696.pdf. For purposes of section 
3(c)(1), SEC staff guidance states that if a company or fund invests 
more than 40 percent of its assets in a 3(c)(1) fund, it is 
potentially formed for the purpose of investing in a 3(c)(1) fund. 
For purposes of section 3(c)(7), 17 CFR 270.2a51-3(a) requires an 
investment adviser to determine whether the beneficial owners of the 
entity formed for purposes of investment in the fund are also 
qualified purchasers.
    \139\ See, e.g., American Bar Association Section of Business 
Law, SEC Staff No-Action Letter (Apr. 22, 1999) at 19-20 (describing 
circumstances under which an entity would be deemed to be formed for 
the specific purpose of acquiring securities in a private fund that 
relies on section 3(c)(7)), available at https://www.sec.gov/divisions/investment/noaction/1999/aba042299.pdf.
---------------------------------------------------------------------------

    These tests are incorporated into the final rule in order to 
address the illicit finance risks posed by foreign-located investment 
advisers. The greatest risks arise, as discussed above, from private 
funds advised by foreign-located investment advisers. The requirement 
of a U.S. nexus in the form of at least one investor that is a U.S. 
person is consistent with FinCEN's desire to focus on risks to the U.S. 
financial system. The presence of a U.S. person investor increases the 
likelihood that illicit finance risk associated with a private fund 
affects the U.S. financial system and the likelihood that U.S. persons 
might be involved in the underlying illicit finance activity. Although 
the presence of one investor that is a U.S. person requires the 
investment adviser to apply the requirements of the final rule to the 
entirety of a private fund, FinCEN notes that the fund as a whole is 
the customer of the foreign-located investment adviser. By their 
nature, private funds involve the commingling of investor assets in a 
pooled vehicle. As previously detailed in the Risk Assessment, the 
pooled nature of such funds may be used to obscure ownership of 
investments (which may present the possibility of higher returns on 
capital) by illicit actors who seek stable returns and do not need 
immediate access to capital.\140\
---------------------------------------------------------------------------

    \140\ See Risk Assessment, supra note 2, at 16.
---------------------------------------------------------------------------

    While FinCEN considered other thresholds for establishing an 
appropriate U.S. nexus, including whether or not to apply the rule's 
obligations with respect to non-U.S. private funds with U.S. investors, 
FinCEN balanced addressing the relevant illicit finance risks to the 
U.S. financial system (such as arising from investments by illicit 
actors in non-U.S. private funds that are commingled with funds from 
U.S. investors and enter the U.S. financial system),\141\ the purposes 
of the BSA, and administrability. FinCEN also considered, as noted by a 
commenter, the SEC's approach in applying substantive provisions of the 
Advisers Act and the purposes underlying that approach. FinCEN further 
considered other SEC rules and practices, such as the foreign private 
adviser exemption and Advisers Act Rule 202(a)(30)-1(c)(2). The SEC 
standards incorporated in section 1032.111 are used to focus on illicit 
finance risks associated with private funds specifically and are 
familiar to foreign-located investment advisers from SEC 
regulations.\142\ By setting a clear minimum standard of at least one 
U.S. private fund investor defined by reference to Advisers Act Rule 
202(a)(30)-1(c)(2), this places clear limits on the ability of 
investment advisers or illicit actors seeking to obscure their 
ownership or control of certain assets through a private fund to avoid 
application of the final rule by admitting U.S. persons as indirect 
investors through intermediate entities. Advisers must ``look through'' 
nominee and similar arrangements to the underlying holders of private 
fund-issued securities to determine whether the private fund has an 
investor that is a U.S. person.
---------------------------------------------------------------------------

    \141\ Id. at 16-20.
    \142\ The standards for determining beneficial ownership of 
investments in private funds, including by U.S. persons, should be 
familiar to investment advisers from SEC reporting requirements and 
determining the status of such funds under the Company Act. See 
Instructions to Form PF, Section 2b Item 16 (requiring reporting of 
a fund's equity that is beneficially owned by various categories of 
investors, including individuals who are U.S. persons); Question 16 
of Section 7.B.(1) of Schedule D to Form ADV (requiring the 
reporting of the percentage of a private fund's beneficial owners 
that are non-U.S. persons); 15 U.S.C. 80b-2(a)(30) and 17 CFR 
275.202(a)(30)-1 (foreign private adviser exemption). See also 76 FR 
39645, 39678 (Jul. 6, 2011) (``A non-U.S. adviser would need to 
count the same U.S. investors [as in connection with Investment 
Company Act exclusions] (except for holders of short-term paper with 
respect to a fund relying on section 3(c)(1)) in order to rely on 
the foreign private adviser exemption. In this respect, therefore, 
the look-through requirement of the foreign private adviser 
exemption will generally not impose any new burden on advisers to 
non-U.S. funds.'').
---------------------------------------------------------------------------

    Moreover, a foreign-located investment adviser retains the option 
of availing itself of foreign private adviser status if it has limited 
U.S. ties and does not wish to apply the requirements of the final rule 
to private funds with lower levels of U.S. investment. Given this 
option, FinCEN anticipates it is unlikely that a significant number of 
foreign-located investment advisers will be required to apply the 
requirements of the rule on the basis of having a small number of 
investors that are U.S. persons or small amount of U.S. investment. 
When a foreign-located investment adviser's activities involving a 
private fund fall within the scope of the final rule, the foreign-
located investment adviser will be expected to subject its advisory 
activities with respect to the fund to internal policies, procedures, 
and controls reasonably designed to prevent the investment adviser from 
being used for money laundering, terrorist financing, or other illicit 
finance activities and to achieve compliance with the applicable 
provisions of the BSA and implementing regulations. Advisers are often 
involved in implementing such internal policies, procedures, and 
controls for their funds for both AML/CFT requirements (if the fund 
implements such requirements voluntarily or to comply with the AML/CFT 
laws of a foreign jurisdiction) as well as requirements under 
securities or other corporate laws. Therefore, foreign-located 
investment advisers should be able to apply the requirements of this 
final rule, including applicable internal policies, procedures, and 
controls, to advisory activities with respect to these private funds, 
and doing so will help prevent these funds from becoming gateways into 
the U.S. financial system for illicit finance activity.

[[Page 72175]]

    Certain of a foreign-located investment adviser's advisory 
activities are not subject to the final rule. This is similar to the 
SEC's regulation of investment advisers pursuant to the Advisers Act: 
non-U.S. advisers are not required to apply the substantive provisions 
of the Advisers Act when advising non-U.S. clients.\143\ While taking 
into account the distinct purposes of the BSA, FinCEN believes that the 
final rule's requirements should not apply to a foreign-located adviser 
when it: (i) provides services exclusively to a foreign-located 
person,\144\ and (ii) the personnel providing such advisory services 
are all outside of the United States as discussed above.
---------------------------------------------------------------------------

    \143\ See, e.g., 76 FR 39645, 39681 (Jul. 6, 2011); SEC No-
Action Letter, Uniao de Bancos Brasileiros S.A. (Unibanco), 1992 WL 
183054 at *3 (Jul. 28, 1992), available at https://www.sec.gov/divisions/investment/noaction/1992/uniaodebancos072892.pdf. The 
SEC's approach considers the location of the client. The final rule 
does not modify the SEC's position on the application of the 
Advisers Act to non-U.S. investment advisers.
    \144\ Other than a private fund with a U.S. person investor, as 
described above.
---------------------------------------------------------------------------

    To ensure that activities within the scope of the rule are properly 
included, a foreign-located investment adviser should (i) determine to 
the extent reasonable and practicable whether its customers and the 
investors in its private funds are within the scope of this rule based 
upon the regulatory text as clarified in this preamble and any relevant 
future guidance that FinCEN might issue, and (ii) ensure that it does 
not provide advisory services to its private fund customers in a manner 
that results in the adviser being unable to identify a potential U.S. 
customer or investor.
    The final rule states that upon request, a foreign-located 
investment adviser must make available to FinCEN or the SEC (in its 
capacity as delegated examiner for this rule) records and reports 
required under this rule and any other records that it has retained 
regarding the scope of its activities covered by this rule. As 
discussed below, the records that an investment adviser--including a 
foreign-located investment adviser--is required to maintain to comply 
with the requirements of the final rule include those required when 
developing and implementing an AML/CFT program as required under 
section 1032.210, including but not limited to a written AML/CFT 
program that includes internal policies, procedures, and controls, as 
well as those required by subpart D of the final rule, which are 
generally records of certain transactions and transfers of funds.
    As for any investment adviser subject to this final rule, for a 
foreign-located investment adviser, properly scoping the advisory 
activities covered by its AML/CFT program is an important part of 
ensuring that its AML/CFT program is reasonably designed to prevent the 
investment adviser from being used for money laundering, terrorist 
financing, or illicit finance activities, and of achieving and 
monitoring compliance. As part of establishing a risk-based and 
reasonably designed AML/CFT program, and to comply with other 
requirements in this final rule, a foreign-located investment adviser 
should generate records to reflect how it properly scoped the advisory 
activities covered by the final rule. A foreign-located adviser must 
provide such records to FinCEN and the SEC upon request.
    The final rule's treatment of foreign-located investment advisers 
broadly is consistent with how FinCEN has treated other foreign-located 
financial institutions, such as foreign-located money service 
businesses (MSBs) and broker-dealers. Specifically, the definition of 
MSBs under FinCEN's regulations includes persons engaged in specified 
activities ``wherever located, doing business . . . wholly or in 
substantial part'' within the United States.\145\ ``This includes but 
is not limited to the maintenance of any agent, agency, branch, or 
office within the United States.'' \146\ FinCEN's 2011 MSB final rule 
explained that whether a person engages in MSB activities is based on 
``all of the facts and circumstances,'' including whether U.S. persons 
are obtaining services from the foreign-located MSBs.\147\ FinCEN 
applies the same principles taking into account all of the facts and 
circumstances of a foreign-located investment adviser's activities, 
tailored as described above to the investment adviser sector, in this 
rule.
---------------------------------------------------------------------------

    \145\ 31 CFR 1010.100(ff).
    \146\ Id.
    \147\ FinCEN, Bank Secrecy Act Regulations; Definitions and 
Other Regulations Relating to Money Services Businesses, Final Rule, 
76 FR 43585, 43588 (Jul. 21, 2011).
---------------------------------------------------------------------------

    Foreign-located broker-dealers that are registered or required to 
be registered with the SEC are similarly subject to BSA requirements. 
FinCEN regulations define a ``broker-dealer'' as a ``person registered 
or required to be registered with the SEC under the Exchange Act, 
except persons who register pursuant to 15 U.S.C. 78o(b)(11).'' \148\ 
Foreign located broker-dealers may be required to register with the 
SEC,\149\ and if they are required to register, such broker-dealers are 
required to comply with applicable BSA requirements for broker-dealers, 
including the maintenance of an AML/CFT program and compliance with BSA 
recordkeeping requirements.\150\ While broker-dealers registered with 
the SEC that are located outside the United States are not required to 
file SARs,\151\ this is a policy choice that FinCEN made for broker-
dealers based on the relevant considerations for that sector and does 
not reflect an interpretation of FinCEN's authority to require such 
reporting.\152\
---------------------------------------------------------------------------

    \148\ See 31 CFR 1023.100(b). The BSA regulations also use the 
related term ``broker or dealer in securities,'' which is defined 
based on the same provisions of the Securities and Exchange Act. 31 
CFR 1010.100(h).
    \149\ See SEC, Registration Requirements for Foreign Broker 
Dealers, Final Rule, 54 FR 30013, 30016 (Jul. 18, 1989); Guy P. 
Lander, Registration requirement and jurisdiction, 3 U.S. Sec. Law 
for Financial Trans. Sec.  13:2 (2d ed.).
    \150\ 31 CFR 1023.210, 1023.400, 1023.410.
    \151\ See 31 CFR 1023.320(a)(1).
    \152\ Amendment to the Bank Secrecy Act Regulations--Requirement 
that Brokers or Dealers in Securities Report Suspicious 
Transactions, Final Rule, 67 FR 44048, 44052 (Jul. 1, 2002).
---------------------------------------------------------------------------

    Although MSBs and broker-dealers located abroad have been subject 
to FinCEN's regulations under the BSA, some commenters suggested that 
the final rule's application to foreign-located investment advisers 
would contravene longstanding territorial limits on the application of 
the BSA. The BSA authorizes the Secretary of the Treasury (since re-
delegated to FinCEN) to define financial institutions and does not 
place territorial limitations on that authority. The BSA does not 
define the term ``financial institution'' in general and simply lists 
the types of businesses that may be financial institutions at 31 U.S.C. 
5312(a)(2) without specifying where they may be located.\153\ FinCEN 
has interpreted this authority to enable regulation of foreign-located 
institutions that operate within the United States or provide services 
to persons in the United States. Moreover, as discussed above, the BSA 
authorizes the Secretary to determine, by regulation, new types of 
financial institutions \154\ and the final rule is an exercise of that 
authority. The BSA confers authority to apply significant obligations 
of the final rule--notably the AML/CFT program and SAR requirements--to 
all ``financial institutions'' as defined by FinCEN.\155\ FinCEN 
therefore interprets the statutory authority to determine investment 
advisers as a financial

[[Page 72176]]

institution to impose such obligations on certain foreign-located 
investment advisers in the final rule.
---------------------------------------------------------------------------

    \153\ 31 U.S.C. 5312(a)(2).
    \154\ See 31 U.S.C. 5312(a)(2)(Y).
    \155\ See, e.g., 31 U.S.C. 5318(g)(1) (SARs); 31 U.S.C. 
5318(h)(1) (AML/CFT program).
---------------------------------------------------------------------------

    Certain requirements of the final rule, however--in particular the 
recordkeeping obligations of subpart D and the special measures of 
subpart F--apply to ``domestic financial institution'' as defined in 
the BSA (also sometimes referred to as a ``domestic financial 
agency'').\156\ The BSA describes the term ``a domestic financial 
institution'' as applying to ``an action in the United States of a 
financial agency or institution.'' \157\ Congress thus defined a 
domestic financial institution based on where an institution acts 
rather than where it is organized or headquartered. FinCEN interprets, 
as it has in the past, ``an action in the United States'' to include 
actions with a nexus to the United States.
---------------------------------------------------------------------------

    \156\ See, e.g., 31 U.S.C. 5318(a)(2) (recordkeeping); 31 U.S.C. 
5318A(a)(1) (special measures).
    \157\ 31 U.S.C. 5312(b)(1).
---------------------------------------------------------------------------

    While the final rule's AML/CFT program and SAR requirements rest on 
FinCEN's broader authority to define ``financial institutions,'' 
through its focus on a U.S. nexus, the final rule's approach with 
respect to foreign-located financial institutions is consistent with 
the reach of ``domestic financial institution'' as defined in the BSA. 
Requirements for foreign-located investment advisers apply when a 
foreign-located investment adviser engages in advisory activities with 
a U.S. nexus, whether by having staff in the United States or advising 
U.S. persons or advising foreign-located private funds with an investor 
who is a U.S. person. FinCEN took a similar approach with regard to 
foreign-located MSBs in requiring them to comply with its regulations 
for activities with a U.S. nexus even if some portion of the activity 
occurs in a foreign jurisdiction (such as transmitting funds to the 
United States from abroad). Thus, in accord with existing practice, 
FinCEN is regulating foreign-located investment advisers with a U.S. 
nexus based upon Congress' authorization of the Secretary to determine 
financial institutions by regulation and to regulate foreign-located 
institutions acting within the United States.\158\
---------------------------------------------------------------------------

    \158\ See 31 U.S.C. 5312(a)(2)(Y); 31 U.S.C. 5312(b)(1).
---------------------------------------------------------------------------

    Nonetheless, one commenter argued that Congress intended to limit 
the application of the BSA to financial institutions located in the 
United States when it passed the Currency and Foreign Transactions 
Reporting Act in 1970 (the ``1970 Act''), which later became part of 
the BSA. At the outset, the text of the 1970 Act is not limited in this 
manner nor is FinCEN aware that Congress otherwise intended it to be. 
Section 203 of the 1970 Act, which defines the term ``financial 
institution,'' states that ``the term `domestic', used with reference 
to institutions or agencies, limits the applicability of the provision 
wherein it appears to the performance by such institutions or agencies 
of functions within the United States.'' \159\ Similar to the term 
``domestic financial institution'' in the current BSA, this use of the 
term ``domestic'' grants jurisdiction based upon where a financial 
institution acts--in the 1970 Act, by performing certain functions--
rather than where it is located. Even if Congress intended to limit the 
reach of the 1970 Act with regard to foreign located financial 
institutions, the 1970 Act was a distinct statute focused on ensuring 
that banks and other institutions maintained sufficient records to 
assist government investigations.\160\
---------------------------------------------------------------------------

    \159\ Public Law 91-508, Title II, sec. 203(e), (f).
    \160\ Id. at Sec.  202.
---------------------------------------------------------------------------

    While maintaining certain records to assist in government 
investigations remains one of the purposes of the BSA, Congress has 
repeatedly amended the BSA to expand its scope, including the Money 
Laundering Control Act of 1986; \161\ the Annunzio-Wylie Anti-Money 
Laundering Act of 1992; \162\ the USA PATRIOT Act of 2001,\163\ and the 
AML Act.\164\ For example, Title III of the USA PATRIOT Act of 2001--
styled the International Money Laundering Abatement and Anti-Terrorist 
Financing Act--amended the BSA to address the threat of international 
terrorism,\165\ including the BSA's AML program and SAR filing 
requirements.\166\ The AML Act amended the purposes of the BSA to 
include addressing a number of international phenomena, including the 
facilitation of ``intelligence and counterintelligence activities . . . 
to protect against terrorism'' and assessments to ``safeguard the 
national security of the United States.'' \167\ These amendments to the 
BSA since 1970, among others, demonstrate that the BSA is intended to 
protect the United States against international threats to the 
financial system and national security, among other purposes, which may 
involve regulating some conduct occurring only in part within the 
United States.
---------------------------------------------------------------------------

    \161\ Public Law 99-570, Title I, Subtitle H.
    \162\ Public Law 102-550, Title XV.
    \163\ Public Law 107-56, Title III.
    \164\ Public Law 116-283, Div. F.
    \165\ Public Law 107-56, Title III, sec. 358(a), (b).
    \166\ See, e.g., id. at sec. 351-52.
    \167\ See id. at 6101(a) (codified at 31 U.S.C. 5311).
---------------------------------------------------------------------------

    Commenters further argue that FinCEN has changed its position on 
the scope of the BSA. In so doing, they point to a Treasury report from 
1987,\168\ the SAR requirements applicable to broker-dealers, and the 
2003 investment adviser NPRM. These sources are inapposite to the final 
rule. The 1987 report was issued in response to a statutory requirement 
to inform Congress regarding BSA regulation of the foreign branches of 
U.S. banks at the time.\169\ The concept of a foreign ``branch'' of a 
U.S. bank has a specific legal meaning tied to how banks are supervised 
and regulated that is not applicable in the context of investment 
advisers, which are a different type of financial institution.\170\ 
Moreover, the 1987 report was written before the Annunzio-Wylie Anti-
Money Laundering Act of 1992,the USA PATRIOT Act of 2001, and the AML 
Act expanded the scope and purposes of the BSA as mentioned above. 
Similarly, another type of financial institution--broker-dealers--are 
not required to file SARs when located abroad. This is a policy choice 
that FinCEN made for broker-dealers based on the relevant 
considerations for that sector and does not reflect an interpretation 
of FinCEN's authority to require such reporting.\171\ Moreover, 
foreign-located investment advisers currently represent a significant 
proportion of the market and therefore account for significant illicit 
finance risks as discussed above.
---------------------------------------------------------------------------

    \168\ Secretary of the Treasury, Money Laundering and the Bank 
Secrecy Act: The Question of Foreign Branches of Domestic Financial 
Institutions (Jul. 29, 1987).
    \169\ See id. at 30-33.
    \170\ The term ``branch'' is used in the final rule for its 
plain meaning rather than this specific concept in banking law.
    \171\ 67 FR 44048, 44052 (Jul. 1, 2002).
---------------------------------------------------------------------------

    FinCEN has also determined not to apply the language of its 2003 
proposed rule for investment advisers and fully exempt all foreign-
located RIAs and ERAs from the requirements of the proposed rule.\172\ 
The approach taken in the final rule is consistent with FinCEN's 2015 
proposed rule for investment advisers \173\ and results from

[[Page 72177]]

the significant growth of foreign investment into the United States 
from offshore financial centers and identified misuse of the investment 
adviser sector by transnational illicit finance threats (as identified 
in the Risk Assessment) in the two decades since the 2003 proposed rule 
was issued.
---------------------------------------------------------------------------

    \172\ See FinCEN, Anti-Money Laundering Programs for Investment 
Advisers, Notice of Proposed Rulemaking, 68 FR 23646, 23652 (May 5, 
2003). The 2003 proposed rule would have defined an investment 
adviser to be only persons ``whose principal office and place of 
business is located in the United States.''
    \173\ FinCEN, Anti-Money Laundering Program and Suspicious 
Activity Report Filing Requirements for Registered Investment 
Advisers, Notice of Proposed Rulemaking, 80 FR 52680, 52684 (Sept. 
1, 2015). The 2015 proposed rule would have defined an investment 
adviser to be any person ``who is registered or required to register 
with the SEC under section 203 of the Investment Advisers Act of 
1940'' and, accordingly, would have applied to foreign-located 
investment advisers.
---------------------------------------------------------------------------

    One commenter stated that foreign-located advisers could face 
conflict of laws and compliance concerns due to local laws where they 
are based, particularly data protection laws that limit the transfer of 
personal data. The commenter does not cite any example of a law that 
would create such a conflict, and FinCEN has not encountered such a 
conflict in the course of regulating other financial institutions 
located outside the United States. FinCEN expects investment advisers, 
like other BSA-defined financial institutions, to comply with their 
obligations under the BSA, and further believes foreign jurisdictions 
are unlikely to interpret their laws to conflict with or otherwise 
impede the final rule because the rule is consistent with FATF 
standards and the global interest in reducing illicit finance.\174\ 
Nonetheless, while FinCEN expects financial institutions to comply with 
obligations under the BSA as a matter of course, financial institutions 
seeking guidance on this rule may submit requests for guidance to 
FinCEN if they encounter unexpected difficulties in doing so.\175\
---------------------------------------------------------------------------

    \174\ See, e.g., FATF, International Standards on Combating 
Money Laundering and the Financing of Terrorism & Proliferation, the 
FATF Recommendations (Updated November 2023), at 10, available at 
www.fatf-gafi.org/en/publications/Fatfrecommendations/Fatf-recommendations.html, (FATF Recommendation 2, stating that national 
AML/CFT policies and procedures should ``ensure the compatibility of 
AML/CFT/CPF requirements with Data Protection and Privacy rules and 
other similar provisions'').
    \175\ For questions regarding the BSA and FinCEN's implementing 
regulations, investment advisers may contact FinCEN's Regulatory 
Support Section at 1-800-767-2825 or email [email protected].
---------------------------------------------------------------------------

    Although one commenter said that regulating foreign-located 
advisers would ``deprive'' investors that are U.S. persons of their 
skills through higher costs and incentivize foreign-located advisers to 
avoid U.S. ties, FinCEN does not believe that this is the case. The 
United States is the world's largest and most competitive financial 
market and the requirements of this rule with respect to foreign-
located investment advisers are substantially similar to the BSA 
requirements applicable to other non-U.S.-based financial institutions, 
which have not unduly impeded access by investors that are U.S. persons 
to financial institutions located abroad or inhibited foreign financial 
institutions from developing ties to the United States. And even if 
there are some effects along these lines, this would be outweighed by 
the increased protection of the U.S. financial system and U.S. national 
security due to the scope of the final rule.
    These benefits also outweigh the remaining concerns raised by 
commenters about covering foreign-located advisers. Commenters argued 
that foreign-located advisers located in FATF-compliant jurisdictions, 
or certain similar AML/CFT regimes such as in the United Kingdom and 
the European Union, should be exempt from the requirements of the final 
rule. While a jurisdiction's compliance with FATF standards is helpful 
to the international effort against illicit finance, it is not a 
replacement for U.S. regulation where the institutions have significant 
links to the U.S. financial system. For instance, without a SAR filing 
obligation, under certain circumstances U.S. law enforcement would have 
to rely on information from foreign authorities to detect U.S.-based 
illicit activity involving foreign-located investment advisers. Another 
commenter raised concerns about foreign-located subadvisers' ability to 
comply with the requirements of the final rule. FinCEN addresses the 
application of the final rule to subadvisers (both U.S. and foreign-
located) below. If such a foreign-located investment adviser cannot 
exclude subadvisory activity from its AML/CFT program, it may work with 
the primary adviser and others to address these issues.
    FinCEN believes that concerns raised by commenters are not 
sufficient to justify reducing the scope of the final rule to exclude 
foreign-located investment advisers or to re-issue the rule to seek 
further comment on this issue. As described above with respect to RIAs 
and ERAs generally, FinCEN has considered potential AUM thresholds, 
including a $100 million U.S. AUM threshold for foreign-located ERAs, 
and appreciates commenters' concerns about the potential burden on 
relatively smaller entities to comply with the rule. Indeed, FinCEN has 
excluded from the final rule certain smaller and mid-sized RIAs. FinCEN 
similarly has considered comments encouraging FinCEN to focus on U.S. 
AUM and U.S. activities and operations, which informed FinCEN's 
determination to limit the scope of foreign-located advisers' advisory 
activities subject to the rule and to exclude foreign private advisers. 
However, as described above with respect to ERAs generally and as 
reflected in the Risk Assessment, FinCEN has determined that smaller 
ERAs present generally higher illicit finance risks than RIAs that do 
not advise private funds, especially those RIAs with lower or zero AUM 
excluded from the scope of this rule. Moreover, for ERAs, lower gross 
asset value of private funds advised in many cases does not correspond 
to lower illicit finance risk. FinCEN is concerned that an AUM 
threshold for smaller ERAs, including smaller foreign-located ERAs, 
would also be challenging to administer, for similar reasons described 
above.\176\
---------------------------------------------------------------------------

    \176\ See supra Section III.B.3.
---------------------------------------------------------------------------

5. State-Registered Investment Advisers
    Proposed Rule: FinCEN did not include State-registered investment 
advisers in the scope of the proposed rule but requested comment on the 
illicit finance risk for State-registered investment advisers and 
whether they should be included in the scope of the final rule.
    Comments Received: Some commenters questioned FinCEN's exclusion of 
State-registered investment advisers from the expanded application of 
the rule. Three commenters requested that State-registered investment 
advisers be added to the definition of ``investment adviser'' in the 
proposed rule. The commenters claimed that excluding State-registered 
investment advisers from the requirements of the proposed rule may 
permit bad actors to exploit inadequate technology or perceived 
weaknesses in the oversight or regulation of State-registered 
investment advisers to circumvent AML/CFT controls at financial 
institutions. One commenter noted that certain state financial 
institutions have already emerged as hotspots for those who wish to 
hide their assets and minimize their tax burdens, especially through 
trusts. One commenter also recommended that, despite increased costs, 
State-registered investment advisers be subject to the proposed rule 
and be required to register with the SEC, and asserted that increasing 
costs may be ``partly offset by taxes on money that may have been 
laundered.'' Two commenters also suggested that FinCEN assess illicit 
finance activity involving investment advisers linked to Tribal 
activity.
    Two commenters agreed with FinCEN's approach to not apply the 
proposed rule to State-registered investment advisers, but advised that 
FinCEN continue to monitor State-registered investment advisers for 
illicit finance risks. One commenter stated

[[Page 72178]]

that money laundering risk posed by State-registered advisers should be 
lower than for RIAs and ERAs as State-registered advisers have lower 
AUM than RIAs. This commenter also stated that State-registered 
advisers are often comprised of a single person and thus know their 
customers personally.
    Final Rule: In the final rule, FinCEN is not including State-
registered investment advisers in the definition of ``investment 
adviser.'' FinCEN notes that while State-registered investment advisers 
may be misused to facilitate illicit finance activity, FinCEN continues 
to assess they are at lower risk for such activity than RIAs or ERAs. 
As noted by one commenter, State-registered advisers are smaller, in 
terms of customers, and tend to be localized. In addition, Treasury's 
Risk Assessment found few examples of State-registered investment 
advisers being used to move illicit proceeds or facilitate other 
illicit finance activity. Furthermore, including State-registered 
investment advisers within the scope of the definition of ``investment 
adviser'' would create significant challenges in monitoring compliance 
with AML/CFT requirements, as the SEC currently has no authority to 
examine them for compliance with the Advisers Act or the rules 
thereunder.
    Given State-registered advisers' lower risk and the potentially 
disproportionate cost of imposing AML/CFT requirements on such 
advisers, FinCEN assesses that the final rule is less likely to achieve 
the same degree of benefits as for RIAs and ERAs. However, FinCEN will 
continue to monitor activity involving State-registered investment 
advisers for indicia of money laundering, terrorist financing, or other 
illicit finance activities and may consider regulatory measures if 
appropriate.
6. Foreign Private Advisers and Family Offices
    Proposed Rule: FinCEN's proposed regulation did not apply to 
foreign private advisers or family offices because such entities are 
not RIAs or ERAs pursuant to the Advisers Act and its implementing 
regulations. FinCEN sought comment on whether any excluded entities, in 
particular family offices, should be included in the scope of the 
proposed rule.
    Comments Received: Five commenters opposed the exclusion of foreign 
private advisers and family offices from the scope of the proposed 
regulation, arguing that the definitions under the Advisers Act that 
exclude foreign private advisers and family offices from SEC regulation 
bear little relevance to FinCEN's mandate to reduce illicit finance 
risks and the purposes of the proposed regulation. These commenters 
expressed concern that excluding foreign private advisers and family 
offices would simply lead some entities, including those engaged in 
illicit activity, to ``re-classify'' as family offices or foreign 
private advisers, thereby reducing the regulation's utility.
    Other commenters noted the growth of the family office sector, 
noting one study of global family offices that found the average AUM 
for family offices was $900 million, and that these family offices had 
approximately half of their investments in North America. Another 
commenter cited cases demonstrating illicit finance risks involving 
family offices. Regarding foreign private advisers, one commenter noted 
that in 2022, foreign private advisers reported that roughly 40 percent 
of clients and 28 percent of assets were reportedly sourced outside the 
United States. On this basis, these commenters proposed that FinCEN 
amend the proposed regulation to include such entities, despite the 
scope of the Advisers Act and the SEC's current examination authority.
    Final Rule: FinCEN recognizes that foreign private advisers and 
family offices may face illicit finance risks that could be mitigated 
through their inclusion in the rule. However, the risks are not 
identical to those posed by other investment advisers. For example, 
family offices, as defined pursuant to regulations issued under the 
Advisers Act, cannot have advisory clients outside of family members 
and certain additional ``family clients.'' \177\ This makes it easier 
to ascertain the source of funds for such customers and less attractive 
for those seeking to obscure their identity or their source of funds. 
Foreign private advisers, to qualify for the exclusion from SEC 
registration, have fewer U.S. clients and fewer ties to the U.S. 
financial system than RIAs and ERAs.\178\ Both types of entities are 
statutorily exempted from the requirements of the Advisers Act and its 
implementing regulations.\179\ Including them within the scope of the 
definition of ``investment adviser'' would therefore create challenges 
in monitoring compliance with AML/CFT requirements, primarily because 
the SEC currently has no authority to examine them. In regard to family 
offices specifically, FinCEN notes that other jurisdictions with 
economies and AML/CFT regimes similar to the United States have also 
excluded family offices or similar entities from the scope of AML/CFT 
regulations impacting entities providing investment adviser-like 
advisory services.\180\ This exclusion is also consistent with 
international AML/CFT standards set by the FATF, which do not require 
such entities be subject to AML/CFT requirements.
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    \177\ 17 CFR 275.202(a)(11)(G)-1.
    \178\ See 15 U.S.C. 80b-2(a)(30), 80b-3(b)(3); see also supra 
note 34.
    \179\ See 15 U.S.C. 80b-2(a)(11)(G) (excluding family offices as 
defined by the SEC from the Advisers Act definition of ``investment 
adviser''); 15 U.S.C. 80b-3(b)(3) (exempting foreign private 
advisers from registration with the SEC).
    \180\ For example, in Germany, the Money Laundering Act refers 
to the Banking Act for definitions of obliged entities, and the 
Banking Act does not require licensing for single-family offices. 
Hinweise zur Erlaubnispflicht gem[auml][szlig] KWG und KAGB von 
Family Offices, sec. 4(c), BaFin (updated Jul. 12, 2018), https://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Merkblatt/mb_140514_familyoffices.html. Hong Kong exempts most single-family 
offices from licensing requirements. Family Offices FAQ, Securities 
and Futures Commission of Hong Kong (last updated Sep. 8. 2020), 
available at https://www.sfc.hk/en/faqs/intermediaries/licensing/Family-Offices.
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    FinCEN will continue to monitor activity involving foreign private 
advisers and family offices for indicia of the risks of money 
laundering, terrorist financing, or other illicit finance activities 
and may take regulatory action if appropriate.
7. Other Comments Related to the Definition of ``Financial 
Institution'' and ``Investment Adviser''
    One individual commenter suggested Treasury change regulations 
applying to certain state-chartered banks as part of the final rule. 
The commenter claimed that ``some states may have inadequate oversight 
regulations (sometimes intentional) that will allow local banks to 
skirt more strict oversight'' and serve as an entry point for private 
equity funds seeking to move funds through the international financial 
system, as these banks may offer investment management services similar 
to investment advisers. The commenter recommended that state-chartered 
banks be required to be federally chartered to operate across state 
lines, and that a state-chartered bank must clear through a Federal 
Reserve Bank any funds that are received from or sent to a foreign 
jurisdiction.
    Two commenters suggested that FinCEN explicitly include real 
estate-focused investment funds in the scope of the proposed 
regulation. These commenters claimed that while real estate funds are 
generally not covered by the Advisers Act because real estate held in 
fee simple ownership is not considered a ``security'' by the SEC, 
pooled real estate investment vehicles

[[Page 72179]]

are structured similarly to other private funds and can pose illicit 
finance risks, including money laundering, public corruption, and 
potential national security risks.
    Another commenter noting the preamble discussion on AML/CFT 
requirements applicable to dual registrants and affiliates and wishing 
to avoid duplication of resources and jurisdictional conflicts between 
the SEC and other federal functional regulators, suggested modifying 
the definition of ``investment adviser'' to exclude ``persons that are 
subject to enterprise-wide BSA regulation at a depository institution 
or trust company.''
    Regarding regulatory changes to state-chartered banks, FinCEN notes 
that state-chartered banks are subject to comprehensive supervision, 
including for AML/CFT requirements.\181\ This mitigates the need to 
include state-chartered banks within the final rule, and making the 
suggested change would involve considerations beyond their potential 
investment management activities, as well as consultations with other 
state and Federal regulators. As such, FinCEN declines to pursue that 
recommendation as part of this rulemaking.
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    \181\ See, e.g., FDIC, The Bank Secrecy Act: A Supervisory 
Update (Jun. 2017, last updated Apr. 6, 2023), at 23, n. 5-6, 
available at https://www.fdic.gov/regulations/examinations/supervisory/insights/sisum17/sisummer2017-article02.html.
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    Regarding real estate-focused funds, FinCEN notes that it has 
focused AML/CFT regulatory efforts at the level of the adviser rather 
than any specific customer or service. To the extent real estate 
investment funds are advised by an investment adviser or an investment 
adviser is otherwise involved in their operation, there will be a BSA-
defined financial institution involved in their operation. Separately, 
FinCEN has also proposed a rule to require the reporting of buyer and 
seller information for certain residential real estate 
transactions.\182\ Both factors are likely to reduce the risks 
associated with real estate-focused funds. Therefore, FinCEN declines 
to explicitly focus this final rule on any real estate-focused 
investment activity.
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    \182\ See FinCEN, Anti-Money Laundering Regulations for 
Residential Real Estate Transfers, Notice of Proposed Rulemaking, 89 
FR 12424 (Feb. 16, 2024).
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    FinCEN also declines the suggestion to modify the definition of 
``investment adviser'' to exclude ``persons that are subject to 
enterprise-wide AML/CFT regulation at a depository institution or trust 
company.'' Doing so would remove a significant group of covered 
advisers from SEC examination \183\ and limit the ability of the SEC, 
as the federal functional regulator for investment advisers, to 
identify and mitigate potential systemic illicit finance risks that 
might arise in the sector. FinCEN noted in the IA AML NPRM and 
reiterates below, a depository institution or trust company with an 
investment adviser subsidiary or affiliate is not required to develop a 
separate AML/CFT program for its adviser subsidiary or affiliate if the 
depository institution or trust company's existing program addresses 
the identified money laundering, terrorist financing, and other illicit 
finance risks for the adviser. FinCEN believes this flexibility 
appropriately balances the benefits to having cost-effective 
enterprise-wide AML/CFT programs with ensuring that all relevant 
Federal functional regulators have the appropriate authority to 
supervise institutions conducting activities within their supervisory 
mandate.
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    \183\ According to a Treasury analysis of Form ADV data as of 
December 31, 2022, only four percent of RIAs reported being 
affiliated with a bank or trust company, but they held over 40 
percent of total AUM reported on Form ADV.
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C. Recordkeeping and Travel Rules and Currency Transaction Reports

    Proposed Rule: FinCEN proposed to apply to investment advisers 
certain BSA recordkeeping regulations that apply broadly to financial 
institutions, codified as 31 CFR part 1010, subpart D (sections 
1010.400 through 1010.440). Subject to specified exceptions, such 
application would require investment advisers to comply with the 
Recordkeeping and Travel Rules, which are codified at 31 CFR 
1010.410(e) and 31 CFR 1010.410(f), respectively, and require financial 
institutions to create and retain records for extensions of credit and 
cross-border transfers of currency, monetary instruments, checks, 
investment securities, and credit in amounts exceeding $3,000. The 
proposed rule would allow investment advisers to deem the requirements 
of these recordkeeping requirements satisfied with respect to any 
mutual fund that it advises. FinCEN also proposed that RIAs and ERAs be 
required to report transactions in currency over $10,000. Currently, 
all investment advisers report such transactions on Form 8300. Under 
the proposed rule, a CTR would replace Form 8300 for RIAs and ERAs.
    Comments Received: FinCEN received nine comments on the proposed 
requirement that investment advisers file CTRs and proposal to apply 
the Recordkeeping and Travel Rules to investment advisers. Two 
commenters stated their support for both FinCEN's proposal to require 
investment advisers to file CTRs and comply with the Recordkeeping and 
Travel Rules requirements. A commenter asserted that while financial 
institutions such as banks associated with wealth management services 
already implement these rules, the rules are still necessary to close 
the potential gaps or loopholes for bad actors. The commenter also 
asserted that these Recordkeeping and Travel Rule requirements should 
be considered the bare minimum for investment advisers and that similar 
requirements are already in place for many RIAs and ERAs not domiciled 
in the U.S.
    Other commenters questioned whether many advisers can logistically 
comply with the CTR, Recordkeeping, and Travel Rule requirements in the 
proposed rule. Several commenters stated that advisers who do not 
manage customer assets typically do not touch currency or other funds 
outside of the advisory or subscription fees received for their 
services. One commenter asserted that such advisers have no visibility 
into their customers' investment activities or their movement of funds 
and securities, all of which takes place through financial institutions 
such as banks or broker-dealers that are already subject to the CTR, 
Recordkeeping, and Travel Rules. In these commenters' view, applying 
these requirements to investment advisers would be duplicative and 
provide no new information to law enforcement. One commenter claimed 
that while a customer may authorize a bank or broker-dealer to accept 
investment management or transactional instructions from an adviser in 
some cases, compared with other financial institutions involved in the 
funds transfer process, the adviser may not be as well-positioned to 
view how the client's account is funded, where withdrawals from the 
account are sent, or whether there is unusual wire activity. One 
commenter called on FinCEN to either exempt advisers from this rule, or 
delay implementation until a new CIP requirement for investment 
advisers may be adopted, while another commenter claimed that other 
financial institutions subject to AML program requirements are exempt 
from the Recordkeeping and Travel Rules.
    Several commenters asked for additional clarification from FinCEN 
on the scope of the Recordkeeping and Travel Rules as applied to 
investment advisers. One commenter requested that FinCEN explain how it 
expects advisers to implement these rules, given that

[[Page 72180]]

these advisers do not accept or hold investor funds, maintain accounts, 
or engage in transactions with clients or investors. Another commenter 
asked how these rules would impact private funds. Another requested 
that FinCEN confirm that it is not asking or requiring advisers to 
create or share records outside of the ordinary course of business, and 
that FinCEN is not asking advisers to collect or capture information 
not otherwise required by the adviser's AML/CFT program.
    Final Rule: The final rule does not exempt RIAs and ERAs from the 
requirement to file CTRs or adhere to the Recordkeeping and Travel 
Rules. Accordingly, RIAs and ERAs will be required to file CTRs and 
create and retain records for transmittals of funds.
    Under the Recordkeeping and Travel Rules, financial institutions 
must create and retain records for transmittals of funds and ensure 
that certain information pertaining to the transmittal of funds 
``travels'' with the transmittal to the next financial institution in 
the payment chain.\184\ When a financial institution accepts and 
processes a payment sent by or to its customer, then the financial 
institution would be the ``transmittor's financial institution'' or the 
``recipient's financial institution,'' respectively. The transmittor's 
financial institution must obtain and retain the name, address, and 
other information about the transmittor and the transaction.\185\ The 
Recordkeeping Rule also requires the recipient's financial institution 
(and in certain instances, the transmittor's financial institution) to 
obtain or retain identifying information on the recipient.\186\ The 
Recordkeeping and Travel Rules apply to transmittals of funds that 
equal or exceed $3,000.
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    \184\ 31 CFR 1010.410(e), (f); 31 CFR 1020.410(a). Financial 
institutions are also required to retain records for five years. See 
31 CFR 1010.430(d).
    \185\ 31 CFR 1010.410(e)(1)(i), (e)(2).
    \186\ 31 CFR 1010.410(e)(1)(iii), (e)(3) (information that the 
recipient's financial institution must obtain or retain).
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    The term ``transmittal of funds'' includes funds transfers 
processed by banks, as well as similar payments where one or more of 
the financial institutions processing the payment (e.g., the 
transmittor's financial institution, an intermediary financial 
institution, or the recipient's financial institution) is not a 
bank.\187\ There are exceptions that are designed to exclude 
transmittals of funds from the Recordkeeping and Travel Rules' 
requirements when certain categories of financial institutions are the 
transmitter and recipient.\188\ The final rule will add investment 
advisers to the list of institutions among which transfers are excepted 
from the travel rule. This means that investment advisers will be 
treated in the same manner--and with the same exceptions for transfers 
to certain other financial institutions--as banks, broker-dealers, 
futures commission merchants, introducing brokers in commodities, and 
mutual funds.
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    \187\ See 31 CFR 1010.100(ddd) (defining ``transmittal of 
funds''); see also 31 CFR 1010.100(aa), (qq), (ggg) (defining 
``intermediary financial institution,'' ``recipient's financial 
institution,'' and ``transmittor's financial institution'' to 
include both bank and nonbank financial institutions).
    \188\ See 31 CFR 1010.410(e)(6), (f)(4); 31 CFR 1020.410(a)(6). 
As relevant here, section 1010.410(e)(6)(i) excludes from the 
requirements of the Recordkeeping Rule ``[t]ransmittals of funds 
where the transmitter and the recipient'' are certain types of 
listed financial institutions. Section 1010.410(f)(4) excludes these 
same transmittals from the Travel Rule. This rule amends section 
1010.410(e)(6) to add ``investment adviser'' to its list of 
financial institutions.
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    The primary requirements for investment advisers under the 
Recordkeeping and Travel Rules will be when they act as transmittor or 
recipient in transactions other than these excepted transfers. While 
many RIAs and ERAs do not engage in the type of transactional activity 
covered by these requirements, this is not uniform among all RIAs and 
ERAs. For instance, one commenter identified that there is significant 
variation among RIAs and ERAs with regard to their visibility into, and 
involvement in, funding and other cash transactions related to their 
clients' accounts, noting that advisers to retail clients may be more 
actively involved in facilitating the account opening and funding 
process for their clients, including forwarding wire instructions from 
the client to the custodian, while this may be less common among 
advisers to institutional clients. FinCEN agrees with the commenters 
who noted that these similar requirements are already in place for many 
RIAs and ERAs who are not domiciled in the U.S. due to the requirements 
of foreign laws.\189\ Further, as noted by commenters, investment 
advisers can meet this reporting requirement with minimal additional 
costs, while providing law enforcement with useful AML/CFT 
information.\190\
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    \189\ For example, a financial institution located in a foreign 
country may serve as a ``qualified custodian,'' 17 CFR 275.206(4)-
2(d)(6)(iv), and most, if not, all, such foreign institutions would 
be subject to similar AML/CFT requirements under the laws and 
regulations of their home country jurisdiction. For instance, FATF 
Recommendation 11 requires financial institutions to maintain 
certain transactional and customer due diligence records for at 
least five years, while FATF Recommendation 16 requires originators 
and beneficiaries to maintain records of customer information for 
certain wire transfers. FATF, International Standards on Combating 
Money Laundering and the Financing of Terrorism & Proliferation, the 
FATF Recommendations (Updated November 2023), at 15, 17, available 
at www.fatf-gafi.org/en/publications/Fatfrecommendations/Fatf-recommendations.html. Over 175 jurisdictions around the world have 
implemented these requirements into domestic law or regulation. See 
FATF, Consolidated Assessment Ratings (Jul. 18, 2024), available at 
https://www.fatf-gafi.org/en/publications/Mutualevaluations/Assessment-ratings.html.
    \190\ This is because, under 17 CFR 275.204-2, RIAs are already 
required to collect and maintain such information under the Books 
and Records Rule.
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    As requested by several commenters, FinCEN is providing some 
additional guidance on what information it expects advisers to collect 
to comply with the Recordkeeping and Travel Rules. First, FinCEN notes 
that in circumstances where an adviser's customer has a direct account 
relationship with a qualified custodian that is subject to AML/CFT 
requirements, including the Recordkeeping and Travel Rules, such as a 
bank or broker-dealer, and requests that such qualified custodian 
initiate a funds transfer or transmittal of funds, the adviser would 
generally not be required to comply with the requirements of the 
Recordkeeping and Travel Rules. In this circumstance, the qualified 
custodian would have the obligation to comply with the Recordkeeping 
and Travel Rules as the entity that received the instruction and 
transmitted the funds. This would likely apply to many RIAs advising 
retail customers that custody customer assets with a qualified 
custodian. However, for RIAs advising private funds, as well as ERAs, 
their authority and discretion over the fund and customer assets in the 
fund may make them more likely to have to comply with the Recordkeeping 
and Travel Rules. In terms of the information that advisers may have, 
FinCEN notes that under 17 CFR 275.204-2 (the Books and Records Rule), 
RIAs are required to maintain ``originals of all written communications 
received and copies of all written communications sent by such 
investment adviser relating to . . . Any receipt, disbursement or 
delivery of funds or securities.'' \191\ This requirement may assist 
RIAs in satisfying their obligations to identify relevant information 
that may be required to be collected under the Recordkeeping and Travel 
Rules in those circumstances where an RIA is a transmittor's financial 
institution or recipient's financial institution.
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    \191\ See 17 CFR 275-204-2(a)(7)(ii).
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    Regarding CTRs, in instances where investment advisers are not 
involved in one or more related transactions in currency of more than 
$10,000, an

[[Page 72181]]

investment adviser will generally not need to file CTRs.\192\ However, 
all investment advisers are currently required to file reports for the 
receipt of more than $10,000 in currency and certain negotiable 
instruments using joint FinCEN/Internal Revenue Service Form 8300.\193\ 
This means that many advisers likely have some procedure in place for 
recording information for transactions above this threshold. FinCEN 
also agrees with the commenter noting that a wide variety of U.S. 
financial institutions have been filing CTRs for decades and minimize 
the reporting burden through widely available automated software. In 
addition, FinCEN would like to clarify that an adviser is not required 
to purchase any software to file a CTR; CTR filing is available for 
free via the FinCEN BSA E-Filing System.
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    \192\ For purposes of 31 CFR 1010.311 and 1010.313, the term 
``transaction in currency'' means a transaction involving the 
physical transfer of currency from one person to another. A 
transaction, which is a transfer of funds by means of bank check, 
bank draft, wire transfer, or other written order, and does not 
include the physical transfer of currency, is not a transaction in 
currency for this purpose. See 31 CFR 1010.100(bbb)(2).
    \193\ 31 CFR 1010.330; 26 CFR 1.6050I-1. ``Currency'' includes 
cashier's checks, bank drafts, traveler's checks, and money orders 
in face amounts of $10,000 or less, if the instrument is received in 
a ``designated reporting transaction.'' 31 CFR 
1010.330(c)(1)(ii)(A). A ``designated reporting transaction'' is 
defined as the retail sale of a consumer durable, collectible, or 
travel or entertainment activity. 31 CFR 1010.330(c)(2). In 
addition, an investment adviser would need to treat the instruments 
as currency if the adviser knows that a customer is using the 
instruments to avoid the reporting of a transaction on Form 8300. 31 
CFR 1010.330(c)(1)(ii)(B).
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D. Applicability of AML/CFT Program Requirements

    As discussed above, the BSA authorizes Treasury--and thereby 
FinCEN--to prescribe minimum standards for AML/CFT programs.\194\ 
Section 5318(h)(2) of the BSA further provides that in prescribing 
these minimum standards, Treasury take into account, among other 
factors, that AML/CFT programs should be reasonably designed to assure 
and monitor compliance with the requirements of the BSA and regulations 
issued thereunder, as well as risk-based, including ensuring that more 
attention and resources of financial institutions should be directed 
towards higher-risk customers and activities, consistent with the 
financial institution's risk profile, rather than lower-risk customers 
and activities.\195\
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    \194\ 31 U.S.C. 5318(h)(1)-(2) (authorizing Treasury, after 
consultation with the appropriate Federal functional regulator (for 
investment advisers, the SEC), to prescribe minimum standards for 
AML/CFT programs, and setting forth factors to be taken into account 
in doing so). In developing this final rule, FinCEN consulted and 
coordinated with SEC staff, including with respect to the 
statutorily specified factors set out in 31 U.S.C. 5318(h)(2)(B).
    \195\ 31 U.S.C. 5318(h)(2).
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    In light of the BSA's clear direction, FinCEN reiterates that the 
AML/CFT program requirement is not a one-size-fits-all requirement but 
is risk-based and must be reasonably designed. The risk-based and 
reasonably designed approach of the rule is intended to give investment 
advisers the flexibility to design their programs so that they are 
commensurate with the specific risks of the advisory services they 
provide and the customers they advise as described in section 
5318(h)(2) of the BSA.\151\ For example, large firms may assign 
responsibilities to the individuals and departments carrying out each 
aspect of the AML/CFT program, such as AML/CFT employee training, SAR 
filing, and CDD, while smaller firms would be expected to adopt 
procedures that are consistent with their (often) simpler, more 
centralized organizational structures (for instance integrating aspects 
of AML/CFT compliance with other compliance or monitoring functions). 
This flexibility is designed to ensure that all investment advisers 
subject to FinCEN's AML/CFT program requirements, from the smallest to 
the largest, and the simplest to the most complex, have in place 
internal policies, procedures, and controls appropriate to their 
advisory business to prevent the investment adviser from being used to 
facilitate money laundering, terrorist financing, or other illicit 
finance activities and to achieve and monitor compliance with the 
applicable provisions of the BSA and FinCEN's implementing regulations.
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    \151\ The legislative history of the BSA reflects that Congress 
intended that each financial institution should have some 
flexibility to tailor its program to fit its business, considering 
factors such as size, location, activities, and risks or 
vulnerabilities to money laundering. This flexibility is designed to 
ensure that all firms, from the largest to the smallest, have in 
place policies and procedures appropriate to monitor for money 
laundering. See USA PATRIOT Act of 2001: Consideration of H.R. 3162 
Before the Senate, 147 Cong. Rec. S11039-11041 (Oct. 25, 2001) 
(statement of Sen. Sarbanes); Financial Anti-Terrorism Act of 2001: 
Consideration Under Suspension of Rules of H.R. 3004 Before the 
House of Representatives, 147 Cong. Rec. H6938-39 (Oct. 17, 2001) 
(statement of Rep. Kelly) (provisions of the Financial Anti-
Terrorism Act of 2001 were incorporated as Title III in the Act).
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    Because investment advisers operate through a variety of different 
business models, one generic AML/CFT program for this industry is not 
possible; rather, each investment adviser must develop a program based 
upon its own business structure. This requires that each investment 
adviser identify its exposure to money laundering, terrorist financing, 
and other illicit finance activity risks; understand the BSA 
requirements applicable to it; identify the risk factors relating to 
these requirements; design the internal policies, procedures and 
controls that will be required to reasonably assure compliance with 
these requirements; and periodically assess the effectiveness of the 
procedures and controls.
    An investment adviser (other than a foreign-located investment 
adviser) will be required to apply an AML/CFT program to all advisory 
services provided to all customers, other than with respect to mutual 
funds, collective investment funds, and other investment advisers 
subject to the rule. Advisory services subject to an AML/CFT program 
would include, for example, the management of customer assets and the 
submission of customer transactions for execution. The adviser will not 
be required to apply its AML/CFT program to non-advisory services. One 
example of non-advisory services would be in the context of private 
funds, including venture capital funds: an adviser's personnel may play 
certain roles with respect to the portfolio companies in which its 
customer fund invests. Generally, activities undertaken in connection 
with those roles (e.g., making managerial/operational decisions about 
the activities of portfolio companies) would not be ``advisory 
activities.''
    Moreover, in response to comments regarding an investment adviser's 
obligation with regard to portfolio companies, as discussed further 
below, the objective standard that an investment adviser must file a 
SAR when it ``knows, suspects, or has reason to suspect'' certain 
suspicious transactions parallels the language of the rule for mutual 
funds, with which many investment advisers are familiar.\196\ As 
clarified in guidance for mutual funds, this standard should not 
require regulated entities to collect additional information beyond 
that available ``through the account opening process and in the course 
of processing transactions, consistent with the mutual fund's required 
anti-money laundering procedures.'' \197\ Similarly, an investment 
adviser therefore should be able to satisfy this requirement with 
regard to a portfolio company through the information available to it 
in the course of directing investments in the

[[Page 72182]]

securities of a portfolio company, such as the due diligence it 
conducts before directing an investment, and the measures provided in 
its AML/CFT program regarding the adviser's advisory activities. The 
final rule does not require an investment adviser to collect additional 
information from portfolio companies about their activities. But if the 
information the investment adviser already possesses or obtains as part 
of its processes for directing investment in the securities of a 
portfolio company or through its AML/CFT program means that the adviser 
``knows, suspects, or has reason to suspect'' that there is suspicious 
activity occurring at a portfolio company, it is required to file a 
SAR.
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    \196\ 31 CFR 1024.320(a)(2).
    \197\ FinCEN, Frequently Asked Questions Suspicious Activity 
Reporting Requirements for Mutual Funds (Oct 4, 2006), available at 
https://www.fincen.gov/resources/statutes-regulations/guidance/frequently-asked-questions-suspicious-activity-reporting.
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    Under the risk-based approach, an investment adviser should tailor 
its AML/CFT program according to the specific risks presented by its 
various services and customers. Factors that may indicate a service or 
a customer is lower risk include the jurisdiction of registration of 
legal person customers, and whether the legal person customer is 
subject to other U.S. AML/CFT regulatory requirements.
    As described below and consistent with the risk-based approach, 
FinCEN will permit investment advisers to exclude mutual funds, 
collective investment funds, and other investment advisers that they 
advise that are also subject to the rule from their AML/CFT programs 
(and other requirements of the final rule) in light of existing AML/CFT 
program requirements under the BSA. FinCEN declines to further limit 
the scope of AML/CFT requirements for other wrap-fee programs and 
separately managed accounts, but notes that the flexibility in the 
risk-based approach can allow an investment adviser that is a portfolio 
manager in a wrap-fee program or provides advisory services to a 
separately managed account to appropriately adjust its application of 
AML/CFT measures based on the presented risk.
1. Mutual Funds and Collective Investment Funds
    Proposed Rule: FinCEN proposed to exclude activities of investment 
advisers in advising mutual funds from the rule's AML/CFT program 
requirements. Specifically, FinCEN proposed to exempt advisers from 
having to include mutual funds customers in their AML/CFT programs, and 
by extension the reporting and recordkeeping requirements of part 1032, 
subparts C and D. FinCEN, however, did not propose to allow investment 
advisers to exclude mutual fund customers from the information sharing, 
due diligence, and special measures requirements of part 1032, subparts 
E and F. Moreover, the proposed exclusion applied only to mutual funds 
that ``developed and implemented an AML/CFT program compliant with the 
AML/CFT program requirements applicable to mutual funds under another 
provision of this subpart.''
    As explained in the IA AML NPRM, FinCEN proposed the AML/CFT 
program exclusion to recognize that mutual funds ``typically do not 
have their own independent operations,'' and ``are entirely operated, 
and compliance with their legal obligations is undertaken, by their 
service provider entities, foremost among them their investment 
advisers.'' \198\ FinCEN also stated that ``including a mutual fund 
within its investment adviser's AML/CFT program would be redundant.'' 
\199\
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    \198\ 89 FR at 12123.
    \199\ Id. at 12123-24 (``In particular, we expect that the 
investment adviser to a mutual fund will have both (1) access to the 
exact same information concerning the mutual fund or its investors 
that is available to the mutual fund, in part in connection with its 
AML/CFT obligations and (2) a significant role generally in the 
operations of the mutual fund's regulatory responsibilities, 
including its AML/CFT program.'').
---------------------------------------------------------------------------

    FinCEN did not explicitly address the status of collective 
investment funds, which are sometimes also referred to as collective 
investment trusts, in the IA AML NPRM.
    Comments Received: Three commenters supported the proposed rule's 
exclusion of mutual funds, including open-end exchange-traded funds 
(ETFs), from the scope of an investment adviser's AML/CFT program. 
These comments noted that mutual funds, including open-end ETFs that 
are open-end management investment companies, are already subject to 
similar AML/CFT requirements, and concurred with FinCEN's reasoning for 
the proposed exclusion.
    One of these three commenters supported the intent of the proposed 
exclusion--noting that mutual funds have already been subject to 
similar AML/CFT program requirements--but took issue with the scoping 
and structure of this proposed exclusion. This commenter expressed 
that, as written, this proposal would make the investment adviser 
responsible for ensuring that the mutual funds it advises are compliant 
with their AML/CFT program obligations, and suggested that an 
investment adviser should not have to ensure the extent of a mutual 
fund's compliance with mutual fund AML/CFT program obligations as a 
basis for exempting them from the investment adviser's AML/CFT program. 
As an alternative, the commenter recommended that FinCEN adopt the 
exemptive language from the 2003 proposal, which provided that ``an 
investment adviser ``may exclude from its anti-money laundering program 
any pooled investment vehicle it advises that is subject to an anti-
money laundering program requirement under another provision of this 
subpart.''
    One individual commenter recommended bringing mutual funds under 
these provisions as well, but did not acknowledge the long-standing 
application of AML/CFT program obligations to mutual funds.
    Two commenters also suggested that FinCEN exclude bank-sponsored 
collective investment trusts from the scope of the proposed rule 
because collective investment trusts are subject to the AML/CFT 
reporting obligations of a collective investment trust's bank sponsor 
and are available only to/through institutional retirement plans, 
making them inherently low-risk from an AML/CFT perspective.
    Final Rule: FinCEN agrees with commenters who support the proposed 
exclusion of mutual funds from the requirements of an investment 
adviser's AML/CFT program, given that mutual funds have long had their 
own AML/CFT program requirements. Accordingly, the final rule maintains 
an exclusion of mutual funds from the requirements of an investment 
adviser's AML/CFT program requirements. This exclusion is permissive 
and not mandatory; an investment adviser could decide to include the 
mutual funds it advises in complying with any aspect of the final rule. 
An adviser could also integrate its overall AML/CFT program and any 
mutual fund specific program if doing so is risk-based and reasonable 
manner.
    FinCEN also recognizes that, as drafted in the IA AML NPRM, the 
proposed regulation text may have limited the practical utility of the 
exclusion by making the investment adviser responsible for ensuring 
that the mutual funds it advises have ``implemented'' their AML/CFT 
programs in a ``compliant'' manner. The exclusion was not intended to 
require an investment adviser to separately ensure a mutual fund's AML/
CFT program is in compliance with the fund's AML/CFT program rule 
requirements for mutual funds in order to exempt the fund from the 
investment adviser's AML/CFT program. FinCEN has therefore decided to 
modify the text of the regulation to categorically permit an investment 
adviser to exclude any mutual fund from its AML/CFT program

[[Page 72183]]

without the adviser having to verify that such a mutual fund has 
implemented an AML/CFT program. The modified text is reflected at 
section 1032.210(a)(2).
    Regarding collective investment funds, FinCEN notes that collective 
investment funds are investment vehicles administered by a bank or 
trust company that hold commingled assets.\200\ Each collective 
investment fund is established under a plan that details the terms 
under which the bank or trust company manages and administers the 
fund's assets. The bank or trust company acts as a fiduciary for the 
collective investment fund and holds legal title to the fund's assets 
as trustee. However, in some cases an RIA may be hired to provide 
advisory services to the collective investment fund. Participants in a 
collective investment fund are the beneficial owners of the fund's 
assets.
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    \200\ See OCC, Comptroller's Handbook (Collective Investment 
Funds) (May 2014), available at https://www.occ.treas.gov/publications-and-resources/publications/comptrollers-handbook/files/collective-investment-funds/pub-ch-collective-investment.pdf. 
Collective investment funds administered by national banks are 
governed by OCC regulations at 12 CFR 9.18.
---------------------------------------------------------------------------

    As noted by commenters, the banks and trust companies that sponsor 
and serve as trustees of a collective investment fund are already 
subject to AML/CFT reporting obligations under the BSA, and are the 
entities best situated to identify and assess risk associated with the 
participants in a collective investment fund, report suspicious 
activity, and implement other AML/CFT requirements. Commenters also 
noted that collective investment funds themselves are available only to 
institutional retirement plans or to other eligible discretionary 
fiduciary accounts of the bank, making them inherently low risk from an 
AML/CFT perspective.
    FinCEN agrees that applying the AML/CFT requirements of the 
proposed rule to collective investment funds would be duplicative of 
existing requirements applicable to bank and trust company sponsors of 
collective investment funds. These AML/CFT obligations would be applied 
by the bank or trust company to the collective investment fund and its 
underlying participants, and would assess and mitigate any illicit 
finance risk arising from either the fund or its underlying customers. 
While collective investment funds, unlike mutual funds, are not 
separate legal entities, they are fiduciary accounts that serve a very 
similar purpose and function and are only available to participants who 
meet specific criteria in OCC regulations and other applicable laws. 
Therefore, FinCEN is expanding the exclusion from the AML/CFT program 
requirement to include both mutual funds and collective investment 
funds sponsored by a bank or trust company subject to the BSA.
    FinCEN notes that collective investment funds can be sponsored not 
only by national banks, federal savings associations, and trust 
companies chartered by the OCC, but also by state-chartered banks and 
trust companies that are supervised by the FRB, the FDIC, or state bank 
regulators. Collective investment funds established by national banks 
and federal savings associations \201\ are subject to requirements for 
such collective investment funds detailed in OCC regulations at 12 CFR 
9.18. While these regulations only apply to collective investment funds 
established by national banks and federal savings associations, they 
have served as a model for many state statutes governing collective 
investment funds, many of which cross-reference 12 CFR 9.18.\202\ In 
addition, collective investment funds of state-chartered banks and 
trust companies that seek tax-exempt status under IRC section 584 must 
comply with the OCC requirements in 12 CFR 9.18.\203\ Compliance with 
IRC section 584 is necessary for the fund to qualify for favorable tax 
treatment--namely, taxation only at the participant level and not at 
the fund level.\204\ Therefore, FinCEN has determined to define 
collective investment funds for the purposes of this exclusion by 
reference to OCC regulations at 12 CFR 9.18.
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    \201\ Federal savings associations are subject to 12 CFR 150, 
which requires compliance with 12 CFR 9.18 if establishing and 
administering a collective investment fund under 12 CFR 150.260(b).
    \202\ See Comptroller's Handbook (Collective Investment Funds) 
at p.3.
    \203\ See 26 U.S.C. 584(a)(2).
    \204\ See 26 U.S.C. 584(b)-(d).
---------------------------------------------------------------------------

    FinCEN has also added in a reference to ``other applicable law that 
incorporates the requirements of 12 CFR 9.18,'' so that the exclusion 
includes collective investment funds formed pursuant to state law or 
regulation, or other applicable law such as ERISA, so long as those 
other applicable laws incorporate the requirements of 12 CFR 9.18. 
FinCEN expects, however, that almost all collective investment funds 
established by a national or state bank or trust company subject to the 
BSA would meet these requirements. This additional text is reflected at 
section 1032.210(a)(2).
2. Requests To Exempt Certain Customers and Activities
    Proposed Rule: FinCEN proposed to apply the requirements of the 
proposed rule to the full range of advisory services provided by an 
investment adviser, including advisory services that do not include the 
management of customer assets or knowledge of customers' investment 
decisions, as well as when an investment adviser acts as a 
``subadviser'' in certain advisory activities. FinCEN requested comment 
on whether specific services provided by investment advisers should be 
included or excluded from coverage of this proposed rule, as well as 
alternative approaches for addressing compliance with the proposed rule 
when advisers provide particular services, such as subadvisory 
services, as well as other similar services. Thirteen commenters 
provided views on a range of advisory activities and customers. These 
generally related to three issues: (1) the treatment of subadvisory 
services under the proposed rule, (2) the treatment of certain 
customers under the proposed rule, and (3) the treatment of certain 
advisory services provided by investment advisers that do not involve 
the management of customer assets.
(a) Comments on Subadvisory Services, Wrap Fee Programs, and Separately 
Managed Accounts
    Comments Received: 11 commenters asserted that an investment 
adviser acting as subadviser should be able to exclude its subadvisory 
relationships from its AML/CFT program. As noted by one commenter, 
``Sub-Advisory Arrangements can exist in a number of formats, including 
managed account `platforms,' wrap fee programs, separately managed 
accounts (SMAs), unified managed accounts (UMAs), other sub-advised 
accounts, and collective investment funds where a Primary Adviser 
sponsors the fund and retains Sub-Advisers to manage all or part of the 
fund's accounts or investments.'' Some commenters limited their 
comments to certain subadvisory relationships, such as separately 
managed accounts or wrap fee programs, while others referenced 
different types of subadvisory relationships.
    These commenters stated that requiring an investment adviser to 
apply its AML/CFT program to a subadvisory relationship with another 
investment adviser (the primary adviser) would be duplicative of the 
requirements applied by the primary adviser. In addition, several 
commenters indicated that when an investment adviser acts as

[[Page 72184]]

subadviser, it has limited or no access to information about the 
primary investment adviser's underlying clients and does not have 
direct contact with those clients or account holders, and so would not 
be in a position to apply most aspects of its AML/CFT program to the 
subadvisory relationship and generally would be unable to monitor the 
relationship for suspicious activity. One commenter noted that in most 
subadvisory relationships, the primary adviser possesses the authority 
pursuant to a written agreement to appoint and replace each subadviser, 
which functions solely as a service provider to the primary adviser. 
Two commenters both noted the considerable challenges for non-U.S. 
subadvisers that manage foreign asset classes, as well as for U.S. 
subadvisers for non-U.S. accounts or fund structures, in implementing 
the proposed requirements. These commenters generally stated that 
FinCEN should exclude subadvisory activities from the scope of the 
proposed rule, and that responsibility for applying AML/CFT 
requirements should be with the primary adviser.
    Commenters also recommended how FinCEN should treat subadvisory 
relationships if it decides not to exclude them from an investment 
adviser's AML/CFT program. Three commenters suggested FinCEN permit 
primary advisers and subadvisers to allocate applicable AML/CFT program 
and SAR reporting obligations to the primary adviser or sponsor, and 
that FinCEN should confirm that subadvisers would not be required to 
obtain any additional information about clients enrolled in managed 
account programs in order to discharge their AML/CFT program or SAR 
reporting obligations.
    Two commenters recommended that the final rule should cover all of 
the advisory services provided, whether in a primary or subadvisory 
role. One commenter argued that in the private funds context, exempting 
subadvisers, who often make managerial and operational decisions for 
private funds, could encourage complex contractual arrangements to 
enable investment advisers to circumvent their AML/CFT obligations, and 
that subadvisers are treated as investment advisers under the Advisers 
Act. Both commenters also noted that including advisory activities may 
be especially important for digital advice platforms, as they are 
increasingly incorporated into services offered by larger investment 
advisers and for RIAs domiciled in other countries.
    Final Rule: FinCEN recognizes the potential for duplication, which 
may also occur with other BSA-defined financial institutions that 
provide similar services to the same customers. FinCEN notes that 
subadvisory services, wrap-fee programs, and separately managed 
accounts can vary in structure and the allocation of services among 
participating financial institutions (depending on how these programs 
are structured and the role of other BSA-defined financial 
institutions). In addition, subadvisory services or wrap-fee 
arrangements are not defined by regulation but are industry terms 
applied to a range of advisory relationships. Further, there are some 
investment advisers, such as State-registered investment advisers, that 
are not covered by this rule, and RIAs and ERAs may enter into 
subadvisory or similar relationships with such uncovered advisers. 
These factors make it challenging to apply a categorical exemption or 
treatment to a type of advisory relationship for the purposes of this 
rule.
    However, consistent with the exclusion for mutual funds and 
collective investment funds from an investment adviser's AML/CFT 
program described above, FinCEN assesses that permitting investment 
advisers to exclude certain advisory customers rather than particular 
advisory services from their AML/CFT programs strikes the appropriate 
balance between avoiding unnecessary duplication and limiting illicit 
finance risk. This duplication of AML/CFT measures by an investment 
adviser is particularly salient when an investment adviser is advising 
another investment adviser subject to this rule, and lacks a direct 
relationship with the underlying customer of the investment adviser, 
such as in the context of certain subadvisory relationships. In these 
circumstances, any illicit finance risk or useful information for law 
enforcement would be addressed by the AML/CFT program and reporting and 
recordkeeping obligations of the other investment adviser. Therefore, 
FinCEN is permitting an investment adviser to exclude from its AML/CFT 
program any investment adviser that is advised by the adviser and that 
is subject to this rule. This additional text is reflected at section 
1032.210(a)(1)(iii).
    As applied to subadvisers, this exclusion will permit an investment 
adviser (acting as subadviser) to exclude from its AML/CFT program 
another investment adviser (the primary adviser) to which it provides 
subadvisory services where the subadviser has a direct contractual 
relationship with the primary adviser and not with the underlying 
customer of that primary adviser. The investment adviser may also be 
able to exclude wrap-fee programs, separately managed accounts, or 
other advisory relationships, so long as the customer is another 
investment adviser as defined at section 1010.100(nnn) and the adviser 
does not have a direct contractual relationship with the underlying 
customer of the other investment adviser. FinCEN recognizes that this 
exclusion would not permit an investment adviser to exclude from its 
AML/CFT program advisory customers who are BSA-defined financial 
institutions other than an investment adviser, such as a broker-dealer 
or bank, and so would not address all of the duplication described by 
commenters.\205\ For instance, an adviser would not be able to exclude 
from its AML/CFT program: (1) wrap-fee programs where a BSA-defined 
financial institution other than an investment adviser, such as a 
broker-dealer, is the sponsor; (2) any subadvisory relationships where 
the primary adviser is an investment adviser not covered by this rule, 
such as a State-registered adviser or exempt as a foreign private 
adviser; or (3) those customers with which the investment adviser has a 
direct contractual relationship governing the provision of advisory 
services, even if that contract calls for the investment adviser to act 
as a subadviser. In these circumstances, where the contractual 
relationship is with the underlying customer, an adviser acting as a 
subadviser would be better positioned to assess the risk of the 
customer and to request appropriate information from the customer. 
FinCEN therefore declines to exempt such activities from the final 
rule.
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    \205\ In the case of a dual registrant who is a customer of an 
investment adviser, the investment adviser could only exclude the 
dual registrant to the extent the dual registrant was acting as an 
investment adviser, and not as a broker-dealer.
---------------------------------------------------------------------------

    For subadvisory relationships that are not subject to this 
exclusion, an investment adviser is required to include those 
activities in the scope of its AML/CFT program. FinCEN notes that there 
is inherent flexibility in the risk-based approach required by the BSA, 
and that such flexibility can allow an investment adviser to 
appropriately adjust its application of AML/CFT measures based on the 
presented risk. For instance, subject to the requirements discussed 
below regarding delegation, an adviser could contractually delegate 
certain AML/CFT measures to a broker-dealer in a wrap-fee program where 
it is more appropriate for the broker-dealer to implement those 
measures. As discussed below, delegation will require the investment 
adviser to remain fully

[[Page 72185]]

responsible and legally liable for, and need to demonstrate, compliance 
with AML/CFT requirements. Such delegation would not alleviate the 
obligation of the adviser to remain accountable for its own compliance 
with the BSA.
    In addition, some AML/CFT requirements in this rule, such as the 
reporting of suspicious activity, can be effectively implemented by an 
investment adviser even where the filing institution does not have a 
direct customer relationship with the subject of the SAR. FinCEN notes 
that it is common for two or more BSA-defined financial institutions to 
provide different services and establish different types of 
relationships with the same customer, and both entities can still 
effectively implement their own AML/CFT requirements. At the same time, 
in establishing and implementing an AML/CFT program that is risk-based 
and reasonably designed to address the specific risks of the advisory 
services it provides and the customers it advises, an investment 
adviser can incorporate into its program a consideration of the role 
played by other financial institutions with respect to those services 
and customers, and the AML/CFT obligations of those financial 
institutions.
(b) Certain Advisory Customers
    Comments Received: One individual commenter suggested FinCEN 
exclude investment advisers that sub-advise European SICAVs,\206\ which 
the commenter described as essentially foreign-located mutual funds, 
noting that these are subject to European Union (EU) AML/CFT 
regulations. Five commenters requested that either investment advisers 
providing advisory services to retirement plan participants, such as 
participants in participant-directed defined contribution retirement 
plans established under IRC Sections 401(k), 403(b), and 457, be exempt 
from the proposed rule or that such services be exempt from the 
requirements of the proposed rule. These commenters noted earlier 
guidance from Treasury that such plan participant accounts were lower 
risk for money laundering, and that advisers providing services to plan 
participants have no ability to monitor participant contributions or 
withdrawals. Commenters further stated that retirement plans 
necessarily require the involvement of other regulated entities that 
are independently subject to AML/CFT requirements, that those 
requirements would be applied to plan participants and their 
transactional activity, and that employer-sponsored retirement plans 
are also subject to other requirements under ERISA.
---------------------------------------------------------------------------

    \206\ SICAV (Soci[eacute]t[eacute] d'investissement [agrave] 
Capital Variable) is a type of collective investment fund commonly 
used in Europe.
---------------------------------------------------------------------------

    One commenter suggested that the final rule make clear that 
participants in employer-sponsored retirement plans are not the 
``customer'' and, for CIP and beneficial ownership requirements, make 
clear that the definition of ``account'' does not include an account 
opened for the purpose of participating in an employer-sponsored 
retirement plan, and that the requirements of the proposed rule should 
only apply at the plan level.
    Another commenter requested that exchange-traded closed-end funds 
be exempt from the final rule as relevant customer and transaction 
information is held by the transfer agent (and any broker-dealer used 
to purchase the shares) and not the RIA or ERA.
    One commenter suggested FinCEN explicitly recognize certain types 
of advisory customers who categorically present a lower risk of money 
laundering and exclude them from the AML/CFT program requirements. 
These include retirement plans; employee securities corporations; 
publicly-traded corporations; accounts of government entities, such as 
municipal or state agencies; governmental pension plans; non-profit 
organizations; higher education endowment funds; and multi-employer 
plans. The commenter reasoned that these accounts are held in custody 
by a financial institution that is already subject to AML/CFT 
requirements. As an alternative, the commenter suggested that FinCEN 
clarify that investment advisers' AML/CFT program requirements with 
respect to these entities would be minimal under a risk-based approach.
    Three commenters suggested that FinCEN exempt investment products 
offered by, or advisory services provided to, another financial 
institution subject to comprehensive AML/CFT requirements. These 
commenters argued that the rationale for exempting mutual funds from an 
investment adviser's AML/CFT program extends to an investment adviser's 
relationships with other financial institutions subject to an AML/CFT 
program obligation, which would also be consistent with FinCEN's 2003 
proposed rule. One of these commenters proposed that to the extent the 
investment products are covered in any AML/CFT program requirement, 
FinCEN should make clear that a sound AML/CFT program can, and is 
authorized to, rely on the diligence conducted by a regulated 
intermediary.
    Final Rule: Regarding European SICAVs or other pooled investment 
vehicles administered by foreign financial institutions, FinCEN 
declines to exempt such entities from the scope of the proposed rule. 
FinCEN acknowledges that such pooled investment vehicles may be subject 
to comparable AML/CFT regulation by foreign supervisory authorities, 
but that those regulations may not specifically address illicit finance 
risks to the U.S. financial system or provide relevant information 
directly to U.S. regulators or law enforcement. FinCEN notes that the 
application of foreign AML/CFT requirements to a pooled investment 
vehicle administered by a foreign financial institution can be a factor 
in determining risk associated with a particular type of foreign-
located customer.
    Regarding retirement plans, FinCEN recognizes the point made by 
several commenters that such plans are subject to regulation and 
supervision under ERISA as well as other laws and regulations governing 
retirement plans, and are generally only available through a BSA-
regulated financial institution or an entity regulated under another 
federal framework. FinCEN declines to categorically exclude such plans 
from coverage under the proposed rule, however, because doing so would 
leave a material gap in addressing illicit finance risks. Such plans 
may not be offered directly through a financial institution with AML/
CFT program, SAR, and recordkeeping obligations under the BSA, and 
applying AML/CFT requirements to investment advisers to such plans, 
such as SAR filing requirements, may help identify illicit activity 
involving the theft or misappropriation of plan assets. Moreover, the 
potential for duplication and any accompanying burden is reduced by the 
exemption for advisers to such plans who register with the SEC only as 
``pension consultants'' as discussed above.
    FinCEN declines to exempt the other types of advisory customers 
raised by commenters--such as employees' securities companies and other 
BSA-regulated financial institutions--for similar reasons. Advisory 
relationships with customers that are not themselves BSA-regulated 
financial institutions may not necessarily involve any institution 
other than the investment adviser with AML/CFT program and related 
obligations under the BSA. When there is another such institution--such 
as when investment advisers provide advisory services to another BSA-
regulated financial institution--these institutions' AML/

[[Page 72186]]

CFT programs may not be tailored to the specific risks posed by an 
advisory relationship and these institutions may lack the expertise of 
an investment adviser in monitoring the investment advisory 
relationship. Excluding such advisory customers would therefore leave a 
material gap in addressing illicit finance risks. However, investment 
advisers may take into account the nature of advisory relationships 
with such customers in determining the level of risk they pose, which, 
when the particular relationship is lower risk, will reduce the burden 
of including such customers in the investment advisers' AML/CFT 
programs.
    Regarding exchange-listed registered closed-end funds, while they 
are not categorically excluded from an adviser's AML/CFT program under 
the final rule, such funds are typically offered to retail investors 
through a broker-dealer, which performs customer identification and 
verification as well as CDD, with the investment adviser managing the 
investment portfolio of the fund. As described further below, FinCEN 
would expect that, absent actual indicia of high-risk activity tied to 
such funds in specific circumstances, an adviser could treat these 
funds as lower risk for purposes of its AML/CFT program.
(c) Certain Advisory Activities
    Comments Received: Six commenters provided comments on how the 
requirements of the proposed rule should apply to advisory services 
that do not involve the management of customer assets. These commenters 
supported the proposed exclusion of non-advisory services from the 
proposed rule, and suggested that advisory activities that do not 
involve the management of customer assets, such as non-discretionary 
financial planning and publication of securities-related newsletters, 
``model portfolios,'' or research reports, should also be excluded, and 
that advisers that provide these only services would be exempt from the 
requirements of the proposed rule.
    One commenter noted that these activities are entirely outside of 
the ``payment chain''--the adviser neither manages, directly or 
indirectly, the customer's assets nor participates in the transmittal 
of any customer funds to or from any recipient. The same commenter 
noted that many of these activities do not involve an advisory customer 
at all. Another commenter noted that advisers who do not manage 
customer assets are less likely to have information about customer 
specific activity that could facilitate SAR or CTR filings. Another 
commenter noted that an adviser providing model portfolio services to a 
financial services provider has no legal, advisory, or fiduciary 
relationship with the financial services provider's own customers or 
any information regarding the customers themselves, and so that adviser 
is in no position to fulfill the AML/CFT requirements that are outlined 
in the IA AML NPRM.
    Two other commenters requested further examples and clarification 
regarding which non-advisory activities would not be covered, including 
clarifying that investment activities conducted on behalf of a fund 
would be considered non-advisory. Two commenters requested that non-
U.S. activities of U.S. firms should be excluded from the final rule. 
The commenters noted that inclusion of a U.S. investment adviser's non-
U.S. activities in the final rule could lead to conflict of laws and 
compliance challenges. One of the commenters requested that FinCEN 
clarify that U.S. firms are not required to apply the requirements of 
the proposed rule to non-U.S. activities if compliance would cause 
these firms to violate other laws in the jurisdictions in which they 
operate.
    Final Rule: FinCEN agrees with the view of commenters that advisers 
that provide only services that do not involve the management of 
customer assets (and so report no AUM on Form ADV) are unlikely to have 
any relevant information on illicit finance risk or suspicious activity 
involving their customers. In addition, there is a lower risk that 
these advisers will be used as an entry point into the U.S. financial 
system for illicit proceeds. For the reasons described above, FinCEN 
has decided to exempt such RIAs from the definition of ``investment 
adviser'' in the final rule and therefore from the broader AML/CFT 
requirements of the final rule.
    However, when an RIA both manages client assets and provides other 
advisory services that do not involve the management of client assets, 
FinCEN declines to exclude the ``non-management'' services from 
coverage of the rule's requirements. FinCEN notes that when provided 
along with the management of a customer's assets, these services may 
lead to an adviser learning relevant information about a customer for 
purposes of understanding customer risk or identifying suspicious 
activity. Further, there is the risk that exempting non-management 
services from the requirements of the final rule for RIAs that also 
manage client assets could potentially encourage some advisers to 
attempt to evade the requirements of the rule by re-branding certain 
activities as non-management activities. For example, customers that 
would prefer increased anonymity or want to directly avoid being 
subject to AML/CFT requirements could request such a re-branding for 
activities on their behalf. FinCEN would expect that in most 
circumstances, non-management services would be lower risk for money 
laundering, terrorist financing, or other illicit finance activity, and 
accordingly, an investment adviser could treat as lower risk its 
customers that receive only these services.
    FinCEN does not believe that further clarification of the concept 
of non-management services is necessary. The methodology for 
determining when an RIA has regulatory AUM for purposes of Form ADV is 
well-developed under SEC regulations and RIAs are familiar with it in 
that context.\207\ An investment adviser can use this methodology to 
help determine its ``non-management'' services.
---------------------------------------------------------------------------

    \207\ See Instructions to Item 5.F of Form ADV (17 CFR 279.1).
---------------------------------------------------------------------------

    FinCEN also does not believe that further clarification of the 
concept of non-advisory activities is required. Advisers have been 
required to determine when they provide services that require 
registration or other regulatory compliance measures since the passage 
of the Advisers Act in 1940.\208\ With respect to private funds, FinCEN 
does not believe that all investment activities on behalf of a fund are 
necessarily non-advisory. When such activities involve directing 
investment, they pose substantially similar risks to other advisory 
activities. FinCEN therefore declines to clarify that such investment 
activities on behalf of funds are non-advisory.
---------------------------------------------------------------------------

    \208\ Existing judicial precedent interprets whether a person is 
advising others (or acting as an ``investment adviser'' under the 
Advisers Act), and the SEC and SEC staff have issued guidance on 
what services qualify. See, e.g., Abrahamson v. Fleischner, 568 F.2d 
862, 869-72 (2d Cir. 1977), cert. denied, 436 U.S. 913 (1978); 
Applicability of the Investment Advisers Act to Financial Planners, 
Pension Consultants, and other Persons Who Provide Investment 
Advisory Services as a Component of Other Financial Services, SEC 
Statement of Staff Interpretation, Advisers Act Release No. 1092 
(Oct. 8, 1987).
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3. Dual Registrants and Affiliates
    Proposed Rule: FinCEN proposed that an investment adviser also 
registered as a broker-dealer or a bank (i.e., a dual registrant), or 
who is an operating subsidiary of a bank, would be included in the 
scope of the proposed regulation and subject to SEC examination for 
compliance with the regulation. However, in the IA AML NPRM, FinCEN 
clarified that it would not

[[Page 72187]]

require such investment advisers to establish multiple or separate AML/
CFT programs so long as a comprehensive AML/CFT program covers all of 
the investment adviser's applicable legal and regulatory obligations.
    Comments Received: Commenters generally supported the language of 
the proposed rule that an investment adviser that is dually registered 
as a broker-dealer or is a bank (or is a bank subsidiary) does not need 
to establish multiple or separate AML/CFT programs so long as a 
comprehensive AML/CFT program covers all of the entity's relevant 
business and activities that are subject to BSA requirements. 
Similarly, commenters also generally agreed that an investment adviser 
affiliated with, or that is a subsidiary of, another entity required to 
establish an AML/CFT program in another capacity should not be required 
to implement multiple or separate programs. However, some expressed 
concern that FinCEN's proposal to delegate examination authority to the 
SEC for investment advisers would create duplication given the existing 
examination obligations on dual registrants.
    One commenter, while supporting the proposed rule, requested that 
the final rule text should specifically afford investment advisers 
affiliated with a bank or bank holding company flexibility to leverage 
any aspect of the bank or bank holding company's AML/CFT program. The 
commenter argued that stating this in the rule text would require 
relevant supervisory agencies and staff to adhere to this approach. The 
commenter noted that failure to do so could result in costly 
inefficiencies and additional operational risk in being unable to 
achieve a cohesive, enterprise-wide approach to AML/CFT compliance.
    One commenter stated that requiring separate programs may increase 
the compliance and operational burden but could result in less useful 
information because of overlapping and duplicate reports that could be 
filed. One commenter recommended that supervision for a dual 
registrant's AML/CFT program remain with the firm's prudential 
regulator. Another commenter recommended that the SEC examination staff 
should leverage AML/CFT examinations conducted by other functional 
regulators, as well as FINRA and the New York Department of Financial 
Services. The commenter claimed this approach would align with the 
expectations of Congress, Treasury, and FinCEN in achieving objectives 
while efficiently allocating resources and lower the risk of 
conflicting examination results, expectations and findings.
    Final Rule: FinCEN is implementing this requirement without change 
from the proposed rule. Accordingly, any investment adviser is subject 
to the requirements of the final rule, even if it is dually registered 
as a broker-dealer or is a bank (or is a bank subsidiary). As explained 
in the IA AML NPRM, such an adviser does not need to establish a 
separate AML/CFT program so long as a comprehensive AML/CFT program 
covers all of the investment adviser's relevant activities. Such a 
comprehensive program should be designed to address the different money 
laundering, terrorist financing, or other illicit finance activity 
risks posed by the different aspects of the overall business's 
activities and accordingly satisfy each of the risk-based AML/CFT 
program requirements to which it is subject in its capacity as both an 
investment adviser and broker-dealer or bank.
    In addition, an investment adviser affiliated with, or a subsidiary 
of, another entity required to establish an AML/CFT program will not be 
required to implement multiple or separate programs and instead may 
elect to extend a single program to all affiliated entities that are 
subject to the BSA, so long as such AML/CFT program is designed to 
identify and mitigate the different money laundering, terrorist 
financing, and other illicit finance activity risks posed by the 
different aspects of each affiliate's (or subsidiary's) business(es) 
and satisfies each of the risk-based AML/CFT program and other BSA 
requirements to which the entities are is subject in all of their BSA-
regulated capacities, as for example an investment adviser and a bank 
or insurance company.\209\
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    \209\ FinCEN notes that certain insurance companies are required 
to establish and implement AML programs and report suspicious 
activity. See 31 U.S.C. 5312(a)(2)(M); 31 CFR part 1025. However, 
the term ``insurance company'' is not included within the general 
definition of financial institution under FinCEN's regulations. See 
31 CFR 1010.100(t). Therefore, such insurance companies are not 
required to file CTRs with FinCEN or comply with certain 
recordkeeping requirements. Accordingly, FinCEN would not expect an 
insurance company that is affiliated with or owns an investment 
adviser to design an enterprise-wide AML/CFT compliance program that 
would subject the insurance company to AML/CFT requirements not 
otherwise required by FinCEN's regulations. Conversely, FinCEN would 
expect a bank, which is subject to the full panoply of FinCEN's 
regulations implementing the BSA, to design an enterprise-wide AML/
CFT compliance program that would subject an affiliated or 
controlled investment adviser to the AML/CFT requirements required 
by the final rule.
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    FinCEN does not believe that further clarification of the AML/CFT 
program requirements for dual registrants, or how supervisors will 
conduct examination of the final rule, is currently necessary. The 
final rule provides adequate flexibility for investment advisers to 
incorporate its requirements into existing AML/CFT programs at an 
enterprise level and to tailor their programs to their circumstances in 
a risk-based manner. Financial institutions involved in multiple lines 
of business have long been subject to regulation by multiple agencies 
and FinCEN has worked with other agencies in regulatory and supervisory 
contexts. Based on this experience, FinCEN does not believe special 
instructions to examiners to coordinate their examinations touching on 
the final rule is necessary or appropriate. FinCEN anticipates working 
with SEC staff to communicate with relevant regulatory agencies that 
currently supervise relevant entities about the requirements of the 
final rule.
4. Delegation of AML/CFT Requirements
    Proposed Rule: FinCEN proposed to permit an investment adviser to 
delegate contractually the implementation and operation of certain 
aspects of its AML/CFT program. However, the investment adviser would 
remain fully responsible and legally liable for the program's 
compliance with the proposed rule. The investment adviser also would be 
required to ensure that FinCEN and the SEC are able to obtain 
information and records relating to the AML/CFT program. The proposed 
rule noted that, because investment advisers operate through a variety 
of different business models, each investment adviser may decide which 
aspects (if any) of its AML/CFT program are appropriate to delegate.
    FinCEN requested comment on the practical effect of permitting an 
investment adviser to delegate some or all of the requirements in the 
proposed rule, as well as comment on various aspects of how foreign-
located fund administrators may implement these requirements.
(a) General Comments on Delegation
    Comments Received: Seven commenters expressed views on the 
delegation of AML/CFT activities to third party service providers, 
including fund administrators. In general, these commenters suggested 
that FinCEN recognize that many investment advisers delegate 
administrative and compliance responsibilities to third parties, and 
that such delegation for AML/CFT responsibilities should be permissible 
under the proposed rule.

[[Page 72188]]

Some commenters stated that, given a proposed SEC rule to apply minimum 
requirements to the outsourcing of services (including for compliance), 
FinCEN should be cautious about additional guidance on delegation prior 
to the SEC issuing a final rule.
    One commenter requested that FinCEN include a safe harbor for 
investment advisers whose client utilizes a single qualified custodian 
to hold the client's advised assets, and allow the investment adviser 
to rely on the qualified custodian that is performing all AML/CFT 
obligations with respect to any client assets the custodian has in its 
custody. The commenter added that this would leverage the existing AML/
CFT requirements for banks and broker-dealers while avoiding 
unnecessary duplication.
    The same commenter also requested that investment advisers be 
permitted to rely on a service provider's certification of AML/CFT 
compliance so long as the investment adviser performs and documents 
periodic oversight of the service provider's operations at least 
annually. One commenter requested that FinCEN expressly permit an 
investment adviser's AML/CFT program to contractually rely on diligence 
conducted by another covered financial institution or, perhaps, even 
other non-covered financial institutions or entities that are working 
on behalf of, and under the control and supervision of, the adviser. 
Another commenter asserted that the proposed rule rejected the 
suggestion that investment advisers should be able to rely upon the 
AML/CFT efforts of intermediaries, and requested FinCEN permit 
investment advisers to rely on the AML/CFT controls of intermediaries. 
The commenter added that such reliance is consistent with current best 
practices. Another commenter requested that FinCEN clarify in the rule 
text that delegation of AML/CFT requirements is expressly permitted.
    One commenter suggested FinCEN clarify that, while advisers are 
responsible for developing the firm's AML/CFT compliance program, the 
full scope of the implementation and operation of the AML/CFT program 
may be delegated to service providers, including to offshore fund 
administrators. The commenter requested that this could include the 
responsibility to respond to 314(a) requests and to monitor for, 
prepare, and file SARs, to the extent that such administrator has the 
relevant information.
    Two commenters stated that FinCEN should not prescribe additional 
standards or requirements with respect to such permissible delegation, 
as such additional requirements could conflict with the SEC's proposed 
rule on Outsourcing by Investment Advisers (Outsourcing Rule), which, 
would impose minimum due diligence and outsourcing requirements with 
regard to service providers.\210\ These commenters recommended FinCEN 
wait for the Outsourcing Rule process to finalize before mandating any 
requirements for delegation of AML functions.
---------------------------------------------------------------------------

    \210\ See SEC, Outsourcing by Investment Advisers, Notice of 
Proposed Rulemaking, Advisers Act Release No. 6176 (Oct. 26, 2022), 
87 FR 68816 (Nov. 16, 2022).
---------------------------------------------------------------------------

    One commenter stated that if FinCEN chooses not to allow delegation 
of all AML/CFT responsibilities, then FinCEN should clarify which 
aspects of an AML/CFT program may be delegated to third parties. The 
commenter also requested that FinCEN provide guidance on measures 
advisers should take to ensure effective delegation of an AML/CFT 
program to a third party. The commenter recommended that such measures 
could include having the adviser conduct due diligence on the third 
party's AML/CFT policies and determining whether they meet the 
adviser's standards; a written agreement with the third party 
containing appropriate representations and covenants, including that 
the third party will maintain and adhere to effective AML/CFT policies, 
procedures and controls and update the adviser if there are any 
deficiencies identified in the third-party's audit; and having the 
adviser's periodically monitor compliance with such requirements.
    As FinCEN noted in the IA AML NPRM, it is common in the advisory 
business for an investment adviser to delegate a range of compliance, 
administrative, and other activities to third-party providers. FinCEN 
also notes that other BSA-defined financial institutions routinely 
delegate, subject to relevant BSA and non-BSA regulatory requirements 
governing the delegation of activities to service providers, aspects of 
their AML/CFT compliance programs to third parties. Therefore, FinCEN 
will permit an investment adviser to delegate contractually the 
implementation and operation of some or all aspects of its AML/CFT 
program to a third-party provider, including a fund administrator. 
Because investment advisers operate through a variety of different 
business models, each investment adviser must decide which aspects of 
its AML program are appropriate to delegate. Based on current practice 
within the investment adviser sector for both AML/CFT and other 
regulatory requirements, and how other financial institutions delegate 
AML/CFT responsibilities, FinCEN believes it is unnecessary to include 
rule text explicitly permitting such delegation.
    However, if an investment adviser delegates the implementation and 
operation of any aspects of its AML/CFT program, the investment adviser 
will remain fully responsible and legally liable for, and be required 
to demonstrate to examiners, the program's compliance with AML/CFT 
requirements and FinCEN's implementing regulations. The investment 
adviser also will be required to ensure that FinCEN and the SEC are 
able to obtain information and records relating to the AML/CFT program. 
The investment adviser would still be required to identify and document 
the procedures appropriate to address its vulnerability to money 
laundering and terrorist financing, and then undertake reasonable steps 
to assess whether the service provider would carry out such procedures 
effectively.
    For example, it would not be sufficient to simply obtain a 
certification from a service provider that the service provider ``has a 
satisfactory anti-money laundering program.'' However, an investment 
adviser could take into account such a certification as part of the 
investment adviser's periodic oversight of the service provider's 
operations with respect to the delegated obligations. The appropriate 
frequency of that oversight would depend on the adviser's overall risk 
profile for money laundering, terrorist financing, or other illicit 
finance activities, and the types of AML/CFT responsibilities delegated 
to the service provider. Such oversight measures could include, for 
example, having the adviser conduct due diligence on the third party's 
AML/CFT policies and determining whether they meet the adviser's 
standards; a written agreement with the third party containing 
appropriate representations and covenants, including that the third 
party will maintain and adhere to risk-based and reasonably designed 
AML/CFT policies, procedures and controls and update the adviser if 
there are any deficiencies identified in the third-party's audit (if 
any); and/or having the adviser periodically monitor compliance with 
such requirements. FinCEN would like to note that this list of examples 
is illustrative based on information provided by commenters, and other 
measures could be used to conduct oversight of a service provider.

[[Page 72189]]

    Regarding the SEC's proposed Outsourcing Rule,\211\ FinCEN notes 
that the Outsourcing Rule would impose certain minimum requirements on 
an RIA's oversight of service providers to that RIA. However, given 
that the rule has not yet been finalized and would also only apply only 
to RIAs, FinCEN does not believe that delaying this aspect of the final 
rule is appropriate and FinCEN is providing the guidance above on how 
advisers may monitor their service providers' implementation of AML/CFT 
requirements contained in the final rule.
---------------------------------------------------------------------------

    \211\ Id.
---------------------------------------------------------------------------

    Regarding certain suggestions that FinCEN permit advisers to 
expressly rely on diligence or AML/CFT measures by other financial 
institutions, service providers, or other intermediaries, FinCEN 
declines to do so.\212\ When the adviser is outsourcing AML/CFT 
compliance responsibilities with respect to its own customers and 
advisory activities, the adviser will be best positioned to assess 
illicit finance risks and identify and report suspicious activity, and 
design and oversee an AML/CFT program that can do so. Therefore, when 
the adviser delegates the implementation and operation of some or all 
aspects of its AML/CFT program to a service provider, the adviser will 
remain responsible for overall compliance with these requirements.
---------------------------------------------------------------------------

    \212\ FinCEN interprets these suggestions to mean that express 
reliance would remove the investment adviser's liability for 
compliance with the obligation.
---------------------------------------------------------------------------

(b) Comments on Delegation to Foreign-Located Service Providers
    Comments Received: Seven commenters specifically addressed the 
issue of delegation to foreign-located service providers, including 
foreign-located fund administrators. All seven indicated that the IA 
AML NPRM had a negative view of how foreign-located fund administrators 
may apply AML/CFT requirements, and that view was inconsistent with 
their experience in working with foreign-located fund administrators. 
These commenters generally agreed that investment advisers should be 
able to delegate AML/CFT compliance measures to foreign-located fund 
administrators, so long as the investment adviser maintained 
responsibility for oversight of the AML/CFT program. Several commenters 
also requested that FinCEN expressly clarify that delegation of AML/CFT 
responsibilities to foreign-located fund administrators is permissible.
    One investment adviser noted that they delegate AML compliance 
responsibilities to foreign-located service providers, and that these 
service providers are subject to supervision and oversight of a U.S.-
based financial crimes compliance team. The adviser requested explicit 
guidance clarifying that it is permissible to rely on AML/CFT programs 
developed, implemented, and maintained by offshore fund administrators 
when such reliance is subject to contractual agreements and a risk-
based approach to oversight. Another commenter noted that foreign-
located RIAs and ERAs commonly delegate AML/CFT compliance to 
administrators in their local jurisdictions, and these advisers would 
face significant operational and implementation challenges if the final 
rule permits the delegation of only certain elements to offshore 
administrators.
    Another commenter claimed that the SEC does not require a U.S. 
entity to be appointed to ensure that other rules implementing Federal 
securities laws are met, and that AML/CFT programs could easily, and 
should, be treated in the same way. The commenter noted requiring 
foreign-located advisers to outsource AML/CFT compliance to a U.S.-
based entity would create additional risks, especially where robust 
internal functions designed to comply with the requirements of other 
FATF-compliant jurisdictions are already in place.
    Three commenters noted that many foreign-located fund 
administrators are familiar with what is needed to execute a successful 
AML/CFT program, and in jurisdictions such as Ireland, Luxembourg, and 
the Cayman Islands, have been subject to longstanding AML requirements. 
Regarding the Cayman Islands in particular, the commenter noted that 
while the Cayman Islands has been criticized for weaknesses in AML/CFT 
supervision, it has made substantial strides to address these 
deficiencies.\213\
---------------------------------------------------------------------------

    \213\ In October 2023, the FATF announced that the Cayman 
Islands would no longer be subject to increased monitoring by the 
FATF (a process that is externally referred to as the ``grey 
list''). See FATF, Jurisdictions Under Increased Monitoring (Oct. 
27, 2023), available at https://www.fatf-gafi.org/en/publications/High-risk-and-other-monitored-jurisdictions/Increased-monitoring-october-2023.html.
---------------------------------------------------------------------------

    Three commenters requested FinCEN clarify how various compliance 
obligations can be met by the use of offshore administrators, including 
permitting onshore or offshore administrators, agents and service 
providers to engage in suspicious activity clearing, early alert 
reviews and other elements of the SAR process. Another commenter 
requested that FinCEN clarify if there were jurisdictions where 
delegation would not be permitted.
    FinCEN appreciates the detailed information provided by commenters 
on how foreign-located service providers, including offshore 
administrators, can effectively implement the AML/CFT requirements 
contained in the proposed rule. Commenters generally noted that 
foreign-located service providers have implemented these requirements 
on behalf of investment advisers and other financial institutions for 
years, and that these service providers are routinely subject to U.S.-
based supervision and oversight. FinCEN would like to clarify that it 
is permissible for an RIA or ERA to delegate the implementation and 
operation of some or all aspects of its AML/CFT program and other AML/
CFT measures to foreign-located service providers, including fund 
administrators.\214\ As with any delegation to a service provider 
(whether located in the United States or outside the United States), 
the delegation must be subject to contractual agreements and a risk-
based approach to oversight described above, the RIA or ERA must remain 
responsible for overall implementation and ensure that FinCEN and the 
SEC are able to obtain information and records relating to the AML/CFT 
program.
---------------------------------------------------------------------------

    \214\ FinCEN recognizes that in certain circumstances an 
offshore fund administrator may be in the best position to perform 
certain aspects of an investment adviser's AML/CFT program 
requirements, including monitoring for suspicious activity. 
Accordingly, an investment adviser may delegate contractually to an 
offshore fund administrator to monitor for suspicious activity, 
provide the details of such activity to the investment adviser, and 
file SARs on behalf of the adviser. However, the adviser remains 
fully responsible and legally liable for compliance with AML/CFT 
requirements.
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E. Minimum AML/CFT Program Requirements

    As mentioned above, the BSA provides that Treasury may prescribe 
minimum standards for AML/CFT programs that include, at a minimum, (1) 
the development of internal policies, procedures, and controls; (2) the 
designation of a compliance officer; (3) an ongoing employee training 
program; and (4) an independent audit function to test the 
programs.\215\ FinCEN accordingly is adopting the requirement that 
investment advisers establish an AML/CFT program that meets certain 
minimum requirements as provided in section 5318(h) of the BSA. Section

[[Page 72190]]

1032.210(a)(1) of the final rule will require each RIA and ERA to 
develop and implement a written AML/CFT program that is risk-based and 
reasonably designed to prevent the investment adviser from being used 
for money laundering, terrorist financing, or other illicit finance 
activities. Each RIA and ERA will also be required to make its AML/CFT 
program available for inspection by FinCEN and the SEC. The minimum 
requirements for the AML/CFT program are set forth in section 
1032.210(b) of the final rule and discussed in greater detail below.
---------------------------------------------------------------------------

    \215\ 31 U.S.C. 5318(h)(1)-(2).
---------------------------------------------------------------------------

1. General Comments
    Comments Received: One commenter wrote that it served as a 
qualified custodian for customer accounts managed by RIAs and required 
customers of RIAs to establish brokerage accounts (thus making the RIA 
customers their direct customers). The commenter wrote that these 
accounts (and the account holders) are subject to and covered by its 
AML policies and procedures. The commenter also stated that it was 
unclear why, in its view, a duplicative process at the RIA would 
provide additional protection against illicit finance activity. Another 
commenter agreed with FinCEN that advisers' AML/CFT programs should be 
risk-based and that the final rule should provide maximum flexibility 
to advisers to accommodate their varied business models and risk 
profiles.
    One commenter noted that the requirements in the proposed rule do 
not duplicate existing requirements under the Advisers Act. The 
commenter wrote that the requirements serve different purposes and the 
information gathered to carry out each set of objectives is not 
necessarily comparable. For example, the commenter stated that 
regulations issued pursuant to Federal securities laws and the Advisers 
Act define beneficial ownership differently than the BSA and require 
collection of different data.\216\ In addition, the resulting 
information collected under such regulations is not necessarily 
accessible to the same regulators or law enforcement personnel.
---------------------------------------------------------------------------

    \216\ See, e.g., 17 CFR 240.13d-3 (governing determination of 
beneficial ownership pursuant to the Securities Exchange Act of 
1934).
---------------------------------------------------------------------------

    One commenter wrote that while the AML/CFT program must be risk-
based and tailored to the adviser's business, the five minimum 
requirements (four of which are required by statute) for AML/CFT 
programs are highly prescriptive, making it difficult, in the 
commenter's view, for RIAs and ERAs to adopt a tailored, risk-based 
program.
    One commenter agreed that AML/CFT programs should be risk-based and 
that risk-based programs may rely on appropriate vetting of 
intermediaries and other funds (and not require a ``look through'' to 
underlying investors), and requested that the final rule permit 
existing practices undertaken by advisers with regards to 
intermediaries acting for underlying investors, for an adviser to a 
private fund to be compliant with the risk-based AML/CFT program 
requirements.
    One commenter requested that the final rule explicitly clarify 
that, in instances where an investment adviser has no direct customer 
relationship, AML risks inherently are lower and investment advisers 
should have significant latitude to apply the risk-based approach. For 
example, the commenter suggested that advisers, which provide ``non-
advisory'' products and services to other advisers, with no direct 
relationship to the investors, should have the discretion to exclude 
such products and services from the definition of ``account'' or 
``customer.''
    Final Rule: The application of the risk-based approach means that 
an adviser may focus aspects of its AML/CFT program on activities or 
customers that it considers higher risk, and may comply with the BSA by 
applying more limited measures to those customers or activities that it 
identifies as lower risk. Regarding the five components of an AML/CFT 
program specified in section 1032.210(b) of the final rule, FinCEN 
disagrees that these are highly prescriptive, as each can be adjusted 
to address the specific risks and advisory activities of the adviser. 
For example, an adviser that services specific types of institutional 
customers (such as university endowments or municipal accounts) may 
have more tailored employee training than an adviser that has a broader 
customer base composed of both retail and institutional customers.
    FinCEN also reiterates the discussion in both the IA AML NPRM and 
Risk Assessment regarding the limited overlap between AML/CFT 
regulations and the requirements of the Advisers Act. The Advisers Act 
and its implementing regulations are not designed to explicitly address 
the risk that an RIA or ERA may be used to move proceeds or funds tied 
to money laundering, terrorist financing, or other illicit activity; 
they are instead designed to protect customers against fraud, 
misappropriation, or other illegal conduct by an investment 
adviser.\217\ The diversity of customer relationships covered by the 
final rule can be addressed through a risk-based framework rooted in 
the risks posed by the adviser's business and FinCEN addresses some 
specific customer relationships and their risk throughout this 
document.
---------------------------------------------------------------------------

    \217\ See 89 FR at 12113; Risk Assessment, supra note 2, at 29-
30.
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2. Internal Policies, Procedures, and Controls
    Proposed Rule: Proposed section 1032.210(b)(1) would have required 
an investment adviser to establish and implement internal policies, 
procedures, and controls reasonably designed to prevent the investment 
adviser from being used for money laundering, terrorist financing or 
other illicit finance activities. The proposed rule noted that some 
types of customers or customer activities would pose greater risks for 
these money laundering, terrorist financing, or other illicit finance 
activities than others. Generally, under the proposed rule, an 
investment adviser would have been required to review, among other 
things, the types of advisory services that it provides and the nature 
of the customers that it advises to identify the investment adviser's 
vulnerabilities to money laundering, terrorist financing, and other 
illicit finance activities. It would also have needed to review 
investment products offered, distribution channels, intermediaries that 
it may operate through, and geographic locations of customers and 
advisory activities.
    The proposed rule also discussed how an investment adviser's AML/
CFT program may address the money laundering, terrorist financing, or 
other illicit finance risks that may be presented by certain specific 
types of advisory customers, as well as how an adviser's program may 
address the risks presented by certain specific advisory services 
provided to those customers.
    Comments Received: Two commenters asked for additional clarity 
regarding the application of the adviser's AML/CFT program to private 
fund customers. One commenter asked for confirmation that an adviser 
only needs to assess money laundering risks for underlying investors in 
a private fund when that adviser is the primary adviser to a private 
fund and has access to the relevant information about the underlying 
investors, and not when acting as a subadviser. The commenter stated 
that an adviser serving as the primary adviser or sponsor to a private 
fund will likely, but not necessarily, have information about that 
private fund's underlying investors in the ordinary course. The 
commenter

[[Page 72191]]

claimed that the adviser would not have that information, for example, 
in an unaffiliated ``fund-of-funds'' structure. In those instances, the 
commenter suggested that the investee fund in the structure should not 
be required to ``look through'' and assess the risks presented by the 
underlying investors in an investing fund, unless the adviser is also 
the primary adviser to the investing fund and has access to information 
about underlying investors in the ordinary course.
    The second commenter asked for clarity on how an adviser may meet 
its AML/CFT program requirements for (1) a fund that restricts its 
investors from redeeming any part of their interests in the fund within 
two years after that interest was initially purchased; and (2) an 
investment adviser that advises only such funds. A third commenter 
suggested FinCEN to provide further clarity on those types of pooled 
investment vehicles that present lower risks for purposes of an 
investment adviser's AML/CFT program.
    Final Rule: The final rule maintains the proposed requirement that 
an investment adviser establish and implement internal policies, 
procedures, and controls reasonably designed to prevent the investment 
adviser from being used for money laundering, terrorist financing, or 
other illicit finance activities and to achieve compliance with the 
applicable provisions of the BSA and implementing regulations. FinCEN 
is making a technical edit to the regulatory text at 1032.210(b)(1) to 
add the term ``internal'' to the ``policies, procedures, and controls'' 
so that the regulatory and statutory text for this requirement is 
consistent.\218\ FinCEN notes this edit is not intended to affect the 
substance of the requirement.\219\
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    \218\ See 31 U.S.C. 5318(h)(1)(A) (stating that AML/CFT programs 
should include, at a minimum, ``the development of internal 
policies, procedures, and controls'' (emphasis added)).
    \219\ For example, an enterprise-wide AML/CFT program's 
policies, procedures, and controls would still be ``internal'' with 
respect to the investment adviser.
---------------------------------------------------------------------------

    In establishing such internal policies, procedures, and controls, 
an investment adviser will be required to review, among other things, 
the types of advisory services that it provides and the nature of the 
customers that it advises to identify the investment adviser's 
vulnerabilities to being used for money laundering, terrorist 
financing, and other illicit finance activities. It will also need to 
review investment products offered, investment recommendations, 
distribution channels, intermediaries that it operates through, and 
geographic locations of customers and advisory activities. Accordingly, 
an investment adviser's assessment of the risks presented by the 
different types of advisory services that it provides to such customers 
would need to, among other factors, consider the types of accounts 
offered (e.g., managed accounts), the channel(s) through which such 
accounts are opened, and the types of customers opening such accounts 
and related information about such customers, including their 
geographic location, sources of wealth, and investment objective. The 
following paragraphs discuss the final rule's treatment of internal 
policies, procedures, and controls as relating to registered closed-end 
funds and private funds.
    Registered Closed-End Funds. As contemplated in the IA AML NPRM, 
FinCEN is not categorically exempting registered closed-end companies 
(``registered closed-end funds'') from the AML/CFT requirements in the 
final rule.\220\ Accordingly, an investment adviser's AML/CFT program 
will have to take into account any registered closed-end funds advised 
by the investment adviser. FinCEN notes that, absent other indicators 
of high-risk activity, an investment adviser may treat exchange-listed, 
registered closed-end funds as lower risk for purposes of their AML/CFT 
programs. An exchange-listed registered closed-end fund may be treated 
as lower risk given that exchange-listed closed-end funds generally (a) 
do not offer their shares continuously or redeem their shares on 
demand; (b) issue a fixed number of shares, which typically trade at 
negotiated prices on a stock exchange or in the over-the-counter 
market; (c) typically do not have an account relationship with their 
investors; and (d) have shares that are purchased and sold through 
broker-dealers or banks, which are already subject to AML/CFT 
requirements under the BSA (including the performance of CIP and CDD on 
their customers that purchase shares on exchanges).
---------------------------------------------------------------------------

    \220\ A closed-end company is a management company other than an 
open-end company, see 15 U.S.C. 80a-5(a)(2), and includes interval 
funds that rely on rule 23c-3 under the Company Act.
---------------------------------------------------------------------------

    Private Funds. As noted in the IA AML NPRM, the money laundering, 
terrorist financing, or illicit finance activity risks for private 
funds may vary by the individual fund's investment strategy, targeted 
investors, jurisdiction, and other characteristics. When determining 
its risk profile, an investment adviser may wish to consider, with 
respect to any private fund that it advises, among other things, 
minimum subscription amounts, restrictions on the type of investors, 
restrictions on redemptions or withdrawals, and the types of currency 
transactions conducted with investors. For advisers who exclusively 
advise funds with restrictions on redemptions or withdrawals, FinCEN 
does not assess that such funds can be categorically treated as lower 
risk, as there are other factors regarding the fund and its underlying 
investors that are relevant to illicit finance risk, which may vary 
significantly for each adviser or fund.
    FinCEN expects an investment adviser that is the primary adviser to 
a private fund or other unregistered pooled investment vehicle to make 
a risk-based assessment of the money laundering, terrorist financing, 
and illicit finance activity risks presented by the investors in such 
investment vehicles by considering the same types of relevant factors, 
as appropriate, as the adviser would consider for customers for whom 
the adviser manages assets directly. As noted above, the risk-based 
approach of the rule is intended to give investment advisers the 
flexibility to design their programs to meet the specific risks 
presented by their customers, including any funds they advise. In 
assessing the potential risk of a private fund under the rule, 
investment advisers generally should gather pertinent facts about the 
structure or ownership of the fund, including the extent to which the 
adviser is provided with relevant information about the investors in 
that private fund, who may or may not themselves also be customers of 
the investment adviser, and the nature of such investor-related 
information that they investment adviser receives.
    Where an investment adviser attempts to and is unable to obtain 
identifying information about the investors in a private fund as part 
of its risk-based evaluation of the private fund, the adviser may 
determine that such private fund poses a higher risk for money 
laundering, terrorist financing, or other illicit finance activity. 
When a private fund's potential vulnerability to such money laundering, 
terrorist financing, or other illicit finance activity is high, the 
adviser's procedures would need to take reasonable steps to address 
these higher risks to prevent the investment adviser from being used 
for money laundering, the financing of terrorist activities, or other 
illicit activity, and to achieve and monitor compliance with the BSA 
(including to obtain sufficient information to monitor and report 
suspicious activity).

[[Page 72192]]

    FinCEN recognizes that certain private funds and other unregistered 
pooled investment vehicles may present lower risks for money laundering 
or terrorist financing than others. Consequently, FinCEN would not 
expect an investment adviser to risk-rate the advisory services that it 
provides to a pooled investment vehicle that presents a lower risk in 
the same way it might rate the advisory services that it provides to 
other types of pooled investment vehicles that may present higher risks 
for attracting money launderers, terrorist financers, or other illicit 
actors.
3. Independent Testing
    Proposed Rule: Proposed section 1032.210(b)(2) would have required 
that an investment adviser provide for independent testing of the AML/
CFT program by the adviser's personnel or a qualified outside party. As 
explained in the IA AML NPRM, the independent testing, as proposed, 
could be conducted by employees of the investment adviser, its 
affiliates, or unaffiliated service providers, so long as those same 
employees are not involved in the operation and oversight of the AML/
CFT program. The frequency of the independent testing would depend upon 
the money laundering, terrorist financing, and other illicit finance 
risks of the adviser and the adviser's overall risk management 
strategy.
    Comments Received: One commenter expressed concern that the 
requirement for an independent audit of the AML/CFT program would 
significantly burden investment advisers with few employees. The 
commenter stated that most of these advisers would have to hire an 
outside contractor to comply with this requirement. The commenter 
requested that FinCEN permit advisers with 100 or fewer employees to 
employ an internal testing program that may include employees involved 
in the AML/CFT program and/or ongoing AML/CFT compliance. The commenter 
indicated that without this modification, advisers would not be able to 
incorporate AML/CFT program requirements into their existing Federal 
securities compliance reviews, as staff who conduct these reviews would 
not be allowed to participate in the independent AML/CFT testing 
required by the proposed rule.
    Final Rule: FinCEN is implementing this requirement without change 
from the proposed rule. The final rule, like the proposed rule, permits 
independent testing to be conducted by the investment adviser's 
personnel or a qualified outside party. FinCEN recognizes the potential 
burden from using an external party to conduct the required independent 
testing.
    Although the final rule permits the use of an investment adviser's 
personnel with certain restrictions, FinCEN declines to accept the 
recommendation that an individual involved in implementing the 
adviser's AML/CFT program may participate in the independent testing of 
such a program. Doing so would undermine the very purpose of this 
requirement, which is to allow an independent party to verify whether 
the AML/CFT program is functioning effectively. While investment 
advisers may use trained internal staff who are not involved in the 
function being tested, the AML/CFT officer or any party who directly, 
and in some cases, indirectly reports to the AML/CFT officer, or an 
equivalent role, generally would not be considered sufficiently 
``independent'' for these purposes.\221\ Any individual conducting the 
testing, whether internal or external, would be required to be 
independent of the function being tested in the investment adviser's 
AML/CFT program, including its oversight. Investment advisers with less 
complex operations, and lower money laundering, terrorist financing, or 
other illicit finance activity risk profiles may consider utilizing a 
shared resource as part of a collaborative arrangement with similarly 
less complex and lower risk profile advisers to conduct testing, as 
long as the testing is independent.\222\
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    \221\ This is consistent with current 31 CFR 1022.210, which 
provides that independent review may be conducted by an officer or 
employee of an MSB so long as the tester is not the AML/CFT officer. 
Similarly, current 31 CFR 1025.210, 1029.210, and 1030.210 provide 
that independent testing at insurance companies, loan or finance 
companies, and housing government sponsored enterprises, 
respectively, may be conducted by a third party or by any officer or 
employee of the financial institution, other than the AML/CFT 
officer. Likewise, 31 CFR 1027.210 and 1028.210 provide that 
independent testing of a dealer in precious metals, precious stones, 
or jewels or an operator of a credit card system, respectively, can 
be conducted by an officer or employee of the institution, so long 
as the tester is not the AML/CFT officer or a person involved in the 
operation of the AML/CFT program. The criteria to meet the 
``independent requirement'' for independent testing at U.S. 
operations of foreign financial institutions may include a review of 
the reporting arrangements between the party conducting the 
independent testing and the AML/CFT officer, or equivalent 
management function such as a head of business line or a general 
manager, to assess any conflicts of interests and the level of 
independence with the party conducting the independent testing.
    \222\ See Interagency Statement on Sharing Bank Secrecy Act 
Resources (Oct. 3, 2018), available at https://www.fincen.gov/news/news-releases/interagency-statement-sharing-bank-secrecy-act-resources.
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4. AML/CFT Officer
    Proposed Rule: Proposed section 1032.210(b)(3) would have required 
that an investment adviser designate a person or persons to be 
responsible for implementing and monitoring the operations and internal 
controls of the AML/CFT program. The IA AML NPRM explained that the 
designated person or persons should be knowledgeable and competent 
regarding AML/CFT requirements, the adviser's relevant internal 
policies, procedures, and controls, as well as the adviser's money 
laundering, terrorist financing, and other illicit finance risks. A 
person designated as a compliance officer should be an officer of the 
investment adviser (or individual of similar authority within the 
particular corporate structure of the investment adviser) and someone 
who has established channels of communication with senior management 
demonstrating sufficient independence and access to resources to 
implement a risk-based and reasonably designed AML/CFT program.
    Comments Received: Four commenters requested FinCEN modify this 
requirement to provide additional flexibility given the varying 
organizational structures of investment advisers. Three commenters 
requested that an investment adviser be able to designate an employee 
of the adviser's affiliate as its AML/CFT officer, provided that the 
employee is sufficiently qualified to perform this role, including 
possessing the appropriate level of authority, independence, access to 
information, and resources to perform the responsibilities of 
compliance with BSA/AML regulatory obligations.
    Another commenter suggested that any sufficiently senior employee 
of the adviser (including its chief compliance officer)--or of any 
other affiliate or entity within the investment adviser's 
organizational structure--be permitted to serve as the AML/CFT officer 
so long as (i) such employee meets the other requirements set forth in 
at 1032.210(b)(2); and (ii) is either a member of, or reports directly 
to, the advisers or its affiliate's senior management. The reason for 
this suggestion was that investment advisers may not have formally 
designated corporate ``officers'' or have officers who are well-suited 
to serve as the adviser's AML/CFT compliance officer. Another commenter 
echoed the recommendation but suggested that an adviser also be able to 
designate a third-party expert.
    Final Rule: FinCEN is implementing this requirement without change 
from

[[Page 72193]]

the proposed rule. The final rule, like the proposed rule, will require 
an investment adviser to designate a person or persons responsible for 
implementing and monitoring the internal policies, procedures, and 
controls of the adviser's AML/CFT program. Inherent in the requirement 
that an investment adviser designate an AML/CFT officer is the 
expectation that the designated individual is qualified to oversee the 
investment adviser's compliance with the BSA and FinCEN's implementing 
regulations. Accordingly, for an AML/CFT program to be risk-based and 
reasonably designed to achieve compliance with the BSA, the compliance 
officer must be sufficiently qualified. Whether an individual is 
sufficiently qualified as an AML/CFT officer will depend, in part, on 
the investment adviser's risk profile. Among other criteria, a 
qualified AML/CFT officer must have the expertise and experience to 
adequately perform the duties of the position, including having 
sufficient knowledge and understanding of the investment adviser and 
the risks of its use for money laundering, terrorist financing, or 
other illicit finance activities, the BSA and its implementing 
regulations, and how those laws and regulations apply to the investment 
adviser and its activities. Additionally, the AML/CFT officer's 
position in the financial institution's organizational structure must 
enable the AML/CFT officer to effectively implement the adviser's AML/
CFT program. And, as explained in the proposed rule, an investment 
adviser may designate a single person or persons (including in a 
committee) to be responsible for compliance.
    Given these necessary qualifications and the comments received, 
FinCEN clarifies that for purposes of compliance with the final rule, 
the actual title of the individual responsible for day-to-day AML/CFT 
compliance is not determinative, and the AML/CFT officer for these 
purposes need not be an ``officer'' of the adviser. The individual's 
authority, independence, and access to necessary AML/CFT compliance 
resources, however, are critical. Importantly, an AML/CFT officer 
should have decision-making capability regarding the AML/CFT program 
and sufficient stature within the organization to ensure that the 
program meets the applicable requirements of the BSA. The AML/CFT 
officer's access to resources may include the following: adequate 
compliance funds and staffing with the skills and expertise appropriate 
to the investment adviser's risk profile, size, and complexity; an 
organizational structure that supports compliance and effectiveness; 
and sufficient technology and systems to support the timely 
identification, measurement, monitoring, reporting, and management of 
the investment adviser's illicit finance activity risks. An AML/CFT 
officer that has multiple additional job duties or conflicting 
responsibilities that adversely impact the officer's ability to 
effectively coordinate and monitor day-to-day AML/CFT compliance 
generally would not fulfill this requirement.\165\
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    \165\ An RIA that is subject to the SEC's Compliance Rule (17 
CFR 275.206(4)-7) could designate its chief compliance officer under 
the Compliance Rule to be responsible for this provision of this 
final rule. The final rule does not, however, require that an 
investment adviser designate the same person.
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    FinCEN clarifies that, as noted by the comments received, so long 
as the AML/CFT officer fulfils these qualifications and requirements, 
the officer may be an employee of the adviser's affiliate, or of an 
entity within an adviser's organizational structure. However, while an 
investment adviser may delegate the implementation and operation of 
certain aspects of its AML/CFT program to a third party or outside 
consultant (as discussed above), that individual or group of 
individuals cannot serve as the adviser's AML/CFT officer. Said 
differently, the designated AML/CFT officer must be an employee of the 
investment adviser or of its affiliate. This approach is consistent 
with FinCEN's treatment of equivalent requirements for the designated 
officers of other financial institutions.
5. Employee Training
    Proposed Rule: Section 1032.210(b)(4) would have required that an 
investment adviser's AML/CFT program provide ongoing training for 
appropriate persons. The IA AML NPRM explained that such training may 
be conducted through, among other things, outside or in-house seminars, 
and may include computer-based or virtual training. The nature, scope, 
and frequency of the investment adviser's training program would be 
determined by the responsibilities of the employees and the extent to 
which their functions would bring them in contact with AML/CFT 
requirements or possible money laundering, terrorist financing, or 
other illicit finance activity.
    Comments Received: No comments were received regarding employee 
training.
    Final Rule: FinCEN is implementing this requirement without change 
from the proposed rule. As noted in the proposed rule, to carry out 
their responsibilities effectively, employees of an investment adviser 
(and of any agent or third-party service provider that is delegated 
with administering any portion of the investment adviser's AML/CFT 
program) must be trained in AML/CFT requirements relevant to their 
functions and to recognize possible signs of money laundering, 
terrorist financing, and other illicit finance activity that could 
arise in the course of their duties. Such training may be conducted 
through, among other things, outside or in-house seminars, and may 
include computer-based or virtual training. The nature, scope, and 
frequency of the investment adviser's training program should be 
determined by the responsibilities of the employees and the extent to 
which their functions would bring them in contact with AML/CFT 
requirements or possible money laundering, terrorist financing, or 
other illicit finance activity. Consequently, the training program 
should provide a general awareness of overall AML/CFT requirements and 
money laundering, terrorist financing, and other illicit finance risks, 
as well as more job-specific guidance tailored to particular employees' 
roles and functions with respect to the entities' particular AML/CFT 
program.\223\ For those employees whose duties bring them in contact 
with AML/CFT requirements or possible money laundering, terrorist 
financing, or other illicit finance risks, the requisite training would 
have to occur when the employee assumes those duties. Moreover, these 
employees should receive periodic updates and refreshers regarding the 
AML/CFT program.\224\
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    \223\ See, e.g., DWS Investment Management Americas Inc., 
Investment Company Act Rel. No. 6431, ] 28 (Sept. 25, 2023) (noting 
DWS' failure to conduct AML training that was specific to the DWS 
Mutual Funds or the risks applicable to mutual funds for those 
employees with mutual fund responsibilities).
    \224\ The frequency of these periodic updates and refreshers 
would depend upon the money laundering, terrorist financing, and 
other illicit finance risks of the adviser and the adviser's overall 
risk management strategy.
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6. Ongoing Customer Due Diligence
    Proposed Rule: Proposed section 1032.210(b)(5) would have required 
that an investment adviser implement appropriate risk-based procedures 
for conducting ongoing CDD that includes (i) understanding the nature 
and purpose of customer relationships for the purpose of developing a 
customer risk profile; and (ii) conducting ongoing monitoring to 
identify and report suspicious transactions and, on a risk basis, to 
maintain and update customer information.

[[Page 72194]]

    As described in the IA AML NPRM, these are two of the four core 
elements of CDD. The other two elements of CDD are: (1) identifying and 
verifying the identity of customers; and (2) identifying and verifying 
the identity of the beneficial owners of legal entity customers opening 
accounts. As stated in the IA AML NPRM, FinCEN will address the 
customer identification and verification element of CDD in a separate 
joint rulemaking with the SEC. On May 21, 2024, FinCEN and the SEC 
issued the IA CIP NPRM to apply CIP requirements to investment 
advisers.\225\
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    \225\ See Customer Identification Programs for Registered 
Investment Advisers and Exempt Reporting Advisers, Notice of 
Proposed Rulemaking, 89 FR 44571 (May 21, 2024).
---------------------------------------------------------------------------

    Regarding the identification and verification of the identity of 
the beneficial owners of legal entity customers opening accounts, in 
the proposed rule FinCEN noted it would take the first step towards 
incorporating this element by including investment advisers in the 
definition of ``covered financial institution'' under 31 CFR 
1010.605(e)(1). However, as discussed in the IA AML NPRM, given that 
FinCEN expects to revise the CDD Rule as mandated by the Corporate 
Transparency Act, investment advisers would not be required to apply 
the current requirements to identify and verify the beneficial owners 
of legal entity customer accounts until the effective date of the 
revised CDD Rule.\226\ FinCEN requested comment on various aspects of 
the CDD requirement in the proposed rule.
---------------------------------------------------------------------------

    \226\ Customer Due Diligence Requirements for Financial 
Institutions, Final Rule, 81 FR 29398 (May 11, 2016); see also 
Revisions to Customer Due Diligence Requirements for Financial 
Institutions, available at https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=202404&RIN=1506-AB60.
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    Comments Received: Seven commenters provided comments on various 
aspects of the proposed CDD obligation.
    One commenter asked FinCEN to clarify that investment advisers are 
not required to adopt formal risk-rating models or methodologies and 
that advisers have discretion to apply risk factors as they deem 
appropriate and as suitable for their business activities and products. 
The commenter stated that advisers should be permitted to evaluate 
lower risk relationships through consideration of ``inherent or self-
evident information,'' including the type of customer or type of 
account, service or product, without any requirement to obtain 
additional information regarding the customer or the relationship.
    That same commenter asked that FinCEN clarify its expectations for 
transaction monitoring, noting that the number of SARs used to help 
estimate certain costs related to transaction monitoring in the 
proposed rule may not accord with the business model of many investment 
advisers. The commenter requested that FinCEN clarify that (i) in the 
absence of transactional activity, advisers should not have to monitor 
media reports and similar external events that do not have direct 
bearing on their relationships with the clients; and (ii) advisers' 
transaction monitoring systems need not be automated.
    Another commenter requested that CIP requirements and the 
requirement to identify the beneficial owners of legal entity customers 
either (i) not apply to subadvisers, particularly where the sponsor or 
primary adviser represents or confirms that it has independent CIP and 
CDD obligations under the BSA's implementing regulations; or that (ii) 
FinCEN permit subadvisers to allocate CIP and CDD rule responsibilities 
to the sponsor. Another commenter requested that RIAs for employer-
sponsored retirement plans be exempt from having to collect information 
or verify the beneficial ownership information relating to employer-
sponsored retirement plans.
    Regarding the timing for implementing the various elements of CDD, 
three commenters indicated that the decision to split the timeline for 
implementation of these requirements could be problematic, particularly 
if there are delays in finalizing any related regulatory proposals. Two 
commenters requested that the CDD requirements in the proposed rule be 
deferred until a CIP Rule for investment advisers is finalized and the 
CDD Rule is revised. The commenter claimed that it would be difficult 
for advisers to conduct ongoing CDD without a CIP obligation and when 
the full scope of the CDD Rule has not been clarified, as well as 
costly if they have to implement and then alter a CDD program to align 
it with a CIP requirement and revised CDD Rules.
    Two commenters supported the timing for CDD obligations in the 
proposed rule. One commenter encouraged FinCEN to propose and finalize 
a joint CIP rule and the revised CDD Rule as soon as possible so 
investment advisers would be required to implement the other two core 
elements of the CDD Rule. Another commenter also strongly supported 
swiftly applying the requirement for investment advisers to obtain 
beneficial ownership information for legal entity customers.
    Three commenters raised questions about applying CDD requirements 
in the context of private funds and other pooled investment vehicles. 
One of these three commenters stated that advisers do not usually carry 
out the investor onboarding functions that yield information relevant 
for customer risk, as these functions are typically carried out by the 
placement agent, who is already subject to AML requirements, or the 
administrator on behalf of the fund. The commenter asserted that this 
means advisers would not be best placed to identify activity that would 
potentially support filing a SAR.
    One commenter requested that FinCEN acknowledge certain existing 
due diligence practices--including with intermediaries in the private 
funds context--are appropriate in a risk-based AML/CFT program and to 
make clear that risk-based AML/CFT programs will not require investment 
advisers to conduct diligence on underlying investors or customers that 
are represented by intermediaries. Another commenter requested 
additional clarification on who would be the ``customer'' for an 
adviser when the adviser manages a pooled investment vehicle and has an 
advisory relationship with the pooled vehicle and not the investors in 
the vehicle, and how the adviser is expected to apply its due diligence 
procedures to the pooled vehicle and its investors where the adviser 
does not have a direct relationship with the investors.
    Final Rule: FinCEN is implementing this requirement without change 
from the proposed rule. Accordingly, an investment adviser's AML/CFT 
program must implement appropriate risk-based procedures for conducting 
ongoing customer due diligence. In addition, ``investment adviser'' 
will be included in the definition of ``covered financial institution'' 
under 31 CFR 1010.605(e). FinCEN notes that this rule does not require 
the categorical collection of beneficial ownership information for 
legal entity customers of investment advisers. FinCEN may consider a 
subsequent rulemaking imposing such an obligation on investment 
advisers. Rather, an investment adviser should make a risk-based 
determination as to whether it needs to collect beneficial ownership 
information based on the customer's risk profile. Regarding CIP, FinCEN 
will address issues related to the application of CIP requirements to 
certain advisory customers or activities in a CIP final rule for 
investment advisers, but reiterates that the IA CIP NPRM proposed a 
provision permitting investment advisers to rely on other financial 
institutions to perform CIP

[[Page 72195]]

subject to certain conditions, including when the financial institution 
is subject to a rule implementing the AML/CFT compliance program 
requirements of 31 U.S.C. 5318(h) and is regulated by a Federal 
functional regulator.\227\
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    \227\ 89 FR at 44578-79 (discussing section 1032.220(a)(6) of 
the proposed CIP rule).
---------------------------------------------------------------------------

    FinCEN acknowledges the impact of a staggered implementation of the 
CDD requirements in this rule, the CIP requirements that would be 
applied in a final CIP Rule, and a potential future obligation to apply 
a requirement for investment advisers to collect the beneficial 
ownership information of legal entity customers. Recognizing the 
interrelationship of these rulemakings, FinCEN intends for this rule 
and a CIP final rule to have the same compliance date, and that any 
obligation for investment advisers to collect the beneficial ownership 
information of legal entity customers to not be effective until a CIP 
rule is finalized and until the CDD Rule applicable to covered 
financial institutions is revised.
    Understand the Nature and Purpose of Customer Relationships to 
Develop Customer Risk Profiles. As is the case for banks, broker-
dealers, and mutual funds, the term ``customer risk profile'' for 
investment advisers refers to information gathered--typically at the 
time of account opening or, in the case of an RIA or ERA, at the onset 
of an advisory relationship--about a customer to develop the baseline 
against which customer activity is assessed for suspicious activity 
reporting and to develop appropriate risk-based procedures for 
conducting ongoing customer due diligence.
    Under the final rule, and as discussed below, investment advisers 
are obligated to report certain suspicious transactions by filing SARs. 
Suspicious transactions are those that, among other things, have no 
business or apparent lawful purpose or are not the sort in which the 
particular customers would normally be expected to engage. Fulfilling 
this proposed requirement will necessitate that an investment adviser 
gathers sufficient information to form an understanding of the nature 
and purpose of the customer relationship for the purpose of developing 
a customer risk profile, which informs the baseline against which the 
investment adviser can identify aberrant, suspicious transactions. In 
some circumstances, an understanding of the nature and purpose of a 
customer relationship can also be sufficiently developed by inherent or 
self-evident information about the product or customer type, such as 
the type of customer or the service or product offered, or other basic 
information about the customer, and such information may be sufficient 
to understand the nature and purpose of the relationship. This 
information may include the customer's explanation about its initial 
decision to seek advisory services from the adviser and may be 
reflected in the particular type of advisory service the customer 
seeks, as well as information already collected by the investment 
adviser, such as investment objective, net worth, domicile, 
citizenship, or principal occupation or business.
    FinCEN is clarifying that, although investment advisers may 
determine that formal risk-rating models or methodologies assist them 
in complying with this requirement, advisers may comply with this 
requirement through other approaches and have discretion to apply risk 
factors appropriate for their business activities and products. These 
approaches should be informed by an investment adviser's assessment of 
overall risk for its advisory business and should be sufficiently 
detailed to distinguish between significant variations in the illicit 
finance risks of its customers. FinCEN further notes that there are no 
required risk profile categories, and the number and detail of these 
risk characterizations will vary based on the adviser's size and 
complexity. As explained above, FinCEN is also clarifying that, 
consistent with existing BSA regulatory guidance for other financial 
institutions, an investment adviser can evaluate certain lower risk 
relationships through consideration of ``inherent or self-evident 
information,'' including the type of customer or type of account, 
service or product.\228\
---------------------------------------------------------------------------

    \228\ See FIN-2020-G002, Frequently Asked Questions Regarding 
Customer Due Diligence (CDD) Requirements for Covered Financial 
Institutions (Aug. 3, 2020), https://www.fincen.gov/sites/default/files/2020-08/FinCEN_Guidance_CDD_508_FINAL.pdf; see also FFIEC BSA/
AML Examination Manual, Customer Due Diligence -Overview https://bsaaml.ffiec.gov/manual/AssessingComplianceWithBSARegulatoryRequirements/02.
---------------------------------------------------------------------------

    For investment advisers, the risks associated with a particular 
type of customer may vary significantly. For instance, key risk factors 
for a natural person customer may include the source of funds, the 
jurisdiction in which the customer resides, the customer's country(ies) 
of citizenship, and the customer's status as a PEP,\229\ among other 
things. For a legal entity customer, key risk factors an investment 
adviser may consider may include the type of entity (e.g., limited 
partnership, limited liability company, trust), the jurisdiction in 
which it is domiciled and located, and the statutory and regulatory 
regime of that jurisdiction with respect to corporate formation and 
other financial transparency requirements, if relevant. The investment 
adviser's historical experience with the customer or entity and the 
references of other financial institutions may also be relevant 
factors.
---------------------------------------------------------------------------

    \229\ See generally Joint Statement on Bank Secrecy Act Due 
Diligence Requirements for Customers Who May Be Considered 
Politically Exposed Persons (Aug. 21, 2020), https://www.fincen.gov/sites/default/files/shared/PEP%20Interagency%20Statement_FINAL%20508.pdf.
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    In understanding the nature and purpose of customers that are 
private funds, FinCEN notes that investment advisers can (1) create and 
administer a private fund; or (2) provide advice to a private fund that 
is created and administered by a third party--for example, a financial 
intermediary. While the particular role played by the investment 
adviser will affect the type of information the adviser reasonably can 
collect about the investors in such a fund, in either case the adviser 
should collect sufficient information to develop a customer baseline 
for suspicious activity reporting regarding the private fund.
    FinCEN expects advisers to subject non-intermediary legal entity 
customers that are not BSA-defined financial institutions with their 
own AML/CFT requirements to a different assessment than intermediary 
customers that are BSA-defined financial institutions in order to 
understand the nature and purpose of the customer relationship. For 
example, FinCEN expects that an investment adviser would assess the 
risks of a customer that is a registered broker-dealer, and therefore a 
financial institution, as different from the risks of an unregulated 
operating company or private holding company. The final rule's 
requirement to assess customer risk must be understood in this context.
    FinCEN recognizes that certain information regarding underlying 
investors initially may not be collected by investment advisers to 
private funds, and that the investment adviser may not always have a 
direct relationship with the investors in its legal entity or private 
fund customers. Those investors may be introduced to the adviser by 
other entities who may or may not have their own AML/CFT obligations 
(such as a bank, broker-dealer, other investment adviser, or other 
intermediary). Even though investment advisers would not be required to 
collect beneficial ownership information on all legal entity customers, 
investment advisers should collect sufficient information such that 
they are able to detect and report suspicious activity associated

[[Page 72196]]

with intermediaries or nominee holders representing underlying 
investors, as well as activity related to underlying investors.\230\ 
FinCEN acknowledges that advisers to private funds may already engage 
in AML/CFT due diligence practices, including diligence on 
intermediaries representing underlying investors in a fund. In some 
instances, depending on the risk associated with the private fund, an 
investment adviser may determine that it does not need to conduct 
additional diligence on underlying investors or customers that are 
represented by intermediaries. However, in other instances when an 
investment adviser assesses a private fund or its investors presents 
higher risk, the investment adviser may need to collect additional 
information about the underlying investors to develop a customer 
baseline for suspicious activity reporting regarding the private fund.
---------------------------------------------------------------------------

    \230\ See Customer Due Diligence Requirements for Financial 
Institutions, Notice of Proposed Rulemaking, 79 FR 45141, 45161 
(Aug. 4, 2014).
---------------------------------------------------------------------------

    Ongoing Monitoring to Identify Suspicious Transactions and Update 
Customer Information. Similar to the CDD obligations for mutual 
funds,\231\ under the proposed section1032.210(b)(5)(ii), investment 
advisers would have been required to implement appropriate risk-based 
procedures to conduct ongoing monitoring to identify and report 
suspicious transactions and, on a risk basis, to maintain and update 
customer information. FinCEN is implementing this requirement without 
change from the proposed rule. Accordingly, the final rule will require 
an investment adviser's AML/CFT program to implement appropriate risk-
based procedures for conducting ongoing monitoring to identify and 
report suspicious transactions and, on a risk basis, to maintain and 
update customer information. This element of CDD will oblige investment 
advisers to perform ongoing monitoring, drawing on customer 
information, as well as to file SARs in a timely manner in accordance 
with their reporting obligations.\232\ As proposed, the obligation to 
update customer information will generally only be triggered when the 
investment adviser becomes aware of information relevant to assessing 
the potential risk posed by a customer; it does not impose a 
categorical requirement to update customer information on a regularly 
occurring, pre-determined basis.
---------------------------------------------------------------------------

    \231\ 31 CFR 1024.210(b)(5)(ii); see also 81 FR at 29424.
    \232\ The proposed SAR filing obligations being adopted for 
investment advisers are discussed below.
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    Ongoing monitoring may be accomplished in several ways, any of 
which can be included in an investment adviser's AML/CFT program. 
Customer information may be integrated into the investment adviser's 
transaction monitoring system and may be used after a potentially 
suspicious transaction has been identified, as one means of determining 
whether the identified activity is suspicious. An investment adviser 
may also utilize the information sharing provisions under section 
314(b) of the USA PATRIOT Act to request relevant information from 
other financial institutions that may hold relevant information, such 
as the qualified custodians of customer funds.
    FinCEN would also like to clarify, as discussed in detail in the 
Regulatory Analysis at Section V, that the estimated number of SARs to 
be filed by each investment adviser is intended to assist FinCEN in 
estimating the costs associated with identifying and reviewing alerts 
and cases that may eventually lead to a SAR filing. There is no 
regulatory expectation or obligation that an investment adviser file a 
certain minimum number of SARs to be in compliance with the 
requirements of the final rule.
    Regarding transaction monitoring, FinCEN is clarifying that 
investment advisers are not categorically required to perform media 
searches or particular screenings for all customers, but they should 
conduct risk-based monitoring of such reports and events.\233\ In 
circumstances where a customer presents certain risk indicators, an 
adviser may need to collect additional information to better understand 
the customer relationship and monitor for material changes based on 
external developments. For example, an investment adviser may need to 
do additional research, including open-source media searches, where a 
customer claims their funds are derived from a source of wealth that is 
inconsistent with the adviser's understanding of the customer's 
financial activities and sources of funds. Similarly, if an adviser 
knows, or reasonably should know, that a customer has ties to a 
jurisdiction, or legal or natural person, that is subject to OFAC 
sanctions, an adviser should regularly confirm that the customer 
themselves has not been designated or otherwise been made subject to 
OFAC sanctions. Regardless of the approach that an investment adviser 
follows with respect to media searches and similar screenings, the 
adviser should reassess and update customer risk profiles based on 
material information that personnel in customer-facing roles identify 
in the course of performing their duties or that the customer discloses 
as part of an ongoing customer relationship--even if not specifically 
undertaken to support the adviser's AML/CFT program.
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    \233\ As stated in previous FinCEN guidance on the CDD Rule, 
compliance with the CDD Rule does not categorically require the 
performance of media searches or particular screenings. See FIN-
2020-G002, Frequently Asked Questions Regarding Customer Due 
Diligence (CDD) Requirements for Covered Financial Institutions 
(Aug. 3, 2020). See also, FinCEN, Answers to Frequently Asked 
Questions Regarding Suspicious Activity Reporting and Other Anti-
Money Laundering Considerations, (Jan. 19, 2021), available at 
https://www.fincen.gov/sites/default/files/2021-01/Joint%20SAR%20FAQs%20Final%20508.pdf, at questions 4 and 5.
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    FinCEN also notes that this rule does not require investment 
advisers to implement automated transaction monitoring systems. The 
type of transaction monitoring system used by an investment adviser 
should be commensurate with its risk profile; rather than any 
particular technology solution, the adviser should have reasonable 
internal policies, procedures, and controls to monitor and identify 
unusual activity, and adequate resources to identify, report, and 
monitor suspicious activity. RIAs, including smaller RIAs, whose 
customer funds are custodied with a qualified custodian that may employ 
its own transaction monitoring system, may not have a need for their 
own transaction monitoring systems, and so may delegate certain aspects 
of transaction monitoring to the qualified custodian, although such 
RIAs remain legally responsible for such transaction monitoring, and, 
if applicable, reporting to FinCEN on suspicious transactions 
identified through such monitoring.
    As FinCEN noted in the preamble to the CDD Rule, the ongoing 
monitoring obligation is intended to apply to ``all transactions by, 
at, or through the financial institution,'' \234\ and not just those 
that are made by direct customers of the financial institution. Given 
that risks posed by each customer differ, FinCEN believes that the 
level of risk posed by a customer relationship with a legal entity 
customer that is a pooled investment vehicle should be a factor 
influencing the decision to request information regarding underlying 
investors, and if the legal entity customer does not provide such 
information, how the investment adviser should adjust the risk profile 
of that legal entity customer.
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    \234\ 81 FR at 29424.

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[[Page 72197]]

7. AML/CFT Program Approval
    Proposed Rule: Proposed section 1032.210(a)(2) would require that 
each investment adviser's AML/CFT program be approved in writing by its 
board of directors or trustees, or if it does not have a board, by its 
sole proprietor, general partner, trustee, or other persons that have 
functions similar to a board of directors. The proposed rule would 
require an investment adviser's written program to be made available 
for inspection by FinCEN or the SEC.
    Comments Received: Three commenters asserted that, as owners and 
principals of advisers may not be most familiar with operational 
aspects of an adviser's AML/CFT program, the final rule should permit 
approval by a member of senior management. The commenters noted this 
would be consistent with the corresponding rules for broker-dealers and 
with the integration of the AML program into the adviser's existing 
compliance program.
    Final Rule: The final rule retains the proposed requirement without 
change. FinCEN recognizes that some investment advisers might have 
other individuals or groups with similar status or functions as a board 
of directors or trustees, including sole proprietor, general partner, 
trustee, or other persons that have functions similar to a board of 
directors and are able to approve the AML/CFT program. FinCEN agrees 
with the points raised by several commenters and notes that, in such 
circumstances (where an adviser does not have a board of directors or 
trustees but has individuals or groups with similar status or functions 
to such a board), other members of senior management may also be 
appropriately suited to approve the AML/CFT program. Such individuals 
may include the Chief Executive Officer, Chief Financial Officer, Chief 
Operations Officer, Chief Legal Officer, Chief Compliance Officer, 
Director, and other senior management with similar status or function. 
In addition, groups with oversight responsibilities may include board 
committees such as compliance or audit committees as well as a group of 
some, or all of these individuals with aforementioned titles, as senior 
management that can provide effective oversight of the AML/CFT program 
to comply with the rule. Accordingly, under the circumstances noted 
above, an investment adviser may comply with this provision of the 
final rule by having its program approved in writing by any of the 
foregoing persons or groups.
8. Other Comments Regarding AML/CFT Program Requirements
    One commenter suggested FinCEN expressly recognize that investment 
advisers are already subject to significant recordkeeping obligations 
and the intention of the AML/CFT program requirement is not to require 
advisers to create additional records outside of those that are created 
in the ordinary course.
    One commenter suggested that FinCEN create an AML examination team 
for activities or entities that may be subject to AML/CFT regulation 
but do not have a primary Federal regulator. The commenter suggested 
this could include family offices, real estate funds, title insurers, 
escrow agents, and money services businesses. The commenter stated that 
other AML conduct regulators around the world have similarly done so. 
The same commenter recommended that the SEC and CFIUS strengthen 
oversight of private funds, and that CFIUS should be reviewing more 
foreign investments in sensitive economic sectors, aided by the SEC.
    As FinCEN stated in the IA AML NPRM, investment advisers are 
subject to a range of reporting obligations under Federal securities 
laws.\235\ Those laws and regulations, however, only have limited 
overlap with the purposes and requirements of AML/CFT laws and 
regulations. FinCEN further acknowledges the suggestion to create an 
AML examination team for other types of activities (some of which may 
relate to investment advisers), but has determined that they apply to a 
broader set of activities beyond the scope of the proposed rule and 
declines to address them further at this time. Regarding the scope of 
CFIUS reviews and CFIUS oversight of private funds, FinCEN notes that 
this is outside the scope of the current rulemaking.
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    \235\ 89 FR at 12110-11.
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9. Duty Provision
    Proposed Rule: As noted in the IA AML NPRM, section 6101(b)(2)(C) 
of the AML Act, codified at 31 U.S.C. 5318(h)(5), provides that the 
duty to establish, maintain, and enforce a financial institution's AML/
CFT program shall remain the responsibility of, and be performed by, 
persons in the United States who are accessible to, and subject to 
oversight and supervision by, the Secretary of the Treasury and the 
appropriate Federal functional regulator (the ``Duty Provision''). 
Proposed section1032.210(d) would have incorporated this statutory 
requirement with respect to investment advisers' AML/CFT programs by 
restating that the duty to establish, maintain, and enforce the AML/CFT 
program must remain the responsibility of, and be performed by, persons 
in the United States who are accessible to, and subject to oversight 
and supervision by, FinCEN and the financial institution's appropriate 
Federal functional regulator (i.e., for investment advisers, the SEC). 
FinCEN requested comment on a variety of potential questions or 
challenges that may arise for financial institutions as they address 
this requirement and noted that it would consider whether additional 
interpretive language would be appropriate in a final rule.
    Comments Received: FinCEN received four comments on the proposal 
that an investment adviser's AML/CFT program be based in the United 
States. Commenters questioned how foreign advisers without U.S.-based 
staff could implement the AML/CFT program located in the U.S. One 
commenter called for FinCEN to acknowledge that a foreign adviser could 
accomplish that requirement through retention of a U.S.-based 
contractor or administrator or through other means. Another commenter 
called for FinCEN to exclude foreign-located investment advisers from 
the rule or eliminate the obligation of foreign-located investment 
advisers to have persons implementing the AML/CFT program located in 
the United States. A third commenter asked that FinCEN analyze the 
impacts on foreign-located advisers and extend the implementation 
period to allow sufficient time for foreign-located advisers to hire 
and train staff in the United States. Another commenter requested that 
the final rule expressly permit foreign-located persons to participate 
in AML/CFT compliance oversight.
    Final Rule: FinCEN has determined not to include this requirement 
in this final rule as discussed below. The statutory text of the Duty 
Provision \236\ came into effect for all BSA-defined financial 
institutions on January 1, 2021, as part of the National Defense 
Authorization Act for Fiscal Year 2021.\237\ At the same time, the Duty 
Provision previously has not been incorporated into a FinCEN regulatory 
requirement. FinCEN acknowledges the comments seeking further guidance, 
an exemption from, or a delay in implementation for, foreign-located 
investment advisers regarding the Duty Provision, as well as the 
comment requesting use of a U.S.-based contractor or service provider 
to comply with this

[[Page 72198]]

requirement. FinCEN has recently sought comment on a proposed 
regulation incorporating the Duty Provision for existing BSA-defined 
financial institutions as a part of broader updates to the AML/CFT 
Program requirements issued on July 3, 2024 (July AML/CFT Program 
NPRM).\238\ In light of the comments seeking further guidance regarding 
the Duty Provision, as well as the July AML/CFT Program NPRM, FinCEN 
has determined not to include this requirement in this final rule. 
FinCEN continues to take the Duty Provision under advisement and may 
consider incorporating the Duty Provision in a subsequent rulemaking 
applicable to investment advisers.
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    \236\ 31 U.S.C. 5318(h)(5).
    \237\ Public Law 116-283, Div F, Title LXI 6101(b).
    \238\ Anti-Money Laundering and Countering the Financing of 
Terrorism Programs, Notice of Proposed Rulemaking, 89 FR 55428 (Jul. 
3, 2024).
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10. Statutory Factors Considered in Applying AML/CFT Program 
Requirements
    The BSA authorizes FinCEN, after consultation with the appropriate 
Federal functional regulator (for investment advisers, the SEC), to 
prescribe minimum standards for such AML/CFT programs.\239\ In 
developing this final rule, FinCEN consulted and coordinated with SEC 
staff, including with respect to the statutorily specified factors set 
out in 31 U.S.C. 5318(h)(2)(B). These factors are:
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    \239\ 31 U.S.C. 5318(h)(2)(A).
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     financial institutions are spending private compliance 
funds for a public and private benefit, including protecting the United 
States financial system from illicit finance risks;
     the extension of financial services to the underbanked and 
the facilitation of financial transactions, including remittances, 
coming from the United States and abroad in ways that simultaneously 
prevent criminal persons from abusing formal or informal financial 
services networks are key policy goals of the United States;
     effective anti-money laundering and countering the 
financing of terrorism programs safeguard national security and 
generate significant public benefits by preventing the flow of illicit 
funds in the financial system and by assisting law enforcement and 
national security agencies with the identification and prosecution of 
persons attempting to launder money and undertake other illicit 
activity through the financial system;
     anti-money laundering and countering the financing of 
terrorism programs should be--
    [cir] reasonably designed to assure and monitor compliance with the 
requirements of the BSA and regulations promulgated under the BSA; and
    [cir] risk-based, including ensuring that more attention and 
resources of financial institutions should be directed toward higher-
risk customers and activities, consistent with the risk profile of a 
financial institution, rather than toward lower-risk customers and 
activities.
    FinCEN has considered these factors in section 5318(h)(2)(B) in the 
drafting of this final rule. In finalizing this rule, FinCEN has 
considered the fact that comprehensive AML/CFT requirements for 
investment advisers, which will require investment advisers to have 
effective AML/CFT programs and subject them to SAR reporting 
requirements, will aid in preventing the flow of illicit funds in the 
U.S. financial system and in assisting law enforcement and national 
security agencies with the identification and prosecution of those who 
attempt to launder money and undertake other illicit finance activity 
through the financial system. Additionally, FinCEN recognizes that AML/
CFT programs at an investment adviser should be reasonably designed and 
risk-based consistent with the investment adviser's respective risk 
profile, and therefore is adopting an AML/CFT program rule that 
requires internal policies, procedures, and controls reasonably 
designed to prevent the investment adviser from being used for money 
laundering, terrorist financing, or other illicit finance activities, 
as well as risk-based procedures that consider an investment adviser's 
risk profile. Further, as discussed in the Regulatory Impact Analysis, 
FinCEN has analyzed the financial costs to investment advisers in 
imposing AML/CFT obligations, including AML/CFT program requirements 
and SAR filing requirements, and has determined that the public and 
private benefit to this proposed rule would outweigh the private 
compliance costs.\240\
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    \240\ Further discussion relevant to each factor may be found 
at: Factor (i): the regulatory impact analysis at Section V and 
other discussions of the costs and benefits of the rule; Factor 
(ii): we believe that this factor is not relevant to the rule 
because investment advisers generally do not provide services to the 
unbanked, process remittances, or participate in informal financial 
networks. This may be inferred from the risk discussion at Section 
II.C and accompanying discussions of the structure of the investment 
advisory industry; and Factor (iii): the risk analysis at Section 
II.C; Factor (iv): the risk analysis at Section II.C and the 
discussion of building upon existing requirements and examination 
programs in this Section and at Section III.D.
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F. Suspicious Activity Reporting

    The BSA authorizes Treasury--and thereby FinCEN--to require ``any 
financial institution, and any director, officer, employee, or agent of 
any financial institution, to report any suspicious transaction 
relevant to a possible violation of law or regulation.'' \241\ Existing 
FinCEN regulations issued under this authority require banks, casinos, 
card clubs, money services businesses, broker-dealers in securities, 
mutual funds, insurance companies, futures commission merchants, 
introducing brokers in commodities, and loan or finance companies to 
report suspicious activity by submitting SARs to FinCEN.\242\ As 
discussed further below, in this final rule, FinCEN is subjecting 
covered investment advisers to suspicious activity reporting 
requirements similar to those previously issued by FinCEN.
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    \241\ 31 U.S.C. 5318(g)(1).
    \242\ See 31 CFR 1020.320, 1021.320, 1022.320, 1023.320, 
1024.320, 1025.320, 1026.320, and 1029.320.
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    Proposed Rule: Proposed section 1032.320 would have required 
investment advisers to file SARs for any suspicious transaction 
relevant to a possible violation of law or regulation and as otherwise 
defined.
    Proposed section 1032.320(a) set forth the criteria for which an 
investment adviser would be obligated to report any suspicious 
transactions in line with those imposed on other financial 
institutions. Under this proposal, filing a report of a suspicious 
transaction would not relieve an investment adviser from the 
responsibility of complying with any other reporting requirement 
imposed by the SEC.
    Proposed section 1032.320(a)(1) contained the general statement of 
the obligation to file reports of suspicious transactions. The 
obligation would have extended to transactions conducted or attempted 
by, at, or through an investment adviser. Proposed section 
1032.320(a)(2) would have required the reporting of any suspicious 
activity transaction that involves or aggregates at least $5,000 in 
funds or other assets. Furthermore, proposed section 1032.320(a)(1) 
would have permitted an investment adviser to report voluntarily any 
transaction the investment adviser believes is relevant to the possible 
violation of any law or regulation but that is not otherwise required 
to be reported by this proposed rule. As proposed, such voluntary 
reporting would be subject to the same protection from liability as 
mandatory reporting pursuant to 31 U.S.C. 5318(g)(3).

[[Page 72199]]

    Proposed section 1032.320(a)(2)(i) through (iv) would have 
specified that an investment adviser would be required to report a 
transaction if it knows, suspects, or has reason to suspect that the 
transaction (or a pattern of transactions of which the transaction is a 
part): (i) involves funds derived from illegal activity or is intended 
or conducted to hide or disguise funds or assets derived from illegal 
activity as a part of a plan to violate or evade any Federal law or 
regulation or to avoid any transaction reporting requirement under 
Federal law or regulation; (ii) is designed, whether through 
structuring or other means, to evade the requirements of the BSA; (iii) 
has no business or apparent lawful purpose, and the investment adviser 
knows of no reasonable explanation for the transaction after examining 
the available facts; or (iv) involves the use of the investment adviser 
to facilitate criminal activity. Proposed section 1032.320(a)(3) would 
have provided that where more than one investment adviser, or another 
financial institution with a separate suspicious activity reporting 
obligation,\243\ is involved in the same transaction, only one report 
jointly filed on behalf of all involved financial institutions would be 
required.
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    \243\ Other BSA-defined financial institutions, such as broker-
dealers in securities, mutual funds, and banks have separate 
reporting obligations that may involve the same suspicious activity. 
See 31 CFR 1023.320, 1024.320, 1020.320.
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    Comments Received: 11 commenters commented on the requirement for 
investment advisers to file SARs. Commenters generally supported 
applying the SAR filing requirement and the safe harbor from liability, 
but requested clarification on how the SAR filing obligation would 
apply to advisory activities in general and in certain circumstances, 
noting the difference between advisers' role in funds transfers and 
those of other financial institutions. Some commenters supported the 
proposed obligation as an important way to prevent abuse of the 
investment adviser sector and to provide law enforcement with useful 
information to combat illicit finance. Regarding the proposal to allow 
for joint filing of SARs, a number of commenters suggested that the 
regulation require specifically that the SAR narrative describe the 
respective roles and involvement of each financial institution with 
respect to the reported transaction.
    However, other commenters expressed skepticism about the utility of 
this obligation given the limited information available to some 
investment advisers considering their access to the information 
necessary to file SARs and the low number of reported SARs involving 
investment advisers to date. One commenter requested that FinCEN 
clarify its expectations of investment advisers regarding the volume of 
SARs to be filed. Finally, several commenters noted the importance of 
clarifying that foreign-located investment advisers should not be 
required to file SARs where doing so creates a conflict of law with the 
law of the jurisdiction in which the entity is located. The subsections 
below address some of the specific issues raised by commenters related 
to the SAR filing obligation as well as the other provisions in the SAR 
filing requirement.
1. Scope of the SAR Filing Obligation
    Comments Received: One commenter requested that FinCEN revise the 
SAR threshold upwards from $5,000 to $25,000. One commenter requested 
FinCEN clarify that the requirement to file SARs applies to 
transactions initiated after the specified compliance date for the AML/
CFT program, so there is no confusion regarding whether SARs must be 
filed as an adviser begins to implement and test its AML program. One 
commenter suggested that the proposed rule sought to transform the SAR 
requirement into a tool to assist CFIUS efforts and asked FinCEN to 
confirm that the SAR filing obligation require reports where the 
adviser knows, suspects, or has reason to suspect that the activity or 
transaction in question involves a violation of law.
    FinCEN is implementing this requirement without change from the 
proposed rule. FinCEN declines to revise the SAR threshold for this 
specific requirement as applied to investment advisers. FinCEN is 
currently reviewing the threshold for SARs and other applicable BSA 
reports for all covered financial institutions, as required by sections 
6204 and 6205 of the AML Act, and will consider potential changes in 
the context of that review, as appropriate.
    FinCEN is also clarifying in this final rule that while investment 
advisers are not required to file SARs until after the compliance date 
of the final rule, some SAR filings triggered by activity after the 
compliance date may implicate transactions that occur on behalf of a 
customer prior to the compliance date. In this circumstance, an adviser 
should not exclude relevant information from a SAR filing even where 
the information is about activity that occurred prior to the compliance 
date. However, FinCEN does not expect investment advisers to look back 
through activity prior to the compliance date to identify conduct that 
may warrant filing a SAR.
    As set out in 1032.320, the SAR filing obligation requires 
reporting where the adviser knows, suspects, or has reason to suspect a 
possible violation of law or regulation. Contrary to one commenter's 
suggestion, FinCEN does not seek to transform or change SAR filing 
obligations in order to assist the CFIUS process. Rather, as discussed 
further below, FinCEN is adopting SAR filing obligations for advisers 
similar to existing SAR regulations.
2. Transactions ``By, At, or Through'' Investment Advisers
    Proposed Rule: Section 1032.320(a)(1) of the proposed rule stated 
that a transaction ``requires reporting if it is conducted or attempted 
by, at, or through an investment adviser.''
    Comments Received: Seven commenters requested clarification about 
the language ``by, at, or through'' investment advisers in section 
1032.320(a)(1), claiming it was a broad and ambiguous definition, and 
that it did not correspond with the role played by investment advisers 
in the management of funds or processing of transactions. Commenters 
believed that this language was more appropriate for banks or other 
financial institutions that directly hold funds or process 
transactions. Commenters also expressed concern about the prospect of 
being required to file SARs in relation to the underlying changes in a 
fund's portfolio or for the portfolio companies in which their funds 
are invested. One commenter suggested narrowing the reporting 
obligation to transactions by, at, or through a pooled investment 
vehicle or account for which an investment adviser acts as adviser 
given an investment adviser would be better able to file a SAR in 
relation to transactions involving these customers. Two commenters 
requested FinCEN clarify that for an adviser advising a fund serviced 
by a foreign-located fund administrator that is subject to SAR filing 
or similar obligations under their home country AML/CFT regulations is 
not required to file a SAR in the United States, which could otherwise 
raise data privacy and conflicts of laws issues.
    Final Rule: FinCEN is implementing this requirement without 
significant change from the proposed rule. FinCEN has added ``Advisers 
Act'' to this provision to clarify that filing a SAR does not relieve 
an investment adviser from the responsibility of complying with any 
other reporting requirements that may be imposed directly by the 
Advisers Act, as well as SEC rules and regulations that implement the 
Advisers

[[Page 72200]]

Act or other Federal securities laws. FinCEN clarifies that section 
1032.320(a)(1) contains the general statement of the obligation to file 
reports of suspicious transactions, and the obligation extends to 
transactions conducted or attempted by, at, or through an investment 
adviser. FinCEN interprets ``transactions conducted or attempted by, 
at, or through'' to encompass an investment adviser's advisory 
activities on behalf of its clients. In response to comments that the 
rule text for the SAR filing obligation is more appropriate for banks 
or other financial institutions, FinCEN is providing additional detail 
below on suspicious transactions that may occur by, at, or through an 
investment adviser, as well as suspicious transactions involving a 
portfolio company in which an advised fund is invested.
    The requirement to file SARs for transactions conducted or 
attempted by, at, or through an investment adviser parallels the 
language of the BSA regulations for money service businesses, broker-
dealers, and mutual funds.\244\ Investment advisers may be familiar 
with applying this requirement if they are affiliated with a broker-
dealer or otherwise transact through them, or in the context of mutual 
funds they advise.\245\ Examples of activities occurring by, at, or 
through an investment adviser include: when an investment adviser's 
customer provides an instruction to an investment adviser for the 
investment adviser to pass on to the custodian (e.g., an instruction to 
withdraw assets, to liquidate particular securities, or a suggestion 
that the adviser purchase certain securities for the customer's 
account) or an adviser instructs a custodian to execute transactions on 
behalf of its client. However, an adviser's obligation to file a SAR 
does not extend to activity that is outside the scope of their AML/CFT 
program.
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    \244\ See 31 CFR 1022.230(a)(2) (money service businesses); 31 
CFR 1023.320(a)(2) (broker-dealers); 31 CFR 1024.320(a)(2) (mutual 
funds).
    \245\ For instance, pursuant to the Securities Industry and 
Financial Markets Association (SIFMA) No-Action Letter under which 
the staff of the SEC's Division of Trading and Markets stated that 
it would not recommend enforcement action against broker-dealers, an 
investment adviser must promptly disclose to the broker-dealer 
potentially suspicious or unusual activity detected as part of the 
CIP and/or beneficial ownership procedures being performed on the 
broker-dealer's behalf in order to enable the broker-dealer to file 
a suspicious activity report, as appropriate based on the broker-
dealer's judgment. See SEC, Letter to Mr. Bernard V. Canepa, 
Associate General Counsel, Securities Industry and Financial Markets 
Association (SIFMA), Request for No-Action Relief Under Broker-
Dealer Customer Identification Program Rule (31 CFR 1023.220) and 
Beneficial Ownership Requirements for Legal Entity Customers (31 CFR 
1010.230) (Dec. 9, 2022), https://www.sec.gov/files/nal-sifma-120922.pdf [hereinafter SIFMA No-Action Letter]. This request for 
No-Action Relief was originally issued in 2004 and has been 
periodically reissued and remains effective. Any SEC staff 
statements cited represent the views of the SEC staff. They are not 
a rule, regulation, or statement of the SEC. Furthermore, the SEC 
has neither approved nor disapproved their content. These SEC staff 
statements, like all SEC staff statements, have no legal force or 
effect: they do not alter or amend applicable law; and they create 
no new or additional obligations for any person.
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    Because investment advisers are already subject to the anti-fraud 
and anti-manipulation provisions of the Advisers Act and other Federal 
securities laws, they should already have in place policies and 
procedures to prevent and detect fraud by the investment adviser or its 
supervised persons, including the identification of suspicious 
activities that may be conducted by employees of an investment adviser 
as it they relate to discretionary client or proprietary investment 
decisions made by an investment adviser's employees. In either case, 
the investment adviser should ensure it has systems in place to 
determine if suspicious transactions are being conducted ``by'' an 
investment adviser via client or proprietary investments.
    Some of the types of suspicious activity transactions an investment 
adviser may identify and report are transactions designed to hide the 
source or destination of funds and fraudulent activity. Other 
suspicious activity tied to private funds, particularly venture capital 
funds, could, for example, involve an investor in such a fund 
requesting access to detailed non-public technical information about a 
portfolio company the fund is invested in that is inconsistent with a 
professed focus on economic return, in a potential case of illicit 
technology transfer in violation of sanctions, export controls, or 
other applicable law. As such, the activity would be eligible for 
reporting in a SAR. A money launderer also could engage in placement 
and layering by funding a managed account or investing in a private 
fund by using multiple wire transfers from different accounts 
maintained at different financial institutions or requesting that a 
transaction be processed in a manner to avoid funds being transmitted 
through certain jurisdictions. Suspicious activity could also include 
other unusual wire activity that does not correlate with a customer's 
stated investment objectives; transferring funds or other assets 
involving the accounts of third parties with no plausible relationship 
to the customer, transfers of funds or assets involving suspicious 
counterparties--such as those subject to adverse media, exhibiting 
shell company characteristics, or located in jurisdictions with which 
the customer has no apparent nexus; the customer behaving in a manner 
that suggests that the customer is acting as a ``proxy'' to manage the 
assets of a third party; or an unusual withdrawal request by a customer 
with ties to activity or individuals subject to U.S sanctions following 
or shortly prior to news of a potential sanctions listing. 
Additionally, suspicious activity could include potential fraud and 
manipulation of customer funds directed by the investment adviser. 
These typologies can consist of insider trading, market manipulation, 
or an unusual wire transfer request by an investment adviser from a 
private fund's account held for the fund's benefit at a qualified 
custodian.
    FinCEN notes, however, that the techniques of money laundering, 
terrorist financing, and other illicit finance activity are continually 
evolving, and there is no way to provide a definitive list of 
suspicious transactions. A determination to file a SAR should be based 
on all the facts and circumstances relating to the transaction and the 
customer in question.
    FinCEN recognizes that an investment adviser's own proprietary 
investments may be lower risk in comparison to discretionary investment 
decisions made on behalf of clients. However, FinCEN further clarifies 
that it is the investment adviser's responsibility to assess the risk 
of its own proprietary investment activity and determine the level of 
monitoring necessary to be commensurate with the investment adviser's 
assessment of the risks associated with its proprietary investments.
    For foreign-located investment advisers (as defined in the final 
rule), the SAR filing requirements would apply to advisory activities 
covered by this rule, which are advisory activities that (i) take place 
within the United States, including through involvement of U.S. 
personnel of the investment adviser, such as the involvement of an 
agency, branch, or office within the United States, or (ii) provide 
advisory services to a U.S. person or a foreign-located private fund 
with an investor that is a U.S. person. In these circumstances, 
regardless of whether AML/CFT, administrative, or other advisory 
services are delegated to a non-U.S. fund administrator by the adviser, 
a foreign-located investment adviser would be subject to the SAR filing 
requirement with respect to activities covered by the final rule--
including the

[[Page 72201]]

reporting of suspicious transactions involving a foreign-located 
private fund with an investor that is a U.S. person. FinCEN would also 
note that while commenters reported potential data privacy or conflicts 
of laws issues, no specific jurisdictions or statutes were identified 
where this is a significant challenge.
    Additionally, private fund advisers may have limited involvement in 
and visibility into the operation of their portfolio companies, 
including ``material non-public technical information.'' However, there 
are times when an adviser may be required to file a SAR on a portfolio 
company, such as where the adviser: (i) is approached by a limited 
partner or other investor in a fund about unusual access to particular 
technology or processes being developed by a portfolio company, (ii) 
becomes aware that such a limited partner or investor has reached out 
to a portfolio company for such information, or (iii) is asked to 
obscure participation by an investor in a particular transaction to 
avoid notification to government authorities; FinCEN would consider 
such activity to be potentially relevant to a possible violation of law 
or regulation or otherwise indicative of suspicious activity, and an 
adviser should consider filing a SAR. The preceding examples are not an 
exhaustive list and are provided for illustrative purposes only, and 
private fund advisers' determinations to file a SAR should be based on 
all the facts and circumstances relating to the transaction and the 
customer in question.
    FinCEN acknowledges the comments regarding investment advisers' 
potentially limited visibility into the portfolios of funds that they 
do not advise (such as funds of funds) and the activities of portfolio 
companies. In response to these comments, FinCEN has decided to clarify 
the extent of SAR obligations in these contexts. The requirement for 
reporting of suspicious transactions by, at, or through an investment 
adviser focuses on the activities of the adviser, and as discussed 
above, the SAR filing obligation does not extend to activities outside 
the scope of an adviser's AML/CFT program. This excludes non-advisory 
activities such as staff of the adviser occupying management roles at 
portfolio companies. In addition, section 1024.320(a)(2) of the final 
rule limits the SAR filing obligation to transactions where the adviser 
``knows, suspects, or has to reason to suspect'' enumerated types of 
illicit activity. This is an objective standard that focuses on the 
evidence available to an adviser in the particular facts and 
circumstances of a transaction.
    FinCEN applies the same standards in existing SAR regulations, such 
as those for broker-dealers and mutual funds.\246\ The release adopting 
the broker-dealer rule states that ``this is a flexible standard that 
adequately takes into account the differences in operating realities 
among various types of broker-dealers,'' some of which, such as 
clearing brokers, may have less information about their customers.\247\ 
Similarly, FinCEN has issued guidance stating that ``mutual funds 
should be able to meet the `knows, suspects, or has reason to suspect' 
standard . . . based on information available to the mutual fund that 
was obtained through the account opening process and in the course of 
processing transactions, consistent with the mutual fund's required 
anti-money laundering procedures.'' \248\ Thus, the standard takes into 
account both the operational realities of different kinds of financial 
institutions and the information that they typically collect, including 
through their AML/CFT procedures.
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    \246\ 31 CFR 1023.230; 31 CFR 1024.320.
    \247\ 67 FR 44048, 44053-54 (Jul. 1, 2002).
    \248\ FinCEN, Frequently Asked Questions Suspicious Activity 
Reporting Requirements for Mutual Funds (Oct. 4, 2006), available at 
https://www.fincen.gov/sites/default/files/shared/guidance_faqs_sar_10042006.pdf (internal citation omitted).
---------------------------------------------------------------------------

    FinCEN intends the SAR filing requirement to function in a similar 
fashion with regard to investment advisers. The information that an 
investment adviser has access to depends upon the operational realities 
of an adviser in its portion of the market, which includes whether it 
advises the fund at issue and whether it has portfolio companies over 
which it exercises significant influence. The standard is not intended 
to require investment advisers to gather additional information beyond 
what an adviser in their position would normally possess and what is 
required by their AML/CFT program. The information such an adviser 
would have is based upon the due diligence and other information they 
obtain as an adviser. As discussed above, non-advisory activities--such 
as having common employees with a portfolio company--are not covered by 
the SAR filing obligation.
    FinCEN emphasizes that this does not mean that investment advisers 
may disregard indications of suspicious transactions by, at, or through 
the adviser because they involve funds that the adviser does not advise 
(such as funds of funds) or portfolio companies. As FinCEN has stated 
with regard to mutual funds, even if personnel of another entity are 
better positioned to file a SAR under certain circumstances, a 
financial institution remains responsible for meeting its SAR 
obligations.\249\ Thus, if under the relevant facts and circumstances, 
the investment adviser has information causing it to know, suspect, or 
have to reason to suspect suspicious transactions by, at, or through 
the investment adviser that involve funds it does not advise or 
portfolio companies, it is required to file a SAR.
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    \249\ Amendment to the Bank Secrecy Act-Requirement that Mutual 
Funds Report Suspicious Transactions, Final Rule, 71 FR 26213, 26216 
(May 4, 2006).
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3. Filing and Notification Procedures
    Proposed Rule: Section 1032.320(b)(1) through (4) of the proposed 
rule sets forth the filing and notification procedures investment 
advisers would need to follow to make reports of suspicious 
transactions. Within 30 days of initial detection by the investment 
adviser of facts that may constitute a basis for filing a SAR, the 
adviser would have needed to report the transaction by completing and 
filing a SAR with FinCEN in accordance with all form instructions and 
applicable guidance. The investment adviser would have also needed to 
collect and maintain supporting documentation relating to each SAR 
separately and make such documentation available to (1) FinCEN, (2) any 
Federal, State, or local law enforcement agency, and (3); or any 
Federal regulatory authority, such as the SEC, that examines the 
investment adviser for compliance with the BSA under the proposed rule, 
upon request of that agency or authority. If no suspect is identified 
on the date of such initial detection, an investment adviser may delay 
filing a SAR for an additional 30 calendar days to identify a suspect, 
but in no case shall reporting be delayed more than 60 calendar days 
after the date of such initial detection. Under the proposed rule with 
respect to SAR filing obligations for investment advisers, which are in 
line with existing SAR regulations for other BSA-defined financial 
institutions, any supporting documents filed with the SAR would have 
needed to be disclosed to those authorities or agencies to whom a SAR 
may be disclosed. For situations requiring immediate attention, such as 
suspected terrorist financing or ongoing money laundering schemes, 
investment advisers would have been required under section 
1032.320(b)(4) to notify immediately by telephone the

[[Page 72202]]

appropriate law enforcement authority in addition to filing a timely 
SAR.
    Comments Received: No comments were received on this issue.
    Final Rule: FinCEN is adopting the requirements regarding SAR 
filing and notification as proposed.
4. Retention of Records
    Proposed Rule: Section 1032.320(c) would have required that 
investment advisers maintain copies of filed SARs and the underlying 
related documentation for a period of five years from the date of 
filing. Supporting documentation would have needed to be made available 
to FinCEN and the prescribed law enforcement and regulatory 
authorities, upon request.
    Comments Received: No comments were received on this issue.
    Final Rule: FinCEN is adopting the requirements regarding SAR 
filing and retention of records as proposed.
5. SAR Sharing and Confidentiality
    Proposed Rule: Section 1032.320(d) would have required that a SAR 
and any information that would reveal the existence of a SAR are 
confidential and shall not be disclosed except as authorized in section 
1032.320(d)(1)(ii). Section 1032.320(d)(1)(i) generally would have 
provided that no investment adviser, and no current or former director, 
officer, employee, or agent of any investment adviser, shall disclose a 
SAR or any information that would reveal the existence of a SAR. This 
provision of the proposed rule would have further provided that any 
investment adviser and any current or former director, officer, 
employee, or agent of any investment adviser that is subpoenaed or 
otherwise requested to disclose a SAR or any information that would 
reveal the existence of a SAR, would decline to produce the SAR or such 
information and would be required to notify FinCEN of such a request 
and any response thereto. Investment advisers would be prohibited from 
disclosing voluntary as well as required SARs.
    Section 1032.320(d)(1)(ii) of the proposed rule would have provided 
three rules of construction that clarify the scope of the prohibition 
against the disclosure of a SAR by an investment adviser and closely 
parallel the rules of construction in the suspicious activity reporting 
rules for other financial institutions. The proposed rules of 
construction would have primarily described situations that are not 
covered by the prohibition against the disclosure of a SAR or 
information that would reveal the existence of a SAR contained in 
section 1032.320(d)(1). The rules of construction proposed would have 
remained qualified by, and subordinate to, the statutory mandate that 
revealing to one or more subjects of a SAR of the SAR's existence would 
remain a crime.
    The first rule of construction, in section 
1032.320(d)(1)(ii)(A)(1), would have authorized an investment adviser, 
or any director, officer, employee or agent of an investment adviser, 
to disclose a SAR, or any information that would reveal the existence 
of a SAR, to various authorities--FinCEN; any Federal, State or local 
law enforcement agency; or a Federal regulatory authority that examines 
the investment adviser for compliance with the BSA--provided that no 
person involved in the reported transaction is notified that the 
transaction has been reported. As discussed above, FinCEN is proposing 
to delegate its examination authority for compliance by investment 
advisers with FinCEN's rules implementing the BSA to the SEC.
    The second rule of construction, in section 
1032.320(d)(1)(ii)(A)(2), would have provided two instances where 
disclosures of underlying facts, transactions, and documents upon which 
a SAR was based would be permissible: in connection with (i) 
preparation of a joint SAR or (ii) certain employment references or 
termination notices.\250\ This would enable an investment adviser to 
share the underlying facts, transactions, and documents upon which a 
SAR is based with certain entities consistent with existing FinCEN 
guidance where the investment adviser and the recipient entity or 
entities are jointly filing a SAR. Similarly, an investment adviser, or 
any current or former director, officer, employee, or agent of an 
investment adviser would not be prohibited from disclosing the 
underlying facts, transactions, and documents upon which a SAR is based 
in connection with certain employment references or termination 
notices, to the full extent authorized in 31 U.S.C. 5318(g)(2)(B). The 
third rule of construction, in section 1032.320(d)(1)(ii)(B), would 
authorize sharing of a SAR within an investment adviser's corporate 
organizational structure for purposes consistent with the BSA as 
determined by regulation or in guidance.
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    \250\ To the extent permitted by existing FinCEN regulations and 
guidance, this would include non-U.S. financial institutions.
---------------------------------------------------------------------------

    Section 1032.320(d)(2) would also incorporate the statutory 
prohibition against disclosure of SAR information by government 
authorities that have access to SARs other than in fulfillment of their 
official duties consistent with the BSA.\251\ The paragraph would 
clarify that official duties do not include the disclosure of SAR 
information in response to a request by a non-governmental entity for 
non-public information \252\ or for use in a private legal proceeding, 
including a request under 31 CFR 1.11.\253\ Accordingly, the provision 
would not permit such disclosure by government users in response to 
these requests or uses.
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    \251\ 31 U.S.C. 5318(g)(2)(ii).
    \252\ For purposes of this rulemaking, ``non-public 
information'' refers to information that is exempt from disclosure 
under the Freedom of Information Act.
    \253\ 31 CFR 1.11 is Treasury's regulation governing demands for 
testimony or the production of records of Treasury employees and 
former employes in a court or other proceeding.
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    Comments Received: Four commenters stated that advisers should be 
able to share SARs with affiliates, noting the benefits to industry-
wide efforts to identify and reduce illicit finance risks. Two of the 
four commenters recommended that advisers be permitted to share SARs 
with (1) affiliates; (2) the directors and officers of the funds 
managed by the adviser; and (3) the funds' administrator(s). One 
commenter requested that FinCEN authorize advisers to share SARs with 
service providers that may need to be informed of SAR filings for 
compliance monitoring and other purposes. One commenter requested 
FinCEN clarify how an RIA would oversee compliance with a qualified 
custodian that it had delegated responsibility for SAR filing to if any 
SAR the third-party files is by definition kept confidential from the 
adviser.
    Final Rule: FinCEN is implementing this requirement without change 
from the proposed rule.\254\ FinCEN understands that investment 
advisers may find it necessary to share SARs within their 
organizational structures to fulfill reporting obligations under the 
BSA, and to facilitate more effective enterprise-wide BSA compliance. 
FinCEN will consider issuing additional guidance, consistent with SAR 
sharing guidance finalized in 2010 and applicable to other BSA-defined 
financial institutions, that would permit investment advisers to share 
SARs with certain U.S. affiliates, provided the affiliate is subject to 
a regulation providing for the confidentiality of SARs issued by FinCEN 
or by the affiliate's Federal functional regulator.\255\
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    \254\ This provision as proposed, and as set out in the final 
rule, is consistent with the notification prohibitions for 
suspicious activity reporting provided in the BSA. 31 U.S.C. 
5318(g)(2).
    \255\ See, e.g., FIN-2010-G005, Sharing Suspicious Activity 
Reports by Securities Broker-Dealers, Mutual Funds, Futures 
Commission Merchants, and Introducing Brokers in Commodities with 
Certain U.S. Affiliates (Nov. 23, 2010); FIN-2010-G006, Sharing 
Suspicious Activity Reports by Depository Institutions with Certain 
U.S. Affiliates (Nov. 23, 2010).

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[[Page 72203]]

    FinCEN would like to reiterate that, as outlined in section 
1032.320(d)(1)(ii)(A)(2) of the final rule, an investment adviser, or 
any director, officer, employee, or agent of an investment adviser, is 
not prohibited from disclosing the underlying facts, transactions, and 
documents upon which a SAR is based, including but not limited to, 
disclosures of such information to another financial institution or any 
director, officer, employee, or agent of a financial institution, for 
the preparation of a joint SAR, provided that no person involved in the 
reported transaction is notified that the transaction has been 
reported. For example, this would permit a qualified custodian engaging 
in transaction monitoring on behalf of an investment adviser to share 
any underlying information with an investment adviser for activity 
involving both institutions, so long as the SAR did not involve 
suspected misconduct by the adviser or its employees.
(a) Sharing With Other Regulators
    Comments Received: One commenter requested that proposed section 
1032.320(c)(2) be revised to clarify that government authorities' 
official duties may include disclosing a SAR to an SRO, consistent with 
the SRO's existing access to SARs. The commenter noted that, unlike 
existing rules addressing the confidentiality of SARs for other types 
of financial institutions, the proposal inserts the phrase ``to a non-
governmental entity'' before ``in response to a request for disclosure 
of non-public information.'' The commenter was concerned that this 
insertion could be misread as restricting the SRO's access to SARs, 
because SROs are not governmental entities. The commenter also noted 
that it may be important for SROs to have access to SARs filed by 
financial institutions for oversight of broker dealers' compliance with 
BSA requirements and the identification of areas of potential AML/CFT 
risk.
    Final Rule: FinCEN is implementing this requirement with one change 
to the proposed rule, in response to comments. FinCEN does not intend 
that the requirements of this rule interfere with any existing access 
to BSA information. This includes access to BSA information for SROs 
that may have delegated authority to examine other BSA-defined 
financial institutions, including broker-dealers and future commission 
merchants. Therefore, FinCEN has removed the words ``to a non-
governmental entity'' in the regulatory text.\256\
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    \256\ For the avoidance of doubt, the final rule is not intended 
to change SROs' confidentiality obligations pursuant to 31 U.S.C. 
5318(g) or pursuant to other provisions of this chapter.
---------------------------------------------------------------------------

(b) Filings by More Than One Financial Institution
    Proposed Rule: Section 1032.320(a)(3) would have provided that more 
than one investment adviser may have an obligation to report the same 
suspicious transaction and that other financial institutions may have 
separate obligations to report suspicious activity with respect to the 
same transaction pursuant to other provisions in the BSA. The provision 
would clarify that no more than one report would be required to be 
filed by all financial institutions (including investment advisers) 
involved in the transaction, under specified conditions.
    Comments Received: Three commenters commented on SAR filing 
obligations when more than one financial institution is associated with 
the same suspicious activity. Two commenters asked for clarification on 
how advisers should manage SAR filings obligations for custodians of 
client accounts, as well as with fund administrators, service 
providers, and other third parties. One commenter agreed that SARs 
filed jointly with investment advisers should specifically include the 
name of each financial institution involved in the transaction and the 
words ``joint filing'' in the narrative section, and that FinCEN should 
also consider requiring specifically that the SAR narrative describe 
the respective roles and involvement of each financial institution with 
respect to the transaction.
    Final Rule: FinCEN is implementing this requirement without change 
from the proposed rule. FinCEN would like to clarify that section 
1032.320(a)(3) of the final rule provides that the obligation to 
identify and report a suspicious transaction rests with the investment 
adviser ``by, at, or through'' which the transaction occurs. However, 
where more than one investment adviser, or another financial 
institution with a separate SAR obligation, is involved in the same 
transaction, only one report is required to be filed. FinCEN recognizes 
that other financial institutions, such as broker-dealers in 
securities, mutual funds, and banks have separate reporting obligations 
that may involve the same suspicious transaction.\257\ Therefore, in 
those instances, when an investment adviser and another financial 
institution, such as a broker-dealer, are involved in the same 
transaction, only one report for the transaction is required to be 
filed. It is permissible for either the investment adviser or the other 
financial institution to file a single joint report provided it 
contains all relevant facts and that each institution maintains a copy 
of the report and any supporting documentation. In filing a joint SAR, 
the filing entities should include the name of each financial 
institution involved in the transaction, their role in the 
transactions, and the words ``joint filing'' in the narrative. A single 
jointly filed SAR will satisfy both financial institutions' independent 
filing obligations so long as each institution maintains a copy of the 
SAR filed, along with any supporting documentation. Although financial 
institutions are permitted to file a joint SAR, they may also choose to 
file their own individual SARs instead.
---------------------------------------------------------------------------

    \257\ See 31 CFR 1023.320, 1024.320, and 1020.320.
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(c) Sharing With Other Government Agencies
    In the IA AML NPRM, FinCEN stated that SAR filing requirements for 
investment advisers, particularly venture capital advisers, may help 
CFIUS agencies identify certain transactions that could pose national 
security risks. One commenter stated that mandating SAR filing to 
support CFIUS efforts would be a major departure from standard practice 
under the BSA. The commenter indicated that requiring venture capital 
advisers to submit SARs filings to supplement CFIUS reviews would 
impose a significant burden, and FinCEN should consider more targeted 
regulatory options besides AML/CFT requirements.
    FinCEN notes that CFIUS member agencies may already have access to 
BSA information as part of their normal duties. FinCEN is also 
clarifying that it is not requesting venture capital advisers file SARs 
for the purpose of supplementing notices or declarations submitted to 
CFIUS. Rather, and as explained elsewhere in this document, an 
adviser's SAR filing obligations may provide information that is 
relevant for CFIUS, specifically in the case of technology transfers. 
In identifying the potential relevance of information in filings 
related to technology transfers, FinCEN is simply providing more 
targeted guidance to such advisers as to circumstances specific to 
venture

[[Page 72204]]

capital activity where a SAR filing may be required.
6. Limitation of Liability
    Section 1032.320(e) of the proposed rule will would have provided 
protection from liability, also known as a safe harbor, for making 
either required or voluntary reports of suspicious transactions, or for 
failures to provide notice of such disclosure to any person identified 
in the disclosure to the full extent provided by 31 U.S.C. 
5318(g)(3).\258\ This protection would extend to an investment adviser 
and any current or former director, officer, employee, or agent of an 
investment adviser under the conditions of this regulation.
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    \258\ To encourage the reporting of possible violations of law 
or regulation and the filing of SARs, the BSA contains a safe harbor 
provision that shields financial institutions making such reports 
from civil liability. In 2001, the USA PATRIOT Act clarified that 
the safe harbor also covers voluntary disclosure of possible 
violations of law and regulations to a government agency and 
expanded the scope of the safe harbor to cover any civil liability 
which may exist under any contract or other legally enforceable 
agreement (including any arbitration agreement). See USA PATRIOT 
Act, sec. 351(a). Public Law 107-56, Title III, 351, 115 Stat. 272, 
321 (2001); 31 U.S.C. 5318(g)(3).
---------------------------------------------------------------------------

    Comments Received: No comments were received on this issue.
    Final Rule: FinCEN is adopting the requirements regarding 
limitations of liability for SAR filing as proposed.
7. Compliance
    Under section 1032.320(f) of the proposed rule, FinCEN or its 
delegates would have examined compliance by investment advisers with 
the obligation to report suspicious transactions. The section also 
would provide that failure to comply with the proposed rule may 
constitute a violation of the BSA and FinCEN's regulations. As 
discussed above, pursuant to 31 CFR 1010.810(a), FinCEN has overall 
authority for enforcement and compliance with its regulations, 
including coordination and direction of procedures and activities of 
all other agencies exercising delegated authority. Further, pursuant to 
section 1010.810(d), FinCEN has the authority to impose civil penalties 
for violations of the BSA and its regulations.
    Comments Received: No comments were received on this issue.
    Final Rule: FinCEN is adopting the requirements regarding 
compliance by investment advisers with the obligation to report 
suspicious transactions as proposed.
8. Consultation With Federal and State Authorities
    Under section 6202 of the AML Act (codified at 31 U.S.C. 
5318(g)(5)), in imposing any requirement to report any suspicious 
transaction under this subsection, the Secretary of the Treasury, in 
consultation with the Attorney General, appropriate representatives of 
State bank supervisors, State credit union supervisors, and the Federal 
functional regulators, shall consider items that include--
     the national priorities established by the Secretary;
     the purposes described in section 5311 of the BSA; and
     the means by or form in which the Secretary shall receive 
such reporting, including the burdens imposed by such means or form of 
reporting on persons required to provide such reporting, the efficiency 
of the means or form, and the benefits derived by the means or form of 
reporting by Federal law enforcement agencies and the intelligence 
community in countering financial crime, including money laundering and 
the financing of terrorism.\259\
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    \259\ 31 U.S.C. 5318(g)(5).
---------------------------------------------------------------------------

    These items have been considered by the Treasury as described 
elsewhere in this final rule.\260\ The AML/CFT National Priorities 
include, among other considerations, combating corruption, fraud, and 
transnational crime.\261\ For example, as discussed above and in the 
Risk Assessment, the absence of AML/CFT requirements for investment 
advisers, including SAR filing requirements, enables criminals to gain 
access to the U.S. financial system for purposes of fraud, laundering 
the proceeds of corruption, and other forms of transnational crime. For 
these reasons, and the risk of foreign adversaries using investment 
advisers to gain access to U.S. technology, requiring investment 
advisers to file SARs will be highly useful for criminal and regulatory 
investigations and intelligence or counterintelligence activities to 
combat terrorism, and are otherwise consistent with the purposes set 
forth in section 5311 of the BSA.
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    \260\ See supra Section III.A and infra Section IV.A.4.
    \261\ See FinCEN, Anti-Money Laundering and Countering the 
Financing of Terrorism National Priorities (Jun. 30, 2021), https://www.fincen.gov/sites/default/files/shared/AML_CFTPriorities(June30%2C2021).pdf.
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    During the drafting of the IA AML NPRM, the comment period for that 
NPRM, and this final rule, Treasury has consulted with the relevant 
State and Federal regulators. The IA AML NPRM and final rule were sent 
to the Department of Justice and to the staff of the SEC as the Federal 
functional regulator for investment advisers for interagency 
consultation. Federal banking regulators were also invited to comment 
on all aspects of this proposed rule. Treasury also reached out to the 
Conference of State Banking Supervisors as a representative of State 
banking and credit union supervisors and the North American Securities 
Administrators Association (NASAA) as a representative of state 
securities regulators.

G. Information Sharing, Special Due Diligence, and Special Measures

1. Sections 314(a) and 314(b)
    Proposed Rule: Proposed sections 1032.500, 1032.520, and 1032.540 
would expressly subject investment advisers to FinCEN's rules 
implementing the special information-sharing procedures to detect money 
laundering or terrorist activity of sections 314(a) and 314(b) of the 
USA PATRIOT Act.\262\ These provisions generally would require an 
investment adviser, upon request from FinCEN, to expeditiously search 
its records for specified information to determine whether the 
investment adviser maintains or has maintained any account for, or has 
engaged in any transaction with, an individual, entity, or organization 
named in FinCEN's request. An investment adviser would then be required 
to report any such identified information to FinCEN. Further, 
investment advisers would be able to participate in voluntary section 
314(b) information sharing arrangements, through which they would be 
able to gather additional information from other financial 
institutions.
---------------------------------------------------------------------------

    \262\ See 31 CFR part 1010, subpart E, including 31 CFR 1010.520 
and 1010.540.
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    Comments Received on Section 314(a): Three commenters were 
supportive of applying these requirements, as the requirements had been 
applied by other BSA-defined financial institutions for the past twenty 
years and doing so with investment advisers would ensure consistent and 
effective implementation across the U.S. financial sector.
    Five commenters opposed applying section 314(a) requirements, 
stating that advisers do not maintain accounts or engage in 
transactions with the investors or clients, and that custodians and 
other financial institutions involved in the activity already have to 
comply with section 314(a) information requests, and would have any 
relevant transactional information. One commenter asserted that RIAs 
and ERAs lack insight into client account information, while another 
commenter indicated that requiring RIAs and ERAs

[[Page 72205]]

to respond to bi-weekly section 314(a) requests would be duplicative 
and impose a significant administrative burden without a corresponding 
benefit. Another commenter requested that, as information collected 
under the CDD Rule is relevant for complying with section 314(a) 
requests, FinCEN wait to apply this requirement to investment advisers 
until the CDD Rule is revised so parties may comment on how that 
revision will impact 314(a) requests.
    Three commenters requested that if these requirements are applied 
to RIAs and ERAs, that FinCEN offer guidance on how advisers should 
comply with 314(a) requests, such as for specific requirements related 
to funds transfer information. Two commenters requested confirmation 
that section 314(a) requests can be delegated to offshore fund 
administrators and other service providers.
    Regarding private funds, one commenter requested that an adviser 
not be directly responsible for reviewing underlying investors in funds 
because the adviser has effectively delegated this function to the 
administrator, while two commenters requested that an RIA or ERA be 
exempt from applying 314(a) requests to underlying investors in 
foreign-located funds because such investors are not clients of the 
adviser, are located outside of the United States, and may have no U.S. 
touchpoints. These commenters also asked for clarification on how the 
requirements would apply to foreign-located advisers and their foreign-
located customers.
    Comments Received on Section 314(b): FinCEN received five comments 
on permitting RIAs and ERAs to enter into information sharing 
arrangements under section 314(b) of the USA PATRIOT Act. All five 
commenters supported allowing RIAs and ERAs to enter into information 
sharing arrangements under Section 314(b), noting that this would 
assist RIAs and ERAs in detecting and reporting suspicious activity. 
One commenter recommend that FinCEN provide a clear procedure for 
sharing relevant information under 314(b) in the final rule.
    Applicability to Mutual Funds: One commenter also requested that 
FinCEN exempt investment advisers from having to apply the information 
sharing, due diligence, and special measures requirements of part 1032, 
subparts E and F, to their mutual fund customers. The commenter noted 
that a mutual fund is highly unlikely to be named in a section 314(a) 
request, and that the shareholders of mutual fund accounts would be 
covered by section 314(a) obligations applicable to mutual funds. 
Regarding the due diligence and special measures requirements of 
subpart F, the commenter noted that as all mutual funds must be 
organized under U.S. law, mutual funds would never be a foreign 
institution subject to those requirements.
    Final Rule: FinCEN is implementing this requirement with one 
substantive change from the proposed rule in response to comments. 
Regarding section 314(a), FinCEN will include the proposed requirement 
in the final rule. FinCEN recognizes that implementing this will impose 
some burden on investment advisers to implement this requirement, but 
that given the binary nature of the response (yes or no as to whether 
the adviser has an account for the subject), FinCEN believes such a 
burden is manageable. In addition, the nature of the request is also 
something an adviser can answer with existing information. Further, 
while responding to a 314(a) request requires access to the FinCEN 
Secure Information Sharing System (SISS), this need not require the 
purchase of additional technology.
    FinCEN recognizes that investment advisers will not necessarily 
have, as a matter of course, all the information that is considered 
part of an account when reviewing relevant information to include as 
funds transfers records that may be maintained by a custodian in 
response to a section 314(a) request. However, certain information, 
such as instructions collected from customers or financial information 
collected to understand the customer's investment objectives, may still 
be useful for a law enforcement investigation involving the subject of 
such a request.
    Additionally, FinCEN would like to clarify that, for purposes of 
section 314(a) requests, FinCEN would not expect investment advisers to 
have ``accounts'' for the underlying investors in a private fund unless 
the adviser has a separate advisory relationship with that underlying 
investor, and, as described above, an investment adviser is not at this 
time categorically required to collect beneficial ownership information 
for private funds. Therefore, when responding to a section 314(a) 
request for a private fund, an investment adviser would generally be 
expected to respond for the fund, and not for the underlying investors 
in the fund.
    Regarding section 314(b), FinCEN will include, at section 1032.540, 
a reference to 1010.540, which will permit investment advisers to enter 
into voluntary information sharing agreements under section 314(b). As 
described in the proposed rule, under the final rule, investment 
advisers will now be able to participate in voluntary section 314(b) 
information sharing arrangements, through which they can gather 
additional information from other financial institutions, which would 
enable broader understanding of customer risk and filing of/or file 
more comprehensive SARs, for example.\263\ FinCEN will further consider 
whether existing guidance on section 314(b) information sharing 
arrangements is sufficient, or if investment advisers require 
additional guidance specific to their activities.\264\
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    \263\ FinCEN, Section 314(b) Fact Sheet (Dec. 2020), available 
at https://www.fincen.gov/sites/default/files/shared/314bfactsheet.pdf.
    \264\ Id.
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    Regarding mutual funds, FinCEN also agrees with the arguments 
raised by the commenter regarding the application of section 314(a) 
information requests and the implementation of special due diligence 
and special measures applicable under the sections 311 and 312 of the 
USA PATRIOT Act. FinCEN agrees with the commenter that a mutual fund is 
highly unlikely to be named in a section 314(a) request, and, as also 
noted by the commenter, a mutual fund covered by this exclusion 
generally could not be a ``foreign financial institution'' subject to 
the special due diligence and special measures under sections 311 and 
312. Therefore, FinCEN has modified the proposed rule text to permit 
investment advisers to exclude mutual funds from these requirements at 
subpart E and subpart F, which is reflected at section 1032.500 and 
1032.600, respectively. This exclusion will also apply to (a) 
collective investment funds sponsored by a bank or trust company 
subject to the BSA and (b) any other investment adviser subject to the 
final rule that is advised by the investment adviser.
2. Special Due Diligence and Special Measures
    Proposed Rule: FinCEN proposed to implement special due diligence 
requirements for correspondent and private banking accounts, as well as 
certain prohibitions on correspondent banking and special measures 
under section 311 of the USA PATRIOT Act and section 9714 of the 
Combating Russian Money Laundering Act,\265\ including by amending the 
definitions in 31 CFR 1010.605 for ``account'' and ``covered financial 
institutions'' so that these would apply to investment

[[Page 72206]]

advisers. FinCEN proposed to add a general cross reference, proposed 
1032.600, that would state that investment advisers are subject to the 
``special standards of due diligence; prohibitions; and special 
measures'' already applicable to covered financial institutions, with 
no exclusion for business activities involving mutual funds advised by 
the investment adviser.
---------------------------------------------------------------------------

    \265\ FinCEN is clarifying that in addition to special measures 
under section 311 of the USA PATRIOT Act, investment advisers must 
also comply with actions taken under section 9714(a) of the 
Combating Russian Money Laundering Act, codified as a note to 31 
U.S.C. 5318A, and section 7213A of the Fentanyl Sanctions Act, 
codified at 21 U.S.C. 2313a.
---------------------------------------------------------------------------

    Comments Received: FinCEN received a range of comments on these 
proposals. Some commenters supported the proposals without 
qualification, stating that imposing these requirements on investment 
advisers would help prevent abuse of the U.S. financial system from 
criminals and malign actors. One commenter also proposed that FinCEN 
consider including foreign investment advisers as ``within the 
definition of foreign financial institutions that are subject to 
special due diligence programs'' under 31 CFR 1010.610(a), noting that 
such foreign investment advisers may ``present similar or more 
significant illicit finance risks than those presented by foreign banks 
and broker-dealers that are currently subject to those requirements.''
    However, one commenter suggested that these requirements should not 
apply to an adviser to, or sponsor of, a private fund, because private 
funds are not in a position to provide the information required by 
these requirements regarding details of transactions and the 
corresponding beneficiaries and originators, unlike a bank providing a 
correspondent account. Further, some commenters suggested that FinCEN 
exempt mutual funds from an investment adviser's requirements to apply 
certain due diligence and special measures to relevant aspects of their 
business activities because sections 311 and 312 of the USA PATRIOT ACT 
(which supply the statutory authority for these requirements) apply 
only to relationships outside of the United States, while mutual funds 
are required to be organized under the laws of the United States or of 
a U.S. state.
    Final Rule: FinCEN is implementing this requirement with one 
substantive change from the proposed rule in response to comments. 
Under the final rule, investment advisers may exclude from these 
requirements mutual funds, collective investment funds, and other 
investment advisers they advise that are subject to this rule. 
Accordingly, investment advisers will be subject to the special 
standards of diligence, prohibitions, and special measures requirements 
with respect to their customers that are not mutual funds, or 
collective investment funds, or other investment advisers that they 
advise.
    This approach will maintain the requirements in the proposed rule 
with regard to special due diligence and special measures requirements 
given the final rule's intent to bring the investment advisers' AML/CFT 
obligations on the investment adviser sector in line with those imposed 
on other comparable financial institutions.\266\ As discussed in the IA 
AML NPRM and in line with some comments received, applying these 
measures to investment advisers would assist RIAs and ERAs in managing 
risk and identifying illicit activity in certain intermediated advisory 
relationships. In response to the comment that certain private funds 
may not have the information necessary to conduct such due diligence, 
FinCEN recognizes the differing role that many investment advisers play 
in the movement and storage of funds relative to other financial 
service providers such as banks. Consistent with the approach taken in 
prior rules regarding special due diligence and special measure 
requirements, only covered investment advisers that offer accounts that 
provide financial institutions with a conduit for engaging in ongoing 
transactions in the U.S. financial system are subject to this 
requirement.\267\Accordingly, this requirement is intended to be 
limited to those types of relationships that provide ongoing services, 
excluding isolated or infrequent transactions.\268\ FinCEN will work 
with the SEC staff with respect to implementation and examination of 
this requirement and may issue guidance, if deemed necessary.
---------------------------------------------------------------------------

    \266\ See Special Due Diligence Programs for Certain Foreign 
Accounts, Final Rule, 71 FR 496 (Jan. 4, 2006), available at: 
https://www.federalregister.gov/documents/2006/01/04/06-5/financial-crimes-enforcement-network-anti-money-laundering-programs-special-due-diligence-programs.
    \267\ Id.
    \268\ Other requirements, such as suspicious activity reporting 
and recordkeeping, however, apply to such transactions as set out in 
this final rule.
---------------------------------------------------------------------------

    With respect to the special due diligence requirements for private 
banking accounts, FinCEN would like to clarify that in the context of 
private funds, the term ``minimum aggregate deposit of funds'' would 
apply to the assets in the private fund, if held by the adviser. In 
other words, the rule applies where an investment adviser manages more 
than the minimum aggregate deposit of funds for a customer (which may 
be a private fund or another type of customer).
    Regarding the comment suggesting to include foreign ``investment 
adviser'' within the definition of ``foreign financial institution'' 
under 31 CFR 1010.610(a) in order to require that special due diligence 
program requirements apply to correspondent accounts that covered 
financial institutions open for foreign investment advisers, FinCEN 
declines to do so because it assesses at this time that illicit finance 
risks to the U.S. financial system are adequately addressed by the 
application of the final rule to the U.S. advisory activities of 
certain foreign-located investment advisers, as described above. As a 
result a financial institution will not need to apply these 
requirements with respect to accounts for foreign investment advisers; 
instead, a financial institution (including an investment adviser under 
the final rule) will would still need to apply its overall AML/CFT 
program (regardless of special due diligence program requirements) to a 
foreign investment adviser, as it would any other customer covered by 
the AML/CFT program.

H. Delegation of Examination Authority to the SEC

    Proposed Rule: FinCEN proposed to delegate its examination 
authority for investment advisers to the SEC given the SEC's expertise 
in the regulation of investment advisers and the existing delegation to 
the SEC of authority to examine broker-dealers and mutual funds for 
compliance with FinCEN's regulations implementing the BSA.
    Comments Received: FinCEN received four comments pertaining to the 
delegation of examination authority to the SEC. One commenter supported 
the delegation of authority. Two commenters called on FinCEN to require 
that the SEC publicly release a copy of its relevant AML examination 
manual as the FFIEC has done with its BSA/AML examination manual. A 
commenter recommended that the final rule expressly recognize that the 
SEC should not prioritize examination or enforcement activities with 
respect to investment advisers who work with fund clients that (1) 
predominantly engage in investment activities in the U.S. and (2) 
predominantly accept subscriptions from domestic sources or through 
unaffiliated U.S.-regulated financial institutions. Instead, the 
commenter asked FinCEN to make clear that investment advisers with a 
domestic focus in their operations will be selected for examination by 
the SEC only if additional risk factors (e.g., unusual transactions 
flagged by the banks) are present. One commenter called on FinCEN to 
ensure, to the fullest extent possible, that agencies avoid duplication 
of examination

[[Page 72207]]

activities, reporting requirements, and requests for information, and 
called on the SEC as the functional regulator of investment advisers, 
to leverage the work of other BSA/AML examiners.
    Final Rule: FinCEN is implementing this provision without change 
from the proposed rule. The final rule maintains the proposed rule's 
delegation of examination authority to the SEC over investment 
advisers' compliance with the rule.\269\ This delegation reflects 
FinCEN's recognition that the SEC is best equipped to handle such 
examinations given the existing SEC regulatory and examination 
apparatus with respect to investment advisers. FinCEN declines to 
expressly adopt the comments suggesting that the SEC should not 
prioritize its examination activities for those investment advisers 
``predominantly engaged in investment activities in the U.S. and 
predominantly accept subscriptions from domestic sources or through 
unaffiliated U.S.-regulated financial institutions'' absent other risk 
factors. In recognizing that the SEC is best equipped to handle such 
examinations, FinCEN has determined that the SEC is best able to 
determine its own examination procedures and priorities.
---------------------------------------------------------------------------

    \269\ See also 31 CFR 1010.810(b)(6) (FinCEN's delegation of 
examination to determine compliance with requirements of Chapter X 
for brokers and dealers in securities and investment companies to 
the Securities and Exchange Commission).
---------------------------------------------------------------------------

    FinCEN also declines to publish an AML/CFT examination manual for 
investment advisers. FinCEN notes that the SEC has not published an 
investment adviser examination manual. FinCEN does note that the SEC 
maintains a compilation of relevant resources on AML/CFT for both 
broker-dealers and mutual funds, and FinCEN will discuss with the SEC 
whether to prepare something similar for investment advisers.\270\ 
Regarding the commenter request that the SEC leverage the work of other 
BSA/AML examiners, FinCEN notes that, as with other types of entities 
that may have more than one Federal functional regulator, supervisory 
coordination with regard to investment advisers is important to 
maintain efficiencies and avoid duplication.
---------------------------------------------------------------------------

    \270\ See SEC, Anti-Money Laundering (AML) Source Tool for 
Broker-Dealers, https://www.sec.gov/about/offices/ocie/amlsourcetool 
and Anti-Money Laundering (AML) Source Tool for Mutual Funds, 
https://www.sec.gov/about/offices/ocie/amlmfsourcetool.
---------------------------------------------------------------------------

I. Compliance Date

    Proposed Rule: Proposed section 1032.210(c) would have required an 
investment adviser to develop and implement an AML/CFT program and 
comply with the other AML/CFT requirements of the proposed rule on or 
before 12 months after the effective date of the regulation.
    Comments Received: Several commenters expressed concern about the 
proposed compliance date, stating that FinCEN had underestimated the 
overall impact of complying with the regulation. Several commenters 
requested that the compliance date be extended to 18 or 24 months (the 
majority of commenters recommended 24 months) from the effective date 
of the regulation to take into account the burden of complying with the 
regulation, with one also suggesting that this extended timeline would 
allow FinCEN to align the effective date of the proposed rule and the 
pending CIP rule. Some commenters noted that a 12-month compliance date 
would have a disproportionate impact on smaller entities, with one 
suggesting that advisers with 100 or fewer staff be given 36 months to 
comply should they remain in scope of the final rule. Two commenters 
noted that many advisers may need to renegotiate or amend contracts 
with a range of banks and broker-dealers to whom investment advisers 
may need to delegate or with whom they may need to share compliance 
obligations. One commenter also noted that there exist relatively few 
custodians, prime brokers, trading counterparties, and fund 
administrators that are responsible for revising all of these 
agreements on behalf of the entire universe of RIAs.
    Final Rule: FinCEN will require that an investment adviser must be 
in compliance with the final rule on or before January 1, 2026. FinCEN 
recognizes that the final rule will create new burdens on investment 
advisers, that investment advisers have other new regulatory 
obligations in addition to existing regulatory obligations, and that 
some advisers may need to develop, build, and integrate technology 
solutions to comply with certain requirements of final rule.
    However, based on FinCEN's experience issuing regulations for other 
financial institutions requiring them to meet similar requirements, 
FinCEN believes that a compliance date of January 1, 2026, provides an 
adequate amount of time to comply with the regulation. As noted by two 
commenters, FinCEN recognizes that advisers may need to renegotiate or 
amend contracts with a range of banks and broker-dealers, as well as 
fund administrators and other market participants, to whom investment 
advisers may need to delegate or with whom they may need to share 
compliance obligations. Given that the effective dates of these 
agreements may vary throughout the industry, FinCEN wants to ensure 
advisers have at least a full calendar year to adjust any contractual 
arrangements with custodians, broker-dealers, fund administrators, or 
other service providers.

J. Other Issues

1. Extend Comment Period
    FinCEN received one comment asking for an extended comment period, 
saying that the IA AML NPRM, by coming in the first quarter of the year 
(specifically, February) coincided with a time when RIAs are required 
to update Form ADV as well as oversee audited financials and the 
preparation of tax statements.
    FinCEN declines to re-open or otherwise extend the comment period, 
believing those options to be unnecessary, given the number of comments 
received, the wide array of content in the comments received, and the 
various types of advisers and organizations who submitted comments 
during this comment period.
2. Use of Legal Entity Identifiers
    One commenter suggested that FinCEN ``leverage existing collection 
procedures from the SEC'' to require investment advisers to collect the 
legal entity identifier (LEI) \271\ of their legal entity customers as 
part of this rule. The commenter stated that the LEI is ``an open and 
non-proprietary identifier [that] increases transparency and promotes 
information sharing among financial regulators'' The commenter noted 
that the SEC had already included the LEI in other proposed rules 
applicable to investment advisers, including amending forms for 
required filings to include LEI.
---------------------------------------------------------------------------

    \271\ The LEI is an identification number based on the 
International Organization for Standardization (``ISO'') 17442-1 
standard that uniquely identifies a legal entity. As noted by the 
commenter, the SEC requires an adviser to provide an LEI, if it has 
one, on Item 1.P on Form ADV.
---------------------------------------------------------------------------

    FinCEN recognizes that using uniform entity identifiers such as an 
LEI may assist investment advisers and law enforcement agencies in 
detecting illicit finance activity, such as by assisting in ongoing 
monitoring of legal entity customer activity. However, not all 
customers of investment advisers have an LEI. Moreover, FinCEN aims to 
offer investment advisers flexibility in implementing the proposed 
requirements while maintaining consistency with how AML/CFT 
requirements are applied to other financial institutions. Therefore, it 
will

[[Page 72208]]

not require investment advisers to collect the LEI of their legal 
entity customers. Notwithstanding the absence of an LEI requirement, 
advisers may still collect LEIs from customers or third party advisers 
if they believe it is helpful in assessing and mitigating illicit 
finance risk or complying with specific requirements in the proposed 
rule.
3. Use of Foreign Jurisdiction Compliance
    FinCEN received two comments calling on FinCEN to exempt from the 
final rule foreign-located advisers who are compliant with the AML/CFT 
laws of other jurisdictions. One comment noted that there is global 
acceptance of and adherence to FATF requirements, adding that the SEC 
and the Commodity Futures Trading Commission are signatories to the 
International Organization of Securities Commissions (IOSCO) 
Multilateral Memorandum of Understanding Concerning the Consultation 
and Cooperation and the Exchange of Information (MMoU).\272\ Another 
commenter stated that foreign-located investment advisers based in the 
United Kingdom and EU are already subject to similar AML/CFT laws and 
regulations and the burden of applying the proposed rule to foreign-
located investment advisers would be disproportionate and duplicative.
---------------------------------------------------------------------------

    \272\ Per the IOSCO, the MMoU sets an international benchmark 
for cross-border co-operation among its signatories. Established in 
2002, the MMoU provides securities regulators with the tools for 
combating cross-border fraud and misconduct. See IOSCO, Multilateral 
Memorandum of Understanding Concerning Consultation and Cooperation 
and the Exchange of Information (May 2002; rev'd May 2012), 
available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD386.pdf.
---------------------------------------------------------------------------

    FinCEN recognizes the importance of consistency and international 
coordination in applying and supervising for AML/CFT requirements on 
financial institutions active in multiple jurisdictions. As described 
above, the requirements of the final rule with respect to foreign-
located investment advisers will apply only with respect to certain 
advisory activities with a nexus to the United States. This is 
consistent not only with the SEC's own supervisory authority under the 
Advisers Act, but also with AML/CFT supervision of other types of 
financial institutions, including foreign-located advisers, which are 
subject to AML/CFT supervision by regulators in multiple jurisdictions. 
Further, as noted by the commenters, supervisors are able to make use 
of established fora and mechanisms, such as IOSCO's MMoU, to coordinate 
their activities and help minimize the burden on regulated entities. 
Therefore, FinCEN declines to exempt from the rule foreign-located 
advisers on the basis that they are compliant with the AML/CFT laws of 
other jurisdictions.
4. Interaction of Proposed Rule With Other Investment Adviser or AML/
CFT Rulemakings
    Commenters raised several questions pertaining to the interaction 
of the proposed rule with other rulemakings. Several commenters 
discussed the plan to issue CIP requirements for investment advisers 
jointly with the SEC. Commenters noted confusion over the plan for the 
SEC to issue new CIP rules allowing for adherence to this rulemaking. 
Several comments called on FinCEN to reopen the comment period for this 
proposed rule if a joint CIP rule were proposed prior to this rule 
being finalized. One commenter also requested that FinCEN continue to 
coordinate with staff at the SEC, especially on rulemakings that are 
interrelated or will have significant implications for one another, 
including on the SEC's proposed Outsourcing \273\ and Safeguarding 
\274\ rules. One commenter stated that given the overlap between CIP 
and some of the requirements in the proposed rule--such as the 
Recordkeeping and Travel Rules and Special Information Sharing 
Procedures FinCEN should not implement those requirements until the CIP 
rule is finalized.
---------------------------------------------------------------------------

    \273\ Outsourcing by Investment Advisers, Proposed Rule, 87 FR 
68816 (Nov. 16, 2022).
    \274\ Safeguarding Advisory Client Assets, Proposed Rule, 88 FR 
14672 (Mar. 9, 2023).
---------------------------------------------------------------------------

    Another commenter raised concerns that if the CDD Rule is applied 
as currently written, many funds would potentially not have to report 
the identities of any of their beneficial owners as limited partner 
investors will be below the 25 percent ownership reporting threshold. 
One commenter also suggested that FinCEN consider requiring investment 
advisers to begin customer and beneficial ownership identification and 
verification within a set timeframe, not specifically linked to the CDD 
update. The commenter also noted that given some of the unique issues 
related to pooled investment vehicles, FinCEN should not rely solely on 
an updated CDD rule to implement these requirements for pooled 
investment vehicles.
    FinCEN recognizes and has considered the potential challenges that 
may arise with multiple rulemaking processes that could affect 
investment advisers' AML/CFT requirements. As such, FinCEN intends to 
carefully coordinate on these rulemakings to ensure consistency in how 
investment advisers, as well as other financial institutions, are 
treated under these rules. Regarding CIP, as noted above, FinCEN and 
the SEC intend to align the compliance dates for both AML/CFT Program 
and SAR Rule as well as a potential final CIP rule. Regarding the 
revisions to the CDD Rule, FinCEN is considering how any such revisions 
may impact investment advisers and, as required by the Corporate 
Transparency Act, intends to issue a notice of proposed rulemaking, 
which would be subject to public comment. FinCEN will continue to 
coordinate with the SEC on these and other rulemakings.

IV. Severability

    In the IA AML NPRM, FinCEN proposed that if any provision of the 
final rule, or the application thereof to any person or circumstance, 
is held to be invalid, such invalidity shall not affect other 
provisions, or application of such provisions to other persons or 
circumstances, that can be given effect without the invalid provision 
or application. FinCEN did not receive any comments on this issue.
    FinCEN adopts this position without change and, separately, 
incorporates this position into the text of the rule at section 
1032.112 for the avoidance of doubt. FinCEN also clarifies its intent 
regarding the severability of specific parts of the final rule. It is 
FinCEN's position that if any of the provisions of this final rule, or 
the application thereof to any person or circumstance, is held to be 
invalid, such invalidity shall not affect other provisions, or 
application of such provisions to other persons or circumstances, that 
can be given effect without the invalid provision or application. Each 
provision of the final rule and application thereof serves an 
important, related, but distinct purpose; provides a distinct benefit 
separate from, and in addition to, the benefit provided by other 
provisions and applications; is supported by evidence and findings that 
stand independent of each other; and is capable of operating 
independently such that the invalidity of any particular provision or 
application would not undermine the operability or usefulness of other 
aspects of the final rules. Based on its analysis, FinCEN believes that 
although more limited application would change the magnitude of the 
overall benefit of the final rule, it would not undermine the important 
benefit of, and justification for, the final rule's application to 
other persons or circumstances. The qualitative and

[[Page 72209]]

quantitative benefits of the rule outweigh the costs for all persons 
and circumstances covered by the final rule.
    For example, but without limitation, if application of the final 
rule to any subcategory of investment advisers, such as foreign-located 
advisers, private fund advisers, or venture capital fund advisers, is 
held to be invalid, it is FinCEN's intent that the final rule remain in 
effect as to all other subcategories of investment advisers. The 
purpose of the final rule is to reduce the risk that investment 
advisers may be misused by money launderers, terrorists, or other 
actors who seek access to the U.S. financial system for illicit 
purposes and who threaten U.S. national security; and it is consistent 
with this purpose to cover some, but not all, investment advisers as 
defined in the final rule if the application of the rule to a 
subcategory of investment advisers is held to be invalid. Furthermore, 
subcategories of investment advisers generally do not depend on each 
other to comply with the requirements of the final rule and may 
continue to reduce illicit finance risk even if another subcategory of 
advisers is no longer covered by the final rule.
    The substantive requirements of this final rule--the AML/CFT 
program, SAR filing, recordkeeping, special standards of diligence, and 
other requirements--are likewise severable. FinCEN intends for 
investment advisers to implement each requirement regardless of whether 
another requirement is held to be invalid, and if the application of a 
requirement is held to be invalid in certain circumstances, to continue 
to apply a requirement to the extent it can be given effect in 
circumstances where it has not been held invalid. Many of the 
requirements are unaffected if another requirement is held to be 
invalid. While some substantive requirements facilitate compliance with 
another requirement of the final rule, no substantive requirement is 
unworkable if another requirement is invalidated or has its application 
limited. For example, but without limitation, an investment adviser may 
continue to maintain an AML/CFT program even if it is not obligated to 
file SARs or maintain special standards of diligence, which is already 
the case for certain categories of financial institutions under the 
BSA.\275\ Thus, although an AML/CFT program establishes a structure to 
facilitate SAR filing, an investment adviser may still report 
suspicious activity even if it is not required to have an AML/CFT 
program as set out under the final rule. FinCEN therefore intends for 
each substantive requirement of the rule to be severable from each of 
the others and to be applied to the extent possible if its application 
is limited.
---------------------------------------------------------------------------

    \275\ See, e.g., 31 CFR part 1027 (dealers in precious metals, 
precious stones or jewels); 31 CFR 1023.230(a)(1) (foreign-located 
broker-dealers not required to file SARs).
---------------------------------------------------------------------------

V. Regulatory Analysis

    In accordance with Executive Orders 12866, 13563, and 14094 (i.e., 
E.O. 12866 and its amendments), this regulatory impact analysis (Impact 
Analysis) is composed of assessments of the anticipated impacts of the 
final rule--in particular, the final rule's expected costs and benefits 
to affected parties. This analysis also includes assessments of the 
rule's impact on small entities pursuant to the Regulatory Flexibility 
Act (RFA) and of its reporting and recordkeeping burdens under the 
Paperwork Reduction Act (PRA), as well as consideration of whether an 
assessment under the Unfunded Mandates Reform Act of 1995 (UMRA) is 
required and of the implications of the Congressional Review Act for 
the final rule.
    This Impact Analysis finds that the impact associated with the 
final rule would primarily affect investment advisers (specifically, 
covered RIAs and ERAs) and U.S. Federal agencies, and estimates that 
the total present value of costs of the final rule over a 10-year time 
horizon ranges from $4.3 billion to $8.7 billion, with a primary 
estimate of $7.4 billion, using a 2 percent discount rate. The 
annualized costs over a 10-year time horizon range from $470 million to 
$950 million, with a primary estimate of $810 million, using a 2 
percent discount rate.\276\ This final rule has been determined to be a 
``significant regulatory action'' under section 3(f) of Executive Order 
12866 and significant under section 3(f)(1) because it may have an 
annual effect on the economy of $200 million or greater.
---------------------------------------------------------------------------

    \276\ All aggregate figures are approximate and not precise 
estimates unless otherwise specified.
---------------------------------------------------------------------------

    Table 1 summarizes the benefits and costs of the final rule. The 
potential benefits are difficult to quantify--and thus are unquantified 
in this Impact Analysis--but are reported alongside the monetized 
costs:

[[Page 72210]]

[GRAPHIC] [TIFF OMITTED] TR04SE24.000

    FinCEN has chosen to issue the final rule applying AML/CFT 
requirements to RIAs and ERAs (with certain exemptions) instead of two 
regulatory alternatives: (1) applying AML/CFT requirements to RIAs, 
ERAs, and State-registered investment advisers, and (2) merely 
requiring private funds to collect beneficial ownership information on 
legal entity investors. The first alternative would expand the 
regulatory requirements of the BSA applied to nearly twice as many 
entities (as compared to the final rule) at a greater overall cost but 
provide a similar level of benefits (with only limited incremental 
benefits attributable to the inclusion of State-registered investment 
advisers in the definition of financial institution). The second 
alternative would reduce the costs of the regulation (as compared to 
the final rule) while providing fewer benefits and only achieving a 
small proportion of the objectives of the BSA in the investment adviser 
industry.
    FinCEN has conducted a final regulatory flexibility analysis (FRFA) 
pursuant to the RFA. In response to the findings in the initial 
regulatory flexibility analysis and public comments on the IA AML NPRM, 
for the final rule FinCEN has specifically exempted RIAs that register 
with the SEC as mid-sized advisers to reduce the

[[Page 72211]]

potential regulatory burden on small entities.
    As detailed in the PRA analysis, for the private sector, the final 
rule is estimated to result in a one-time, upfront information 
collection burden of 6.83 million hours and an average annual 
information collection burden of 4.86 million hours thereafter. The 
estimated one-time, upfront information collection cost is 
approximately $408 million, and the estimated average annual recurring 
information collection cost is approximately $278 million thereafter. 
These costs are included in the Impact Analysis.
    Pursuant to its UMRA-related analysis, FinCEN has not anticipated 
any expenditures for State, local, and Tribal governments. FinCEN 
anticipates expenditures by the private sector of more than $177 
million, the current UMRA threshold.\277\ The UMRA-related analysis for 
private sector entities has been incorporated into this Impact 
Analysis.
---------------------------------------------------------------------------

    \277\ As explained below in the section V.D, the UMRA threshold 
is $100 million adjusted annually for inflation. The U.S. Bureau of 
Economic Analysis reported the annual value of the gross domestic 
product (GDP) deflator in 1995 (the year in which UMRA was enacted) 
as 71.823, and in 2022 as 127.215. See U.S. Bureau of Economic 
Analysis, Table 1.1.9, ``Implicit Price Deflators for Gross Domestic 
Product,'' available at https://apps.bea.gov/iTable/?reqid=19&step=2&isuri=1&categories=survey%23eyJhcHBpZCI6MTksInN0ZXBzIjpbMSwyLDMsM10sImRhdGEiOltbIkNhdGVnb3JpZXMiLCJTdXJ2ZXkiXSxbIk5JUEFfVGFibGVfTGlzdCIsIjEzIl0sWyJGaXJzdF9ZZWFyIiwiMTk5NSJdLFsiTGFzdF9ZZWFyIiwiMjAyMSJdLFsiU2NhbGUiLCIwIl0sWyJTZXJpZXMiLCJBIl1dfQ. Thus, the 
inflation adjusted estimate for $100 million is 127.215 divided by 
71.823 and then multiplied by 100, or $177 million.
---------------------------------------------------------------------------

A. Executive Orders 12866, 13563, and 14094

    As detailed below, Treasury assesses that RIAs and ERAs pose a 
material risk of misuse for illicit finance. Including investment 
advisers as ``financial institutions'' under FinCEN regulations issued 
under the BSA and applying comprehensive AML/CFT measures to these 
investment advisers are likely to reduce this risk.
    Executive Order 12866, as amended by Executive Order 14094, directs 
agencies to assess costs and benefits of available regulatory 
alternatives and, if regulation is necessary, to select regulatory 
approaches that maximize net benefits (including potential economic, 
environmental, and public health and safety effects; distributive 
impacts; and equity). Executive Order 13563 emphasizes the importance 
of quantifying both costs and benefits, reducing costs, harmonizing 
rules, and promoting flexibility. This final rule has been designated a 
``significant regulatory action'' under section 3(f) of Executive Order 
12866 and significant under section 3(f)(1). Accordingly, this final 
rule has been reviewed by the Office of Management and Budget (OMB).
1. Discussion of Comments to the Initial Impact Analysis
    Seven commenters commented on the initial impact analysis 
accompanying the proposed rule. Three of these seven commenters 
commented on the initial impact analysis's cost estimates; all seven 
commented on the analysis's estimated benefits; and two commented on 
the analysis's estimates regarding the frequency of SAR filing. As 
explained below, in response to these comments, FinCEN increased its 
estimates of costs and expanded its discussion of benefits in the final 
Impact Analysis, but left the initial SAR estimates unchanged.
(a) Comments Related to Costs
    Comments Received: Three commenters provided views on the estimated 
costs in the initial regulatory analysis. Two commenters argued that 
advisers would not be able to easily adapt existing policies and 
procedures to comply with the requirements of the proposed rule, 
suggesting that the initial impact analysis had thus underestimated the 
proposed rule's costs by assuming that some such existing policies and 
procedures could be so adapted. The commenters stated that existing 
requirements are principles-based and designed to prevent violations of 
the Advisers Act, and that there is little overlap between those 
requirements and the purpose and substantive requirements of the BSA 
that the proposed rule would impose on investment advisers. One 
commenter also indicated that the annual reviews that investment 
advisers must conduct for compliance with the Advisers Act do not 
necessarily equip them to implement the independent testing under the 
AML/CFT program requirement that the proposed rule would impose.
    Regarding those AML/CFT programs that some investment advisers do 
already have, one commenter noted that even affiliated and dual 
registered advisers would need to update their compliance programs 
under the proposed rule. The commenter also noted that advisers with a 
voluntary AML/CFT program would still need to modify their program, as 
it is unlikely that their existing program (and systems developed to 
implement that program) would fully track the requirements in the 
proposed rule.
    In addition, one commenter asserted that FinCEN had underestimated 
the costs for several specific requirements of the proposed rule, 
including the costs of implementing an AML/CFT program (particularly 
for unaffiliated RIAs with limited existing measures), training 
employees, and filing SARs. The commenter indicated these burdens may 
be particularly significant for small firms. The commenter also 
disagreed that a ``risk[hyphen]based'' program will manage the costs of 
these requirements for investment advisers, as many financial 
institutions feel pressure to implement more extensive controls than 
strictly required to minimize potential regulatory risk. The commenter 
further reasoned that some firms may decide to not take on customers 
that may make compliance more difficult, and that this hesitancy may 
hinder innovation and competition in financial markets, a difficult-to-
quantify cost.
    One commenter stated that FinCEN had failed to estimate the degree 
to which ERAs currently implement AML/CFT requirements, which the 
commenter suggested compromises FinCEN's ability to estimate the rule's 
compliance costs for ERAs. The commenter believed that FinCEN's failure 
to do so also would ``inevitably affect'' FinCEN's ability to 
accurately estimate the compliance costs for many RIAs as well, but 
without explaining why this would be so.
    Two commenters indicated that the proposed rule would have costs on 
the broader venture capital ecosystem, as venture capital advisers 
would be forced to take time away from their work supporting businesses 
in which they invest to instead address compliance with the proposed 
rule. One commenter concluded that higher costs for smaller venture 
capital advisers would gradually price them out of the market, leaving 
only the large institutional advisers who already dominate most asset 
classes, and suggested that FinCEN consider not only the actual costs 
of implementation, but the consequences of these costs for investors 
and the overall innovation ecosystem.
    Final Impact Analysis: FinCEN recognizes that there are both 
substantive and procedural differences in the requirements under the 
Advisers Act and those being applied in this final rule. As such, 
FinCEN has not sought to discount or adjust the potential costs of the 
rule based on existing technology systems, staff, or processes designed 
to meet requirements of the Advisers Act or other Federal securities 
laws. Thus, because FinCEN's initial estimates did not generally assume 
that investment advisers would be able to readily adapt

[[Page 72212]]

such existing Advisers Act programs to comply with the rule's 
requirements, no broad change to these estimates is required. FinCEN 
would note, however, that having organizational experience with 
complying with certain requirements of the Advisers Act, such as those 
related to recordkeeping and anti-fraud measures, may help an adviser 
determine how to best apply similar customer-specific or enterprise-
wide recordkeeping or reporting obligations under the final rule.
    FinCEN agrees with commenters' conclusion that even dual 
registrants or affiliates may incur additional costs in conforming 
their existing AML/CFT programs to the requirements of the rule, 
despite FinCEN's initial assessment that a dual registrant or affiliate 
was highly likely to be already applying a significant number of AML/
CFT measures. Therefore, FinCEN has increased its estimate of the cost 
of the rule to these entities in this final Impact Analysis. FinCEN 
also agrees with commenters that advisers with a voluntary AML/CFT 
program may still need to adjust their voluntary programs to comply 
with the requirements of the final rule, but FinCEN assesses that these 
costs were already accounted for in FinCEN's initial impact analysis, 
and thus that adjustment to this estimate is not required.
    Regarding comments that FinCEN is underestimating the cost of 
specific requirements and is unable to determine the degree to which 
ERAs already implement certain AML/CFT measures, FinCEN recognizes that 
there is some uncertainty about specific costs and about the number of 
entities already applying certain AML/CFT measures. All estimates of a 
rule's potential impact, however, involve some level of uncertainty--
indeed no commenter identified costs with certainty--and FinCEN's 
uncertainty analysis in this final Impact Analysis is intended to help 
address those concerns. Moreover, the commenters who claimed FinCEN was 
underestimating the cost of these requirements did not provide an 
alternative estimate for those costs. Regarding concerns that 
investment advisers will minimize regulatory risk by implementing 
extensive measures to comply with this rule, FinCEN reiterates that the 
AML/CFT framework does not utilize a zero tolerance philosophy, and 
that any enforcement action taken is dependent on the facts and 
circumstances of each situation.\278\ FinCEN has also, in coordination 
with Federal functional regulators, continued to emphasize that 
financial institutions should manage customer relationships and 
mitigate risks based on customer relationships, rather than decline to 
provide financial services to entire categories of customers.\279\
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    \278\ See, e.g., Joint Fact Sheet on Foreign Correspondent 
Banking: Approach to BSA/AML and OFAC Sanctions Supervision and 
Enforcement (Aug. 30, 2016), available at https://home.treasury.gov/system/files/136/archive-documents/Foreign-Correspondent-Banking-Fact-Sheet.pdf; see also Joint Statement on Enforcement of Bank 
Secrecy Act/Anti-Money Laundering Requirements (Aug. 13, 2020), 
available at https://www.fdic.gov/sites/default/files/2024-03/pr20091a.pdf.
    \279\ See Joint Statement on the Risk-Based Approach to 
Assessing Customer Relationships and Conducting Customer Due 
Diligence (Jul. 6, 2022), available at https://www.fincen.gov/sites/default/files/2022-07/Joint%20Statement%20on%20the%20Risk%20Based%20Approach%20to%20Assessing%20Customer%20Relationships%20and%20Conducting%20CDD%20FINAL.pdf.
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    In response to one commenter, FinCEN recognizes that there may be 
additional impact from this rule on general investment activities, 
including those associated with venture capital advisers, but notes 
that given the relatively small number of private funds that such 
exempt venture capital advisers service, such costs will not be 
significant for each individual adviser, and these requirements will be 
consistently applied for all investors seeking to invest in private 
funds advised by venture capital or other exempt reporting advisers. 
Thus, contrary to the fears raised by commenters, FinCEN does not 
expect that this rule's costs will drive smaller investment advisers 
out of the market or fundamentally alter the broader venture capital 
ecosystem.
(b) Comments Related to Benefits
    Comments Received: Seven commenters commented on the benefits of 
the proposed rule. Four commenters agreed with FinCEN's initial 
assessment of these benefits. One commenter noted that adding 
regulations to financial advisors would make it harder for money 
laundering operations to operate, and thus reduce the lucrative nature 
of crime in general. Another commenter argued that the proposed rule 
could assist the IRS in addressing tax evasion through private funds, 
while another commenter noted that the proposed rule's benefits would 
significantly outweigh the costs, especially considering the size of 
the investment advisory market and that some advisers already 
voluntarily implemented AML/CFT requirements. An individual commenter 
also provided data from the U.S. Sentencing Commission indicating that 
over 1,000 people were charged with money laundering in fiscal year 
2022, and that the median offense was for over $300,000, to stress the 
importance of controlling money laundering through regulations like the 
proposed rule and the benefits that may be obtained by doing so.
    Several commenters, however, stated that the proposed rule had no 
quantifiable benefit despite imposing billions of dollars in costs on 
investment advisers. One commenter accordingly encouraged FinCEN to 
quantify the proposed rule's benefits and to include a graph that 
visualizes a breakeven analysis of the rule. In addition, two 
commenters specifically disagreed with FinCEN's assessment of benefits. 
These commenters argued that the proposed rule should consider only the 
incremental benefit to law enforcement from the application of the 
proposed rule to venture capital advisers, given the existing AML/CFT 
obligations to which financial institutions that interact with venture 
capital funds are already subject. One of those commenters also argued 
that the initial impact analysis's explanation of benefits was broad 
and suffered from a lack of specificity, while the other commenter 
noted that transactional and customer information held by RIAs and ERAs 
is already available to law enforcement if a warrant has been obtained, 
or to regulators through their examination process, thereby suggesting 
that the proposed rule would not provide significant new information to 
law enforcement.
    Final Impact Analysis: In response to these comments on benefits, 
FinCEN has expanded the discussion on certain benefits in the final 
Impact Analysis and has added additional detail as to why FinCEN is 
choosing to not quantify the benefits of this final rule. In 
particular, FinCEN added additional discussion and detail on benefits 
associated with measures designed to combat crime, including money 
laundering, terrorist financing, and other types of illicit finance 
activity. FinCEN also expanded the Analysis's discussion of benefits 
associated with international regulatory cooperation for AML/CFT, a 
type of benefit on which recently updated OMB guidance places an 
increased emphasis.\280\ In response to comments, FinCEN also provided 
additional discussion on some of the challenges with quantifying the 
benefits from AML/CFT regulations, such as the deterrent and detection 
effects of such rules. FinCEN added some additional guidance from OMB 
on difficulties in

[[Page 72213]]

quantifying benefits in certain rulemakings as well.
---------------------------------------------------------------------------

    \280\ See OMB Circular No. A-4 (2023).
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    As further explained in the final Impact Analysis, however, the 
rule does have clearly identifiable benefits, even if those benefits 
cannot be readily quantified given their nature: difficulty quantifying 
a rule's benefits does not indicate that the rule lacks benefits or 
that its benefits are unimportant. Moreover, the final Impact Analysis 
expressly acknowledges that existing legal requirements provide similar 
benefits to the rule in some circumstances, but also highlights 
significant gaps in the existing requirements, and explains how the 
rule will create new benefits by filling those gaps and more 
comprehensively promoting AML/CFT compliance in the investment adviser 
industry.
(c) Estimate of Suspicious Activity Reports
    Comments Received: FinCEN's initial impact analysis used the number 
of SARs currently filed by dual registrants to estimate the number of 
SARs that RIAs would submit under the proposed rule. One commenter 
claimed that, by doing so, FinCEN significantly overstated the 
frequency with which RIAs would submit SARs under the proposed rule, as 
the vast majority of RIAs do not execute transactions in the way that 
dual registrants do, but instead rely on custodians. Another commenter 
stated that the number of SARs that may be filed under the proposed 
rule should not be used as a proxy for effectiveness of the rule.
    Final Impact Analysis: In the final Impact Analysis, FinCEN 
continues to use the estimated number of SARs to be filed by each 
investment adviser to assist FinCEN in estimating the costs associated 
with identifying and reviewing alerts and cases that may eventually 
lead to a SAR filing, as well as the costs associated with investment 
advisers documenting cases where SARs are not filed. FinCEN agrees with 
the commenters that the frequency with which dual registrants file SARs 
may differ from the frequency with which all RIAs file SARs under the 
rule: for example, dual registrants may have significantly more 
transactional activity than entities that are solely investment 
advisers and may encounter suspicious activity that they would not if 
they were serving solely as an investment adviser. Thus, by relying on 
the frequency with which dual registrants file SARs, FinCEN's Impact 
Analysis may overestimate the number of SARs that RIAs will file under 
the rule, and thus may overestimate the related costs that the rule 
would impose. Nonetheless, FinCEN is keeping this estimate given the 
difficulty of otherwise reliably estimating the frequency of SAR filing 
and to avoid underestimating time and labor costs associated with the 
SAR filing process.
    FinCEN agrees that the number of SARs a financial institution files 
does not, in and of itself, necessarily indicate whether that 
institution has an effective AML/CFT program. FinCEN thus clarifies 
that there is no regulatory expectation that an investment adviser file 
a certain number of SARs to be in compliance with the requirements of 
the final rule. FinCEN recognizes that the amount of potentially 
suspicious transactions that occur by, at, or through an investment 
adviser will vary significantly with its AUM, advisory activities, and 
the risk profile associated with its customers. As such, some advisers 
may file several hundred SARs per year, while many other advisers, 
particularly smaller advisers who have fewer customers, may file few if 
any SARs in a given year. FinCEN also notes that in other sectors 
subject to SAR filing obligations, a small number of entities are 
responsible for a large number of total SAR filings for those 
institutions.\281\
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    \281\ See FinCEN, Year in Review for FY 2022 (Apr. 21, 2023), 
p.3 (noting that the top 10 SAR filers filed approximately 52 
percent of all SARs in FY 2022), available at https://www.fincen.gov/sites/default/files/shared/FinCEN_Infographic_Public_2023_April_21_FINAL.pdf.
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2. Final Regulatory Impact Analysis
    In accordance with OMB guidance, this Impact Analysis contains, as 
follows: (1) a statement of the need for the regulatory action; (2) a 
clear identification of a range of regulatory approaches; and (3) an 
estimate of the benefits and costs--quantitative and qualitative--of 
the final regulatory action and its alternatives.
(a) Statement of the Need for, and Objectives of, the Final Rule
    The primary purpose of the final rule is to address identified 
illicit finance risks among investment advisers (i.e., RIAs and ERAs). 
Currently, investment advisers are not required by regulation to apply 
measures designed to address money laundering, terrorist financing, and 
other illicit finance risks similar to those to which other financial 
institutions are subject. For example, investment advisers are 
generally not required to establish an AML/CFT program, to conduct 
customer due diligence, or to report suspicious customer activity to 
FinCEN. This means that tens of thousands of investment advisers 
overseeing the investment of hundreds of trillions of dollars into the 
U.S. economy currently do not face regulatory sanction for failing to 
implement the above-mentioned measures, creating a material weakness in 
the United States's framework to combat illicit finance.
    As described in detail above, investment advisers work closely with 
and provide services that are similar or related to, services 
authorized to be provided by other BSA-defined financial 
institutions.\282\ While investment advisers do not usually custody 
customer assets, they generally must understand their customers' 
financial background and investment goals to provide advisory services, 
and they direct banks and broker-dealers to execute transactions and 
disperse funds to support their customers' investment objectives.
---------------------------------------------------------------------------

    \282\ See supra Section II.B.
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    Under the current AML/CFT regulatory framework applicable to 
investment advisory activities, the financial institutions that engage 
in trading or transactional activities on behalf of investment advisers 
or their customers, such as banks and broker-dealers, are subject to 
AML/CFT reporting and recordkeeping obligations. However, for many of 
these financial institutions, the investment adviser, and not the 
investment adviser's customers, is their customer. Consequently, they 
may rely solely on an investment adviser's instructions and lack 
independent knowledge of the adviser's customers. In some cases, an 
investment adviser may be the only person or entity with a complete 
understanding of the source of a customer's invested assets, background 
information regarding the customer, or the objectives for which the 
assets are invested. Additionally, an investment adviser may use 
multiple broker-dealers or banks for trading or custody services.
    As a result, one financial institution may not have the complete 
picture of an adviser's activity or information regarding the identity 
and source of wealth of the advisers' customers, and thus may not be 
well-positioned to assess whether funds managed by the adviser may be 
derived from illicit proceeds or associated with a criminal or other 
illicit finance activity. Without more complete information, such an 
institution may not have sufficient information to warrant filing a 
SAR, or may be required to file a SAR that only has limited information 
concerning the investment adviser's transactions on behalf of a 
particular customer. This limits the ability of law enforcement to

[[Page 72214]]

identify illicit activity that may be occurring through investment 
advisers.
    As discussed in the preamble, the final rule addresses this gap by 
requiring covered RIAs and ERAs to implement AML/CFT programs, which 
include risk-based procedures for conducting ongoing customer due 
diligence, and report suspicious activity to FinCEN, among other 
requirements. These RIAs and ERAs will be subject to examination for 
compliance with these requirements by the SEC. FinCEN expects this will 
reduce instances of investment advisers' unwittingly laundering illicit 
proceeds on behalf of clients and increase the likelihood that 
authorities detect illicit activity occurring through unwitting 
investment advisers. It also allows law enforcement to better detect 
complicit investment advisers that knowingly facilitate money 
laundering, terrorist financing, or other illicit finance activity. The 
final rule will also bring the investment adviser industry more in line 
with its counterparts in the U.S. financial sector and around the 
world.
(b) Summary of the Final Rule
    The final rule adds ``investment adviser'' to the definition of 
``financial institution'' at 31 CFR 1010.100(t) and adds a new 
provision to section 1010.100 defining the term ``investment adviser'' 
to mean RIAs (except for those RIAs exempted as described below) and 
ERAs. The final rule also clarifies that for certain ``foreign-located 
investment advisers'' (RIAs and ERAs that have their principal office 
and place of business outside the United States), the requirements of 
the final rule only apply to certain advisory activities with a nexus 
to the United States.
    With these changes to 31 CFR 1010.100, the final rule then subjects 
such ``investment advisers'' to AML/CFT requirements applied to 
financial institutions, including requiring them to: (i) develop and 
implement an AML/CFT program; (ii) file SARs and CTRs; (iii) record 
originator and beneficiary information for transactions (Recordkeeping 
and Travel Rules); (iv) respond to section 314(a) requests; and (v) 
implement special due diligence measures for correspondent and private 
banking accounts.
    AML/CFT Program. These investment advisers are required to maintain 
an AML/CFT program under the final rule, including: (i) developing 
internal policies, procedures, and controls to comply with the 
requirements of the BSA and address money laundering, terrorist 
financing, and other illicit finance risks; (ii) designating an AML/CFT 
compliance officer; (iii) instituting an ongoing employee training 
program; (iv) soliciting an independent test of AML/CFT programs for 
compliance; and (v) implementing risk-based procedures for conducting 
ongoing customer due diligence. As discussed above, FinCEN has 
determined that investment advisers can exempt from their AML/CFT 
programs any (i) mutual fund, (ii) collective investment fund, or (iii) 
investment adviser that they advise and that is subject to the final 
rule. Also as noted above, FinCEN has determined to not include the 
Duty Provision in this final rule.
    File SARs and CTRs. Investment advisers are required to file a 
report of any suspicious transaction relevant to a possible violation 
of law or regulation with FinCEN. In addition, investment advisers are 
required to report transactions in currency over $10,000. Currently, 
all investment advisers report such transactions on Form 8300.Under the 
final rule, a CTR replaces Form 8300 for RIAs and ERAs meeting the 
rule's definition of ``investment adviser.''
    Recordkeeping and Travel Rules. Under the final rule, investment 
advisers are required to obtain and retain originator and beneficiary 
information for certain transactions and pass on this information to 
the next financial institution in certain funds transmittals involving 
more than one financial institution.
    Respond to Section 314(a) Requests. FinCEN's regulations under 
section 314(a) enable law enforcement agencies, through FinCEN, to 
reach out to financial institutions to locate accounts and transactions 
of persons that may be involved in terrorism or money laundering. 
Requests contain subject and business names, addresses, and as much 
identifying data as possible to assist the financial industry in 
searching their records. The final rule allows these requests to be 
made to investment advisers.
    Special Due Diligence Measures for Correspondent and Private 
Banking Accounts. The final rule requires investment advisers to 
maintain due diligence measures that include policies, procedures, and 
controls that are reasonably designed to enable the investment adviser 
to detect and report, on an ongoing basis, any known or suspected money 
laundering or suspicious activity conducted through or involving any 
correspondent or private banking account that is established, 
maintained, administered, or managed in the United States for a foreign 
financial institution.
(c) Discussion of Concurrent/Overlapping/Conflicting Regulations
    There are no Federal rules that directly and fully duplicate, 
overlap, or conflict with the final rule. The majority of the 
investment adviser industry is not subject to any comprehensive AML/CFT 
requirements. FinCEN is aware that requirements within the Advisers Act 
and other Federal securities laws impose requirements upon investment 
advisers that in some instances are similar to the requirements in the 
final rule and perform similar roles (i.e., improving the integrity of 
the U.S. financial system and protecting customers). FinCEN also 
recognizes that the Advisers Act and its implementing regulations 
authorize the SEC to regulate the investment adviser industry for 
compliance with these requirements.
    However, while these existing requirements are important, and may 
provide a supporting framework for implementing certain obligations in 
the final rule, they do not impose the specific AML/CFT measures in the 
final rule in support of the BSA's statutory purposes. Specifically, 
investment advisers are not required to develop internal policies, 
procedures, and controls to identify and mitigate the risk that the 
adviser might be used for money laundering, terrorist financing, or 
other illicit finance purposes. Currently, investment advisers are not 
required to appoint an AML/CFT officer or train their employees to 
comply with AML/CFT requirements. They are not required to report 
suspicious activity, maintain certain transaction records, or respond 
to section 314(a) requests for information on customer accounts or 
transactions. The existing rules and regulations under the Advisers Act 
are designed to prevent adviser fraud or theft of client assets and 
otherwise protect investors, maintain fair, orderly and efficient 
markets, and facilitate capital formation. Preventing illicit actors 
from using the investment adviser industry to launder the proceeds of 
crime or finance terrorism is not contemplated in existing obligations 
on the industry.
    FinCEN recognizes that investment advisers that are dually 
registered as broker-dealers or are chartered as banks (and bank 
subsidiaries) are already subject to AML/CFT requirements. As noted 
above, FinCEN is not requiring such entities to establish multiple or 
separate AML/CFT programs so long as a comprehensive AML/CFT program 
covers all of the entity's applicable legal and regulatory obligations. 
The program should be designed to address the different money 
laundering, terrorist

[[Page 72215]]

financing, or other illicit finance activity risks posed by the 
different aspects of the overall business's activities and satisfy each 
of the risk-based AML/CFT program requirements to which it is subject 
in its capacity as both an investment adviser and a broker-dealer or 
bank. Similarly, an investment adviser that is affiliated with, or a 
subsidiary of, another entity required to establish an AML/CFT program 
in another capacity is not required to implement multiple or separate 
programs and instead may elect to extend a single program to all 
affiliated entities that are subject to the BSA, so long as it is 
designed to identify and mitigate the different money laundering, 
terrorist financing, and other illicit finance activity risks posed by 
the different aspects of each affiliate's (or subsidiary's) 
business(es) and satisfies each of the risk-based AML/CFT program and 
other BSA requirements to which the entities are subject in all of 
their regulated capacities.
    FinCEN is likewise aware that investment advisers serve as advisers 
to mutual funds, which have their own AML/CFT program requirements, and 
bank-and trust-company sponsored collective investment funds, as well 
as to other investment advisers covered by the final rule (including as 
subadvisers). For the reasons described above, FinCEN is mandating 
under the final rule that an RIA advising a mutual fund or collective 
investment fund may deem satisfied its AML/CFT program requirements 
with respect to such mutual fund, collective investment fund, or 
another investment adviser the adviser advises so long as the mutual 
fund, collective investment fund, or investment adviser is subject to 
an AML/CFT program requirement applicable under another provision of 31 
CFR chapter X.
    FinCEN is also aware that the SEC already examines certain 
investment advisers for compliance with the Advisers Act and 
implementing regulations. FinCEN anticipates that the SEC's examination 
of RIA and ERA compliance with the final rule's new requirements will 
be incorporated into its risk-based examination program.
(d) Report Organization
    This Impact Analysis is structured as follows. Section 3 assesses 
the nature and characteristics of the entities and their business that 
will be affected by the final rule. Section 4 then identifies the 
expected benefits of the final rule, and section 5 then assesses the 
expected costs of the final rule to both the private sector and 
government and explains the methodology for doing so. Finally, Section 
6 assesses potential regulatory alternatives to issuing the final rule. 
Following the Impact Analysis are the regulatory analyses required by 
the RFA, PRA, and UMRA. These analyses rely on certain calculations in 
the Impact Analysis.
3. Affected Entities
    This section identifies and characterizes the population of 
investment advisers that are likely to be impacted by the final rule. 
The final rule covers both RIAs (with certain exemptions) and ERAs. 
These groups generally may vary in terms of their business structure, 
AUM, number of employees, and number of client relationships. As 
explained below, these differences affect the estimated burden of the 
final rule, in part, because depending on their business structure, 
some RIAs and ERAs may already be implementing AML/CFT measures to some 
degree.
    To establish a pre-regulation baseline, this section provides a 
profile of investment advisers likely to be affected by the final rule. 
First, it describes which investment advisers will be affected by the 
final rule and on what basis. Next, it describes how RIAs and ERAs are 
categorized based on business structure, in ways that align with the 
expected costs of the final rule. Next, it describes the baseline level 
of economic activity for each type of entity. Finally, it describes 
other characteristics of the regulated population, including the number 
of small businesses.
(a) Universe of Investment Advisers Impacted by the Final Rule
    The Advisers Act defines an investment adviser as a person or firm 
that, for compensation, is engaged in the business of providing advice 
to others or issuing reports or analyses regarding securities.\283\ The 
final rule would cover two subsets of such investment advisers: RIAs, 
who register or are required to register with the SEC (with certain 
exemptions); and ERAs, who are exempt from registration but must report 
certain information to the SEC. Each RIA and ERA must submit the 
Uniform Application for Investment Adviser Registration (commonly known 
as Form ADV) and update it on an annual basis with the SEC.\284\ Form 
ADV is an SEC-administered self-disclosure form that collects certain 
information about each RIA and ERA. On Form ADV, RIAs must report 
ownership, clients, employees, business practices, custodians of client 
funds, and affiliations, as well as any disciplinary events of the 
adviser or its employees, and marketing and certain disclosure 
reporting materials it provides to clients. ERAs report a subset of 
this information.
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    \283\ See 15 U.S.C. 80b-2(a)(11) for this definition of 
``investment adviser.'' The statute excludes some persons and firms, 
such as certain banks, certain professionals, certain broker-
dealers, publishers, statistical ratings agencies, and family 
offices. See 15 U.S.C. 80b-2(a)(11)(A)-(G).
    \284\ See 17 CFR 275.203-1 and 204-4. A detailed description of 
Form ADV's requirements is available at https://www.sec.gov/oiea/investor-alerts-bulletins/ib_formadv.html.
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i. SEC Registration and Reporting Criteria
    Unless eligible to rely on an exemption, investment advisers that 
manage more than $110 million must register with the SEC, rather than a 
State authority, as well as submit a Form ADV and update it at least 
annually.\285\ Besides having AUM above $110 million, additional 
criteria may result in an investment adviser registering with the 
SEC.\286\ For example, investment advisers with AUM of at least $100 
million but less than $110 million are allowed, but not required, to 
register with the SEC. Unless a different exception from the 
prohibition on registration applies, investment advisers with AUM under 
$100 million are prohibited from registering with the SEC,\287\ but 
must register instead with the relevant State securities regulator.
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    \285\ Exceptions to this registration requirement include (1) 
venture capital advisers, (2) private fund advisers with AUM under 
$150 million, (3) advisers to life insurance companies, (4) foreign 
private advisers, (5) advisers to charitable organizations, (6) 
certain commodity trading advisers, (7) advisers to small business 
investment companies, and (8) advisers to rural business investment 
companies. See 15 U.S.C. 80b-3(b).
    \286\ Other exceptions to the prohibition on SEC registration 
include: (1) an adviser that would be required to register with 15 
or more States (the multi-State exemption); (2) an adviser advising 
a registered investment company; (3) an adviser affiliated with an 
RIA; and (4) a pension consultant. Persons satisfying these criteria 
and the definition of ``investment adviser'' are required to 
register as investment advisers with the SEC. See Form ADV: 
Instructions for Part IA, Item 2. Advisers with a principal office 
and place of business in New York and over $25 million AUM are 
required to register with the SEC.
    \287\ 17 CFR 275.203A-1. Note that if an RIA's AUM falls below 
$90 million as of the end of such RIA's fiscal year, then it must 
withdraw its registration with the SEC, unless otherwise eligible 
for an exception to the prohibition on SEC registration.
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    An ERA is an investment adviser that would be required to register 
with the SEC but is statutorily exempt from such requirement because: 
(1) it is an adviser solely to one or more venture capital funds, or 
(2) it is an adviser solely to private funds and has AUM in the United 
States of less than $150

[[Page 72216]]

million.\288\ ERAs are required to report to the SEC on Form ADV.
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    \288\ See sections 203(l) and 203(m) of the Advisers Act and 17 
CFR 275.203(l)-1 and 275.203(m)-1, respectively.
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    Based on FinCEN's initial regulatory flexibility analysis and 
public comments submitted on the proposed rule, in the final rule, 
FinCEN has exempted several classes of investment advisers from the 
rule's requirements. FinCEN is making these adjustments to the 
definition of ``investment adviser'' to reduce the regulatory burden on 
small advisers and appropriately tailor the final rule to balance 
regulatory burden, identified illicit finance risk, and the range of 
advisory activities in clearly understood and administrable fashion. 
First, the final rule exempts RIAs that report $0 in AUM. Second, the 
final rule also exempts RIAs that register with the SEC (as indicated 
on their Form ADV) solely for one or more of the following reason(s):

 Mid-Sized Adviser [Item 2.A.(2)]
 Pension Consultant [Item 2.A.(7)]
 Multi-state Adviser [Item 2.A.(10)]

    In addition, FinCEN has clarified how the rule will apply to 
foreign-located investment advisers (RIAs and ERAs that have their 
principal office and place of business outside the United States). As 
described at section 1032.111, the rule will apply only to advisory 
activities of foreign-located investment advisers that (i) take place 
within the United States, including through the involvement of U.S. 
personnel of the investment adviser, such as the involvement of an 
agency, branch, or office within the United States or (ii) provide 
services to a U.S. person or a foreign-located private fund with an 
investor that is a U.S. person. As of July 31, 2023, there were 830 
RIAs and 2,145 ERAs with their principal office and place of business 
outside the United States.\289\ No ERAs are exempt from the final rule.
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    \289\ According to Form ADV data as of July 31, 2023. FinCEN is 
not able to determine from available information which particularly 
advisory activities of the 830 RIAs and 2,145 ERAs that may be 
foreign-located investment advisers would be subject to the rule, so 
for the purposes of this cost-benefit analysis, it is assuming all 
their advisory activities would be subject to the rule.
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    As of July 31, 2023, there were 212 small RIAs \290\ that would 
have been subject to the final rule had it then been in effect. Based 
on information in the IA CIP NPRM, FinCEN estimates that, due to SEC 
registration thresholds, the only small ERAs that would be subject to 
the final rule would be those that maintain their principal office and 
place of business outside the United States.\291\ Thus, FinCEN 
estimates there are 173 small ERAs.\292\ Therefore, approximately 385 
investment advisers, or 1.9 percent of all investment advisers, 
impacted by the final rule are estimated to be small advisers.
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    \290\ As noted below, FinCEN is relying on the small entity 
definition under the Advisers Act rule adopted for purposes of the 
RFA. Under SEC regulations implementing the Advisers Act, which 
FinCEN is relying on for its analysis under the Regulatory 
Flexibility Act, an investment adviser is considered a small entity 
if (i) it has, and reports on Form ADV, less than $25 million in 
AUM; (ii) it has less than $5 million in total assets on the last 
day of its most recent fiscal year; and (iii) it does not control, 
is not controlled by, and is not under common control with another 
investment adviser that is not a small entity. See 17 CFR 275.0-7.
    \291\ See 89 FR 44571 (May 21, 2024).
    \292\ There are no direct data indicating which ERAs that 
maintain their principal office and place of business outside the 
United States are small entities because, although ERAs are required 
to report in Part 1A, Schedule D, the gross asset value of each 
private fund they manage, advisers with their principal office and 
place of business outside the United States may have additional AUM 
other than what they report in Schedule D. Therefore, to estimate 
how many of the ERAs that maintain their principal office and place 
of business outside the United States could be small entities, an 
analysis was conducted from a comparable data set: SEC-registered 
investment advisers. According to Form ADV data as of July 31, 2023, 
there are 67 small RIAs with their principal office and place of 
business outside the United States and 830 total RIAs with their 
principal office and place of business outside the United States (67 
/ 830 = 8.1%). Based on Form ADV data, there are approximately 2,145 
ERAs with their principal office and place of business outside the 
United States. Applying the same percentage (8.1%) to ERAs, FinCEN 
estimates there are 173 ERAs that are small entities.
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ii. Size of the Regulated Population
    The number of RIAs and ERAs is well-defined based on the number of 
Form ADV filings. The four subcategories of RIAs that are exempted from 
the final rule, noted above, account for 1,318 entities as of July 31, 
2023. Table 3.1 shows the number of RIAs and ERAs as of July 31, 2023, 
subject to the final rule. For this Impact Analysis, one additional RIA 
was omitted because it reported an implausibly high number of total 
clients.
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    \293\ Based on a Treasury review of Form ADV information filed 
as of July 31, 2023. See supra note 23. The sum across individual 
categories for RIAs and ERAs is greater than the total because each 
investment adviser may belong in more than one category.
[GRAPHIC] [TIFF OMITTED] TR04SE24.001

    In total, there are 14,073 RIAs subject to the final rule. These 
firms manage a total of $119 trillion in assets and have roughly 
861,000 total employees.\294\ Additionally, there are 5,846 ERAs 
subject to the final rule with total gross assets of $5.2 trillion 
(ERAs do not report the number of employees to the SEC).\295\ With 
limited exceptions, the final rule does not apply to RIAs with respect 
to their mutual fund or collective investment fund customers, or when 
they advise other investment advisers subject to this rule.\296\ ERAs 
do not advise mutual funds or collective investment funds. Therefore, 
as a practical matter, RIAs that exclusively advise such funds or other 
investment advisers subject to this rule are exempt from most of the 
requirements of this rule.\297\ Details on cost estimates for

[[Page 72217]]

these advisers are provided in the next sub-section.
---------------------------------------------------------------------------

    \294\ See supra note 25.
    \295\ ERAs report gross assets for each fund they advise, but 
only if that fund is not reported by another adviser in its own Form 
ADV; therefore, some ERAs report zero gross assets because all of 
the funds they advise are also reported by another adviser. See Form 
ADV, Instructions for Part 1A.
    \296\ See, e.g., section1032.210(a) infra. See supra Section 
III.D.1 for additional detail on the treatment of mutual funds and 
collective investment funds under the final rule.
    \297\ But an RIA would still be required to designate an AML/CFT 
officer, for example.
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(b) Categorizing the Regulated Population Based on Business Structure
    The economic impact of the final rule will depend on an adviser's 
business structure and the extent to which such an adviser is already 
implementing some AML/CFT requirements. FinCEN assesses that RIAs and 
ERAs dually registered as broker-dealers or banks, are a subsidiary or 
affiliate of a bank or broker-dealer are more likely to already apply a 
significant or moderate number of the requirements of the final rule. 
Additionally, as described below, survey data indicate that some RIAs 
are already implementing certain requirements of the final rule.
    RIAs and ERAs are also subject to a variety of regulations and 
reporting requirements, such as those under Federal securities laws, in 
addition to the final rule. In some cases, compliance with existing 
regulations under Federal securities laws may reduce the burden of the 
final rule. In addition, RIAs and ERAs rely on third-party entities to 
execute business services, and those entities may be required to comply 
with AML/CFT regulations. Depending on the business structure of an RIA 
or ERA, such third-party relationships may also reduce the burden of 
the final rule.
    Therefore, FinCEN categorized RIAs and ERAs based on their 
likelihood of having existing AML/CFT measures in place, and the extent 
of those measures. This subsection first details the justification for 
the categorization, based on the regulatory structure of the investment 
adviser industry and associated institutions. The subsection then 
describes each category of the regulated population.
i. Dual Registrants and AML/CFT-Compliant Entities Associated With RIAs 
and ERAs
    Some RIAs and ERAs are dually registered as, subsidiaries of, or 
affiliated with entities that are already subject to AML/CFT 
obligations and, therefore, may already be applying such obligations to 
their advisory activities, although they may not be legally obligated 
to do so.\298\ For instance, dual registrants may seek to provide 
customers with both brokerage and advisory services, and apply AML/CFT 
measures across their businesses rather than incurring greater costs by 
duplicating measures across each business. Additionally, some AML/CFT 
measures, such as employee training and initial customer due diligence, 
can be designed to apply across a firm rather than to specific 
activities.
---------------------------------------------------------------------------

    \298\ See Treasury, 2022 National Money Laundering Risk 
Assessment, pp. 63-66, https://home.treasury.gov/system/files/136/2022-National-Money-Laundering-Risk-Assessment.pdf.
---------------------------------------------------------------------------

    Further, in past Treasury outreach to financial institutions, those 
that have a financial subsidiary subject to AML/CFT program obligations 
as well as a subsidiary investment adviser have indicated they choose 
to typically apply an enterprise-wide AML/CFT program extending to all 
their subsidiaries and their customers so that all business lines or 
entities in their corporate enterprise are subject to consistent risk 
practices and procedures.
    In other circumstances, an RIA or ERA may perform AML/CFT functions 
via contract with a broker-dealer or other financial institution, such 
as when the adviser advises a mutual fund, or the adviser may have 
voluntarily implemented certain AML/CFT measures, such as due diligence 
or identification requirements.\299\ Many RIAs and ERAs also frequently 
use the services of certain third-party entities that are required to 
comply with AML/CFT regulations, namely, prime brokers, qualified 
custodians (e.g., banks), and in some circumstances, fund 
administrators.
---------------------------------------------------------------------------

    \299\ See id. See also Managed Funds Association, Sound 
Practices for Hedge Fund Managers (2009), Chapter 6 (Anti-Money 
Laundering) (recommending voluntary implementation).
---------------------------------------------------------------------------

ii. Existing Laws and Regulations
    The Advisers Act and its implementing rules and regulations form 
the primary existing framework governing investment adviser activity. 
Some rules and regulations that apply to RIAs are relevant to AML/CFT 
compliance and may lower the cost of compliance, including, as 
discussed further below: (1) the Custody Rule, which governs the 
custody of client funds and securities, often through relationships 
with qualified custodians who are often subject to AML/CFT 
requirements; and (2) the Compliance Rule, which governs policies and 
procedures designed to prevent violations of the Advisers Act, and 
establishes a procedural and organizational framework that RIAs may be 
able to build upon to implement AML/CFT measures, thus lowering the 
cost of compliance with the final rule.
    Custody Rule. The Custody Rule requires that client funds or 
securities over which an RIA has custody be held at a qualified 
custodian.\300\ The qualified custodian may hold the funds or 
securities in separate accounts for each client under that client's 
name; or in accounts under the name of the RIA as agent or trustee for 
clients, with only client funds and securities inside. Qualified 
custodians can be banks, registered broker-dealers, futures commission 
merchants, or certain foreign entities. Because such qualified 
custodians are BSA-defined financial institutions (or their equivalents 
under foreign law) that must comply with AML/CFT regulations, accounts 
maintained on behalf of an RIA--and the associated client 
relationships--are subject to AML/CFT requirements.
---------------------------------------------------------------------------

    \300\ See 17 CFR 275.206(4)-2.
---------------------------------------------------------------------------

    Compliance Rule. Under the Compliance Rule,\301\ an RIA must adopt 
and implement written policies and procedures reasonably designed to 
prevent violations of the Advisers Act and the rules thereunder. RIAs 
must review their policies and procedures at least annually and 
designate a chief compliance officer to administer the policies and 
procedures. Although these policies and procedures do not include 
requirements that an RIA comply with the BSA, having written policies 
in place may reduce the time needed to develop and review specific AML/
CFT policies and procedures. Alternatively, having a framework in place 
for establishing policies and procedures may be useful for RIAs in 
complying with the final rule. Additionally, the presence of a chief 
compliance officer may reduce costs associated with designating an AML/
CFT compliance officer, for example by dual-hatting the current chief 
compliance officer.
---------------------------------------------------------------------------

    \301\ See 17 CFR 275.206(4)-7.
---------------------------------------------------------------------------

    Other Requirements. Certain private fund advisers also fill out 
Form PF, which requires disclosure of limited beneficial ownership 
information for private funds; for example, the percentage of the 
private fund's equity owned by broker-dealers, pension plans, and U.S. 
and foreign-located persons.\302\ Some investment advisers may have 
policies and procedures to comply with OFAC sanctions, which similarly 
may provide a framework for implementing certain AML/CFT measures 
included in the final rule.
---------------------------------------------------------------------------

    \302\ See 17 CFR 279.9.
---------------------------------------------------------------------------

    Due to these information collection requirements, RIAs and ERAs 
already compile varying amounts of information that could be useful in 
AML/CFT compliance--particularly information related to the identity 
and citizenship of various clients. Such information collection 
activities would lower the burden of the final rule on covered RIAs and 
ERAs.

[[Page 72218]]

iii. RIA and ERA Categories for Cost Analyses
    As described above, some RIAs and ERAs are already applying some 
AML/CFT requirements (although there is no legal requirement to do so). 
This is primarily because of their registration as or affiliation with 
another type of BSA-defined financial institution (such as a broker-
dealer). Therefore, the baseline level of AML/CFT measures for an RIA 
or ERA may vary with their business structure. For the purposes of the 
cost analysis, FinCEN categorized RIAs and ERAs based on business 
structure and likelihood of having existing AML/CFT measures in place 
in the baseline.
    Based on discussions with industry, information from the 2016 
Investment Management Compliance Testing Survey (IMCT Survey),\303\ and 
the framework described above, FinCEN assessed that dual registrants 
are most likely to already have a significant number of AML/CFT 
measures in place. An RIA or ERA with a significant number of AML/CFT 
measures in place is assessed to be applying most requirements in the 
final rule, including filing SARs, recordkeeping, information sharing, 
and special due diligence measures. Any modifications to existing 
policies or procedures, such as training programs, are likely to be 
less burdensome than developing new policies and procedures as some 
processes could be incorporated into existing routine maintenance, 
review, and updating procedures.
---------------------------------------------------------------------------

    \303\ Investment Management Compliance Testing Survey, 
Investment Adviser Association (2016) [hereinafter 2016 IMCT 
Survey], Executive Summary available at https://higherlogicdownload.s3.amazonaws.com/INVESTMENTADVISER/aa03843e-7981-46b2-aa49-c572f2ddb7e8/UploadedImages/publications/2016IMCTexsummary.pdf, Results available at https://higherlogicdownload.s3.amazonaws.com/INVESTMENTADVISER/aa03843e-7981-46b2-aa49-c572f2ddb7e8/UploadedImages/publications/2016IMCTresults.pdf.
---------------------------------------------------------------------------

    FinCEN also assessed that the majority of RIAs and ERAs affiliated 
with a bank or broker-dealer are most likely to have a moderate number 
of AML/CFT measures, though they are less likely than dual registrants 
to have a significant number AML/CFT measures in place. An RIA or ERA 
with a moderate number of AML/CFT measures in place are assessed as 
more likely to implement internal recordkeeping, annual training 
programs, and initial customer due diligence. However, these RIAs and 
ERAs are less likely to meet SAR filing, ongoing due diligence, 
information sharing, and special due diligence requirements under the 
BSA. These additional measures would need to be implemented under the 
final rule.
    Finally, FinCEN assessed that while most RIAs or ERAs that are not 
dually registered or affiliated with a bank or broker-dealer are 
currently implementing a limited number of AML/CFT measures, a minority 
of that subgroup are currently implementing a moderate number of--
rather than a limited number of--AML/CFT measures. An RIA or ERA with a 
limited number of AML/CFT measures in place would need to implement 
most of the requirements in the final rule, except that they are likely 
to be collecting some customer information at the beginning of the 
client relationship and filing reports (Form 8300) that are 
substantially similar to CTRs.
    First, RIAs and ERAs were categorized into three types of entities 
based on business structure: advisers that are dually registered as 
broker-dealers or as banks (``dual registrants''); advisers that are 
affiliated with a broker-dealer or bank (``affiliated advisers''); and 
all others that are not affiliated advisers or dual registrants (i.e., 
``other advisers''). Because broker-dealers and banks must comply with 
AML/CFT requirements, dual registrants are more likely than other 
investment advisers to have a significant number of AML/CFT measures in 
place, and this is reflected in the baseline. Similarly, affiliated 
advisers are more likely than other advisers to have a moderate number 
of AML/CFT measures in place in the baseline. Formally, FinCEN defined 
each group based on Form ADV filings as follows:
     Dual registrants. RIAs or ERAs that report to the SEC that 
they are actively engaged in business as a broker-dealer or bank, 
responding ``Yes'' to Item 6.A.(1) and/or Item 6.A.(7).\304\ As of July 
31, 2023, there were 376 dually registered RIAs and 44 dually 
registered ERAs that would have been subject to the final rule had it 
then been in effect.
---------------------------------------------------------------------------

    \304\ Items 6.A.(1) and 6.A.(7) on Form ADV require an 
investment adviser to identify whether it is actively engaged in a 
particular business. This response does not necessarily mean that 
the investment adviser is registered as a broker-dealer or regulated 
as any particular kind of bank. The phrase ``dual registrant'' 
should be interpreted on this basis for purposes of this analysis.
---------------------------------------------------------------------------

     Affiliated advisers. RIAs or ERAs that report to the SEC 
that they have a related person that is a broker-dealer or bank 
(responding ``Yes'' to Item 7.A.(1) and/or Item 7.A.(8)) and are not 
also dual registrants.\305\ As of July 31, 2023, there were 2,083 
affiliated RIAs and 288 affiliated ERAs that would have been subject to 
the final rule had it then been in effect.
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    \305\ A related person is any advisory affiliate (as defined for 
purposes of Form ADV) of and any person that is under common control 
(as defined for purposes of Form ADV) with the investment adviser. 
See Form ADV, Glossary of Terms.
---------------------------------------------------------------------------

     Other advisers. All RIAs or ERAs that are neither dual 
registrants nor affiliates of broker-dealers or banks. As of July 2023, 
there were 11,614 RIAs and 5,514 ERAs that would have been subject to 
the final rule had it been in effect that were neither a dual 
registrant nor an affiliated adviser.
    FinCEN then divided the RIAs and ERAs in each of these categories 
into subgroups based on the proportion estimated to be implementing a 
significant, a moderate, or a limited number of AML/CFT measures in the 
baseline. Because the exact distribution is unknown, FinCEN relied on 
different assumptions to generate lower and upper bounds and identify a 
primary estimate. In this case, ``lower bound'' means more RIAs and 
ERAs are assumed to have a significant or moderate number of AML/CFT 
measures in place and will have to implement relatively fewer 
additional measures under the final rule, while ``upper bound'' means 
more RIAs and ERAs are assumed to have a limited number of AML/CFT 
measures in place and will have to implement relatively more additional 
measures under the final rule. Although the size of each initial group, 
i.e., dual registrants, affiliated advisers, and other advisers, is 
well-defined based on Form ADV data, the extent of existing AML/CFT 
measures within each group is uncertain and may vary considerably.
    For this analysis, FinCEN used information from the 2016 IMCT 
Survey as a benchmark. The 2016 IMCT Survey collected information from 
approximately 700 RIAs on their existing implementation of AML/CFT 
measures.\306\ According to the 2016 IMCT Survey, as of 2016, 
approximately 40 percent of RIAs had already adopted AML/CFT policies 
consistent with FinCEN's 2015 NPRM to apply AML

[[Page 72219]]

Program and SAR filing requirements to RIAs (2015 NPRM).\307\ An 
additional 36 percent of RIAs adopted some AML/CFT policies and 
procedures, but those were not in line with those in the 2015 NPRM. 
Therefore, approximately 76 percent of RIAs had at least some AML/CFT 
measures in place as of 2016. More granularly, 49 percent had annual 
employee AML/CFT training, 24 percent had a designated an AML/CFT 
compliance officer, and 40 percent performed independent testing of 
their AML/CFT program annually. Similar information was not available 
for ERAs, and FinCEN thus lacks information on the extent to which ERAs 
are already implementing AML/CFT measures. Therefore, FinCEN assumed 
the proportion of dual-registered, affiliated, and other ERAs 
implementing AML/CFT measures was the same as for RIAs across all 
scenarios.
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    \306\ See 2016 IMCT Survey, supra note 301 . The 2024 IMCT 
Survey, which was published on July 16, 2024, was the first IMCT 
Survey since 2016 to ask detailed questions about AML policies and 
procedures. The 2024 IMCT Survey reported a slight drop in the 
percentage of respondent RIAs with AML policies and procedures that 
would comply with the requirements of this rule (from 40 percent to 
38 percent), and a slight increase in with AML policies and 
procedures that did not comply with all the requirements of this 
rule (36 percent to 40 percent). Given this minimal change, FinCEN 
has determined it is not necessary to adjust its baseline for those 
investment advisers with significant, moderate, or limited AML/CFT 
measures. See Investment Management Compliance Testing Survey, 
Investment Adviser Association (2024), available at https://www.investmentadviser.org/wp-content/uploads/2024/07/2024_IMCT-Survey.pdf.
    \307\ 2016 IMCT Survey, supra note 301; see also 80 FR 52680 
(Sept. 1, 2015).
---------------------------------------------------------------------------

    FinCEN assumed in the baseline that a minority of RIAs and ERAs had 
a significant number of AML/CFT measures in place consistent with the 
requirements of the final rule, including filing SARs, recordkeeping, 
information sharing, and special due diligence measures. However, that 
proportion likely varies across the three groups defined above. As 
discussed in the uncertainty analysis, based on the 2016 IMCT Survey 
this figure could be as high as 40 percent. For this group, 
modifications to existing policies or procedures, such as training 
programs, are likely to be less burdensome than developing new policies 
and procedures as some processes could be incorporated into existing 
routine maintenance, review, and updating procedures. Based on 
discussions with industry and the framework described above, for the 
primary estimate FinCEN assessed only dual registrants--i.e., the 376 
RIAs and 44 ERAs cited above or approximately two percent of all 
investment advisers--are likely to already have a significant number of 
AML/CFT measures in place (even if such measures are not required for 
their advisory activities).
    FinCEN then assessed that the majority of affiliated advisers 
implement a moderate number of AML/CFT measures, though they are less 
likely than dual registrants to have a significant number of AML/CFT 
measures in place. For RIAs and ERAs with a moderate number of AML/CFT 
measures in place, FinCEN assessed that existing programs most likely 
include internal recordkeeping, annual training programs, and initial 
customer due diligence. However, these entities are less likely to meet 
SAR filing, ongoing due diligence, information sharing, and special due 
diligence requirements under the BSA. Therefore, they would need to 
implement additional measures under the final rule. For the primary 
estimate, FinCEN assumed that 75 percent of affiliated RIAs, amounting 
to 1,562 entities, have implemented a moderate number of AML/CFT 
measures. FinCEN further assumed that 25 percent of affiliated RIAs, 
amounting to 521 entities have implemented a limited number of AML/CFT 
measures. The same percentages are applied to ERAs.
    Finally, FinCEN assessed that while most ``other advisers'' are 
currently implementing a limited number of AML/CFT measures, a minority 
are currently implementing a moderate number of AML/CFT measures. The 
RIAs and ERAs with just a limited number of AML/CFT measures in place 
would need to implement most of the additional AML/CFT requirements 
under the final rule. However, FinCEN assessed that all RIAs and ERAs, 
even those in the ``other advisers'' group, are likely to be collecting 
some customer information at the beginning of the client relationship 
and filing reports \308\ that are substantially similar to CTRs. If 40 
percent of RIAs have a significant or moderate number of AML/CFT 
measures, as reported in the 2016 IMCT Survey, the above estimates for 
dual registrants and affiliated advisers imply that 32 percent of other 
RIAs are implementing a moderate number of AML/CFT measures. This 
suggests that 68 percent of other RIAs have just a limited number of 
AML/CFT measures. The same percentages are applied to ERAs. Overall, 
this implies that a slightly higher proportion of ERAs have a limited 
number of AML/CFT measures, and a slightly lower proportion of ERAs 
have a significant or moderate number of measures, relative to RIAs 
because fewer ERAs are dually registered or affiliated.
---------------------------------------------------------------------------

    \308\ Investment advisers are currently required to file reports 
for the receipt of more than $10,000 in cash and negotiable 
instruments using joint FinCEN/Internal Revenue Service Form 8300. 
See supra note 191.
---------------------------------------------------------------------------

    As the true distribution of investment advisers implementing a 
significant, a moderate, or a limited number of AML/CFT measures is 
unknown, FinCEN presents an uncertainty analysis using upper and lower 
bound estimates. For the upper bound estimate, FinCEN assumed that the 
AML/CFT measures implemented by RIAs and ERAs (either under the current 
regulatory framework or voluntarily) would not meet the requirements of 
the final rule, and that therefore all RIAs not dually registered would 
have to implement for the first time the complete set of AML/CFT 
measures under the final rule. Based on that assumption, all covered 
RIAs and ERAs except dually registered entities are assumed to have 
implemented a limited number of AML/CFT measures. Thus, about two 
percent of all covered entities (376 RIAs and 44 ERAs) are estimated to 
have a significant number of AML/CFT measures, and the remaining 98 
percent (13,697 RIAs and 5,802 ERAs) are estimated to have a limited 
number of AML/CFT measures. For the lower bound estimate based on the 
2016 IMCT Survey, FinCEN first assumed that approximately 40 percent of 
all covered RIAs are implementing a significant number of AML/CFT 
measures. This includes dually registered RIAs, 75 percent of 
affiliated RIAs, and 32 percent of other RIAs. Next, FinCEN assumed 
that approximately 36 percent of all covered RIAs are implementing a 
moderate number of measures. This includes 25 percent of affiliated 
RIAs and 39 percent of other RIAs. The remaining 24 percent of all 
covered RIAs (or 29 percent of ``other'' RIAs) are assumed to have a 
limited number of AML/CFT measures. The same percentages are applied to 
ERAs.
    Classification of RIAs Advising Mutual Funds, Collective Investment 
Funds, and Other Investment Advisers. As discussed above, RIAs that 
exclusively advise mutual funds, collective investment funds, or other 
investment advisers subject to this rule are largely exempt from the 
requirements of the final rule. However, these RIAs have not been 
identified specifically through the Form ADV data. FinCEN assumed these 
advisers were most likely in the other advisers group. Because the 
clients (mutual funds and, collective investment funds, other 
investment advisers subject to this rule) of these RIAs are subject to 
comprehensive AML/CFT obligations, FinCEN assessed these advisers as 
having a moderate number of AML/CFT measures in place.
    Table 3.2 shows the resulting size of the population for each of 
the scenarios described above.

[[Page 72220]]

[GRAPHIC] [TIFF OMITTED] TR04SE24.002

     
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    \309\ Parentheses indicate the percentage of entities within a 
given category by scenario. Totals may not sum precisely due to 
rounding.

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[[Page 72221]]

[GRAPHIC] [TIFF OMITTED] TR04SE24.003

(c) Baseline Economic and Financial Characteristics of Regulated 
Population
    This subsection describes the economic and financial profiles of 
RIAs and ERAs subject to the final rule in the baseline, including the 
number of employees and customer relationships with legal entities, 
natural persons, and pooled investment vehicles (PIVs)--and annual 
changes in these numbers.
i. Number of Employees
    RIAs report employment figures on their Form ADV, while ERAs do 
not. To estimate the number of employees at ERAs, FinCEN assumed that 
the number of employees was similar to those at RIAs with the same 
number of private funds. In particular, the number of ERA employees was 
approximated as follows. First, FinCEN focused on RIAs with private 
funds only. FinCEN calculated deciles for the number of funds among 
each RIA category: dual registrants, affiliated RIAs, and other RIAs. 
Then, for each category of ERA, FinCEN calculated the average number of 
employees for the decile of the corresponding distribution of RIAs, 
based on the number of private funds advised by that ERA. This served 
as the approximation for the total number of ERA employees in the cost 
calculation. Table 3.3 shows the average number of employees for each 
category of investment adviser.

[[Page 72222]]

[GRAPHIC] [TIFF OMITTED] TR04SE24.004

ii. Number of Clients
    On Form ADV, RIAs report the number of clients, enumerated for 
specific types of clients.\311\ As described in section 3 of this 
Impact Analysis, certain costs of the final rule vary depending on the 
type of client, across three categories of clients: individual persons 
including high-net worth individuals, collectively known as ``natural 
persons''; PIVs; and various other types of clients collectively 
denoted as ``legal entities.'' Table 3.4 shows the average number of 
clients of each type, based on the RIA categories defined above.
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    \310\ Based on a Treasury review of Form ADV information filed 
as of July 31, 2023. See supra note 23. RIAs report total employees 
in Item 5.A. ERA data come from FinCEN calculations of the median 
employment among RIAs that report only private fund clients.
    \311\ Id. Clients are reported in Item 5.D. Natural persons are 
calculated as the sum of 5.D.(a).(1) and 5.D.(b).(1). PIVs are 
reported in 5.D.(f).(1), and exclude investment companies and 
business development companies. Legal entities are the sum of the 
remaining rows of column 1 of Item 5.D. Numbers are rounded to the 
nearest integer.
[GRAPHIC] [TIFF OMITTED] TR04SE24.005

    ERAs report the number of private funds they advise (i.e., an ERA's 
clients), including the number of funds for which another investment 
adviser already reports fund-specific information. Table 3.5 reports 
the average number of funds reported per ERA, based on the investment 
adviser categories described above.
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    \312\ Id. The total number of funds is calculated as the sum of 
the number of funds reported in Schedule D, sections 7.B.(1) and 
7.B.(2). Numbers are rounded to the nearest integer.
[GRAPHIC] [TIFF OMITTED] TR04SE24.006

(d) Other Characteristics of Regulated Entities
    This section describes the industry classification and business 
size of RIAs and ERAs to be regulated under the final rule.
i. Industry Classification by NAICS Code
    In general, businesses may be categorized under multiple industries 
due to having multiple lines of revenue or multiple business functions. 
Many RIAs and ERAs, including but not limited to dual registrants, 
accordingly, may report multiple lines of revenue on their Form ADV, 
and it is occasionally challenging to identify their primary line of 
business. Using the North American Industry Classification System 
(NAICS), the standard classification system used by Federal statistical 
agencies in classifying business establishments for the purpose of 
collecting, analyzing, and publishing statistical data on U.S. 
businesses, FinCEN assesses that most (if not all) RIAs and ERAs are 
classified within the NAICS subsector 523 (Securities, Commodity 
Contracts, and Other Financial Investments and Related Activities)--
with most entities classified in the national industry NAICS 523940 
(Portfolio Management and Investment Advice). However, that subsector 
may not account for the primary line of business of all investment 
advisers, and some may be classified under NAICS 522 (Credit 
Intermediation and Related

[[Page 72223]]

Activities) or NAICS 525 (Funds, Trusts, and Other Financial Vehicles).
ii. Small Entities
    To assess the prevalence of small businesses affected by the final 
rule, FinCEN relied on the small entity definition under the Advisers 
Act rule adopted for purposes of the RFA. Under this definition, an 
investment adviser is considered a small entity if (i) it has, and 
reports on Form ADV, less than $25 million in AUM; (ii) it has less 
than $5 million in total assets on the last day of its most recent 
fiscal year; and (iii) it does not control, is not controlled by, and 
is not under common control with another investment adviser that is not 
a small entity.\313\
---------------------------------------------------------------------------

    \313\ 17 CFR 275.0-7 (defining ``small business'' or ``small 
organization'' for purposes of the Advisers Act).
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    RIAs report whether they meet the conditions listed above in items 
5.F and 12 of Form ADV.\314\ As of July 31, 2023, there were 212 small 
entities RIAs that would have been subject to the final rule had it 
then been in effect. ERAs are not required to report regulatory AUM on 
Form ADV; therefore, it is not feasible to determine whether they meet 
the conditions above. Based on information in the IA CIP NPRM, FinCEN 
estimates that due to SEC registration thresholds, the only small 
entity ERAs that would be subject to the final rule would be those that 
maintain their principal office and place of business outside the 
United States.\315\ Thus, FinCEN estimates there are 173 small entity 
ERAs.\316\ Table 3.6 reports the estimated number of small entities 
subject to the final rule.
---------------------------------------------------------------------------

    \314\ Based on a Treasury review of Form ADV information filed 
as of July 31, 2023. See supra note 25. An RIA qualifies as a small 
entity under the SEC's definition if it has fewer than $25 million 
in regulatory AUM (Item 5.F.(2)(c)) and answers ``No'' to each of 
the questions in Item 12.
    \315\ 89 FR 44571, 44592-44593, n.131 (May 21, 2024).
    \316\ There are no direct data indicating which ERAs that 
maintain their principal office and place of business outside the 
United States are small entities because although ERAs are required 
to report in Part 1A, Schedule D the gross asset value of each 
private fund they manage, advisers with their principal office and 
place of business outside the United States may have additional AUM 
other than what they report in Schedule D. Therefore, to estimate 
how many of the ERAs that maintain their principal office and place 
of business outside the United States could be small entities, an 
analysis was conducted from a comparable data set: SEC-registered 
investment advisers. According to Form ADV data as of July 31, 2023, 
there are 67 small RIAs with their principal office and place of 
business outside the United States and 830 total RIAs with their 
principal office and place of business outside the United States (67 
/ 830 = 8.1 percent). Based on Form ADV data as of July 31, 2023, 
there are approximately 2,145 ERAs with their principal office and 
place of business outside the U.S. Applying the same percentage (8.1 
percent) to ERAs, FinCEN estimates there are 173 ERAs that are small 
entities.
[GRAPHIC] [TIFF OMITTED] TR04SE24.007

    For comparison, Table 3.7 shows the characteristics of small RIAs 
versus all other RIAs.
---------------------------------------------------------------------------

    \317\ Based on a Treasury review of Form ADV information filed 
as of July 31, 2023. See tables above for details on the Form ADV 
items used to calculate each table entry. Numbers are rounded to 
nearest whole number or percent.
[GRAPHIC] [TIFF OMITTED] TR04SE24.008


[[Page 72224]]


4. Assessment of Benefits
    The benefits assessed here are more difficult to quantify than the 
costs, but the final rule is nonetheless anticipated to add substantial 
value directly and indirectly through effects that can contribute to 
detection, deterrence, and broader policy goals.\318\ The principal 
direct benefits of the final rule are expected to accrue primarily in 
the public sector, most notably to U.S. law enforcement and the 
national security community, as well as certain Federal functional 
regulators, and to the investment adviser industry. Further, the 
identification of illicit activity in the investment adviser industry 
by applying program, reporting, and recordkeeping obligations to those 
industry participants, i.e., covered RIAs and ERAs, that have direct 
access to customer information would enhance detecting, investigating, 
and prosecuting illicit finance activity occurring through the industry 
and contribute to deterrence, which will benefit society more generally 
though a range of economic, security, and other effects.\319\
---------------------------------------------------------------------------

    \318\ In OMB Circular No. A-4 (2023), OMB acknowledges that some 
regulatory measures may incur costs or benefits that are highly 
uncertain or cannot be quantified, e.g., for lack of data or 
methods. Among other challenges in the context of this rule, the so-
called dark figure of crime, which is typically defined as the 
difference between reported or known and actual crime, further 
complicates the assessment of both illicit activity and the 
potential effects of changes in policy and regulation. Specifically, 
faced with criminals' active concealment, one can neither directly 
observe the true dimensions of the criminal activity (i.e., the 
baseline) nor unambiguously interpret some common indicators of 
change. For example, an increase in reported crime can reflect 
better enforcement, an increase in criminal activity, or a 
combination of the two. Provisions of this rule will improve the 
availability of information about financial activity that could make 
estimation less challenging in the future.
    \319\ Economists have long argued that increasing the costs and 
risks of law breaking, e.g., by increasing the likelihood of 
detection and punishment, makes law breaking less attractive. For 
the seminal work in this area, see Gary S. Becker, ``Crime and 
Punishment: An Economic Approach,'' Journal of Political Economy, 
Mar.-Apr. 1968, pp. 169-217, which has given rise to a vast and 
still expanding literature.
---------------------------------------------------------------------------

    The AML/CFT requirements in the final rule will help address 
existing information gaps regarding suspicious activity reporting 
discussed in section 1, with potentially significant implications for 
detection and deterrence.\320\ They will also help harmonize AML/CFT 
requirements between investment advisers and similarly situated 
financial institutions that must comply with these requirements, which 
would mean greater parity among them, and between the United States and 
its allies.
---------------------------------------------------------------------------

    \320\ OMB guidance has addressed such benefits in an analogous 
context: ``For some regulations, costs are associated with activity 
that does not itself yield benefits, but instead may prompt 
intermediate actions that connect those effects with ultimate 
beneficial outcomes. For instance, a regulation may require 
collection and dissemination of information related to safety 
practices; the information itself does not make anyone safer, but 
its greater availability may prompt more widespread use of effective 
safety practices.'' OMB Circular No. A-4 (2023), p. 40.
---------------------------------------------------------------------------

    As noted in the Risk Assessment, investment advisers manage tens of 
trillions of dollars in assets.\321\ While some of these assets are 
subject to AML/CFT requirements, others are not. For instance, as of Q3 
2023, RIAs manage approximately $20 trillion in private fund assets, 
and this included $243 billion owned by foreign-located investors where 
the RIA did not have the information on hand to identify the beneficial 
owner because the beneficial interest was held through a chain 
involving one or more third-party intermediaries.\322\ ERAs managed 
approximately $5 trillion in AUM in private funds.
---------------------------------------------------------------------------

    \321\ See Risk Assessment, supra note 2, at 2.
    \322\ See SEC, Private Fund Statistics, Third Calendar Quarter 
2023, available at https://www.sec.gov/files/investment/2023q3-private-funds-statistics-20240331.pdf.
---------------------------------------------------------------------------

    In addition to the specific direct benefits discussed further 
below, each provision in the final rule will also convey benefits 
indirectly by forming part of a comprehensive framework for identifying 
and reporting money laundering, terrorist financing, or other illicit 
finance activity. For instance, the requirement for employee training 
and independent testing will help ensure that the systems and employees 
who will identify whether an investment adviser is being used for 
illicit finance activity are best positioned to do so.
    Specific direct benefits from the final rule include (a) increasing 
access for law enforcement to relevant information for complex 
financial crime investigations, (b) enhancing interagency understanding 
of priority national security threats and their associated financial 
activity, (c) improving financial system transparency and integrity to 
strengthen the U.S. financial system from abuse by illicit actors, and, 
relatedly, (d) aligning with international financial standards and 
supporting international regulatory cooperation, including information 
sharing, with and among allies.\323\ Through these direct benefits, 
crucial indirect benefits will accrue to the public at large by 
reducing money laundering, which can distort legitimate markets, 
countering the financing of terrorism and other illicit finance 
activity, and protecting national security.
---------------------------------------------------------------------------

    \323\ OMB guidance highlights the relevance of international 
cooperation, ``Consistent with Executive Order 13609, agencies often 
engage in international regulatory cooperation (IRC), which can 
include information exchange, work sharing, scientific 
collaboration, pilot programs, and alignment of regulatory 
requirements . . . . [I]nclusion of the foreign effects of a 
regulation in your primary analysis will often be appropriate when 
such analysis would help inform cooperative efforts with foreign 
regulators that aim to minimize unnecessary regulatory differences 
and meet shared challenges.'' OMB Circular No. A-4 (2023), p. 9.
---------------------------------------------------------------------------

(a) Strengthening Law Enforcement Investigations of Certain Financial 
Crimes
    Requiring covered RIAs and ERAs to file SARs and keep certain 
customer records makes that information more readily available to law 
enforcement authorities, assisting those authorities in detecting, 
investigating, and prosecuting financial crimes. The FBI reported that 
36.3 percent of active complex financial crimes investigations and 27.5 
percent of public corruption investigations involved BSA 
reporting.\324\ However, for other types of criminal investigations, 
the percentage of criminal investigations supported by BSA reporting 
was even higher. For example, 46 percent of transnational organized 
crime investigations were supported by BSA reporting.\325\ SAR filing 
by RIAs and ERAs may increase BSA information availability to support 
investigations into corruption, fraud, and tax evasion, the criminal 
activities that the Risk Assessment identified as being most 
prominently tied to illicit proceeds moving through investment 
advisers.\326\
---------------------------------------------------------------------------

    \324\ See FinCEN, Year in Review for FY 2022 (Apr. 21, 2023), 
p.2, available at https://www.fincen.gov/sites/default/files/shared/FinCEN_Infographic_Public_2023_April_21_FINAL.pdf.
    \325\ Id.
    \326\ See Risk Assessment, supra note 2, at 16.
---------------------------------------------------------------------------

    Information from the reporting of suspicious activity and 
recordkeeping by covered RIAs and ERAs may benefit specific types of 
law enforcement financial crime investigations, particularly those 
involving the proceeds of foreign corruption, along with other 
transnational financial crimes. For instance, according to the FBI, in 
the 1MDB criminal investigation, at least $1 billion traceable to the 
conspiracy was laundered through the United States,\327\ including 
through private funds advised by at least one RIA, and used to purchase 
assets in the United States.\328\ In another case

[[Page 72225]]

involving the misuse of private funds, the defendant established fake 
private equity investment funds in the British Virgin Islands to 
launder approximately $400 million in proceeds of a large international 
pyramid fraud scheme called OneCoin.\329\
---------------------------------------------------------------------------

    \327\ See FBI, ``U.S. Seeks to Recover $1 Billion in Largest 
Kleptocracy Case to Date,'' (Jul. 20, 2016), available at https://www.fbi.gov/news/stories/us-seeks-to-recover-1-billion-in-largest-kleptocracy-case-to-date.
    \328\ See Verified Compl. for Forfeiture (Dkt. 3) ] 760, United 
States v. Real Property Located in London, United Kingdom Titled in 
the Name of Red Mountain Global Ltd., No. 19-cv-1326, (C.D. Cal. 
Feb. 22, 2019), https://www.justice.gov/opa/press-release/file/1134376/download.
    \329\ See Department of Justice, ``Former Partner Of Locke Lord 
LLP Convicted In Manhattan Federal Court Of Conspiracy To Commit 
Money Laundering And Bank Fraud In Connection With Scheme To Launder 
$400 Million Of OneCoin Fraud Proceeds,'' (Nov. 21, 2019), available 
at https://www.justice.gov/usao-sdny/pr/former-partner-locke-lord-llp-convicted-manhattan-federal-court-conspiracy-commit-money.
---------------------------------------------------------------------------

    These examples demonstrate that investment advisers and the funds 
they advise have been implicated in certain financial crimes and 
suggest the scope of potential benefit from covering RIAs and ERAs 
under this proposal. They provide concrete evidence that investment 
advising relationships can create openings that can be and have been 
leveraged as conduits in substantial financial crimes that bear on the 
provisions of this rule. The additional visibility that the final rule 
will convey may discourage such leveraging and will provide law 
enforcement with information that it needs to uncover it.
    Further, requiring RIAs and ERAs to respond to section 314(a) 
requests is likely to increase the number of positive responses for law 
enforcement when trying to locate accounts and transactions of persons 
that may be involved in terrorism or money laundering activity. In FY 
2022, 66 law enforcement agencies made 519 requests under section 
314(a) to over 14,000 financial institutions, which resulted in 37,835 
positive responses.\330\ Adding RIAs and ERAs to these requests is 
likely to increase positive responses for account and transactions 
information and then support further investigations using other legal 
tools.
---------------------------------------------------------------------------

    \330\ See FinCEN, Year in Review for FY 2022 (Apr. 21, 2023), p. 
2, available at https://www.fincen.gov/sites/default/files/shared/FinCEN_Infographic_Public_2023_April_21_FINAL.pdf.
---------------------------------------------------------------------------

(b) Improve Understanding of Priority National Security Threats
    Applying AML/CFT obligations to RIAs and ERAs may help increase 
U.S. government understanding of two priority national security 
threats: (1) funds moving through the U.S. financial system that may be 
associated with Russian oligarchs and (2) investment activity that may 
be tied to foreign-state efforts to invest in early-stage companies 
developing critical or emerging technologies with national security 
implications.
    SAR filings or information collected by RIAs and ERAs in the CDD 
process could improve the U.S. government's understanding of how 
illicit funds linked to Russian oligarchs may be accessing the U.S. 
financial system. According to a 2022 FinCEN Financial Trend Analysis, 
BSA data provides significant financial intelligence about the movement 
of oligarch-related funds and assets with a nexus to the United States 
around the time of Russia's unprovoked military invasion of Ukraine, 
including likely attempts by Russian oligarchs and elites to conceal 
their assets, property, and financial activities.\331\ Treasury and 
FinCEN guidance has identified typologies Russian oligarchs and elites 
have used to access U.S. investment opportunities and the financial 
system through private funds or other PIVs, to avoid disclosing their 
identities to other parties.\332\
---------------------------------------------------------------------------

    \331\ See FinCEN, Trends in Bank Secrecy Act Data: Financial 
Activity by Russian Oligarchs in 2022 (Dec. 2022), available at 
https://www.fincen.gov/sites/default/files/2022-12/FinancialTrendAnalysis_RussianOligarchsFTA_Final.pdf.
    \332\ See Department of the Treasury, Global Advisory on Russian 
Sanctions Evasion Issued Jointly by the Multilateral REPO Task 
Force, p. 3 (Mar. 9, 2023), available at https://home.treasury.gov/system/files/136/REPO_Joint_Advisory.pdf; see also FinCEN, Alert on 
Potential U.S. Commercial Real Estate Investments by Sanctioned 
Russian Elites, Oligarchs, and Their Proxies, p. 4, (Jan. 25, 2023), 
available at https://www.fincen.gov/sites/default/files/shared/FinCENAlertRealEstateFINAL508_1-25-23FINALFINAL.pdf.
---------------------------------------------------------------------------

    However, FinCEN currently receives only limited information from 
investment advisers and the securities industry in general regarding 
illicit Russian financial activity. For instance, of 454 SARs reviewed 
as part of a FinCEN Financial Trend Analysis on U.S. financial activity 
linked to Russian oligarchs, only 11, or less than 3 percent, were 
filed by the securities and futures industry.\333\
---------------------------------------------------------------------------

    \333\ See supra note 329.
---------------------------------------------------------------------------

    Applying SAR filing, CDD, and other recordkeeping requirements to 
RIAs and ERAs may also assist the U.S. government in identifying 
foreign-linked investments in certain U.S. companies that could raise 
national security issues. This could be beneficial for CFIUS and 
potentially other programs. In particular, while there are certain 
transactions where notification to CFIUS is required, most transactions 
reviewed by CFIUS are filed voluntarily.\334\ To complement the largely 
voluntary nature of the CFIUS process, Treasury (as chair of CFIUS) 
along with certain member agencies invest staff time and resources in 
identifying transactions that may be a covered transaction and may 
raise national security considerations, and assessing whether to 
request that the parties file with CFIUS.\335\ CFIUS transactions that 
originate through this process (referred to as the non-notified 
process) remain among the most complicated that CFIUS considers, and 
often require mitigation measures to address national security 
risks.\336\ SAR filing obligations may help identify these transactions 
earlier on (such as prior to the closing of a transaction).
---------------------------------------------------------------------------

    \334\ See Treasury, ``Remarks by Assistant Secretary for 
Investment Security Paul Rosen at the Second Annual CFIUS 
Conference,'' (Sept. 14, 2023), available at https://home.treasury.gov/news/press-releases/jy1732.
    \335\ See id.
    \336\ Committee on Foreign Investment in the United States--
Annual Report to Congress CY 2022, p. 52, available at https://home.treasury.gov/system/files/206/CFIUS%20-%20Annual%20Report%20to%20Congress%20CY%202022_0.pdf.
---------------------------------------------------------------------------

    Assessing the national security consequences of investments into 
early-stage companies developing emerging technology can be 
particularly challenging.\337\ Requiring ERAs, particularly venture 
capital advisers, to submit SARs may help Treasury and some CFIUS 
member agencies identify transactions where investors affiliated with 
foreign governments are attempting to use an investment to acquire 
technology or know-how with national security implications. This could 
include providing information about transactions CFIUS was unaware of, 
or providing new information about investors or other parties to 
transactions already before CFIUS. In addition, law enforcement 
agencies involved in CFIUS reviews could use section 314(a) information 
sharing authorities to engage venture capital advisers or other RIAs or 
ERAs on particular technologies or concerning foreign investors, 
consistent with CFIUS statutory obligations to protect confidentiality 
of relevant information.\338\
---------------------------------------------------------------------------

    \337\ See The Washington Post, ``Scrutiny mounts over tech 
investments from Kremlin-connected expatriates'' (Dec. 19, 2022), 
available at https://www.washingtonpost.com/technology/2022/12/19/russia-expatriates-links-probed/; see also The Wall Street Journal, 
``Government `SWAT Team' Is Reviewing Past Startup Deals Tied to 
Chinese Investors'' (Jan. 31, 2021), available at https://www.wsj.com/articles/government-swat-team-is-reviewing-past-startup-deals-tied-to-chinese-investors-11612094401.
    \338\ See 50 U.S.C. 4565(c).
---------------------------------------------------------------------------

(c) Protect the U.S. Financial System From Abuse
    Applying AML/CFT obligations to RIAs and ERAs will also strengthen 
the ability of the Federal Government and private sector to better 
protect the U.S. financial system from being misused for illicit 
finance. First, the final rule applies a set of AML/CFT obligations to

[[Page 72226]]

RIAs and ERAs (with certain exemptions), and those investment advisers 
are subject to enforcement actions for failure to comply with those 
requirements. Those investment advisers are required to, as described 
above, implement AML/CFT programs, conduct due diligence on customers, 
report suspicious activity, and keep certain records, among other 
obligations. In doing so, these obligations imposed on investment 
advisers will help identify, prevent, and deter bad actors from using 
investment advisers to further illicit finance activity, as investment 
advisers will be required to obtain information from customers to 
comply with these requirements.
    Moreover, the final rule also strengthens the ability of RIAs, 
ERAs, and other financial institutions to identify and report illicit 
activity. Covered RIAs and ERAs are able to coordinate with broker-
dealers and banks to file joint SARs, and voluntarily share information 
on illicit activity under section 314(b) of the USA PATRIOT Act. Such 
reporting by financial institutions under the BSA--and their broader 
efforts to implement effective AML/CFT programs--are fundamental to the 
government's effort to detect and prevent illicit finance activity and 
to protect the integrity of the financial system as a whole.
(d) Improve Alignment With International Standards
    The final rule also helps bring the United States into full 
compliance with several international AML/CFT standards established by 
the FATF. In the 2016 FATF Mutual Evaluation Report (MER) of the United 
States, the United States was rated (and remains rated) ``partially 
compliant'' or ``non compliant'' on eight of the 40 FATF 
Recommendations.\339\ These included partially compliant ratings on 
Recommendations 1, 12, and 20 for the failure to apply AML/CFT 
requirements to investment advisers, among other reasons.\340\
---------------------------------------------------------------------------

    \339\ See FATF (2016), Mutual Evaluation of the United States, 
pp. 255-258, available at https://www.fatf-gafi.org/content/dam/fatf-gafi/mer/MER-United-States-2016.pdf.coredownload.inline.pdf. 
The U.S. was re-rated from ``partially compliant'' to ``largely 
compliant'' on Recommendation 10, and from ``non compliant'' to 
``largely compliant'' on Recommendation 24. See FATF (2024), Anti-
money laundering and counter-terrorist financing measures--United 
States, 7th Enhanced Follow-up Report & Technical Compliance Re-
Rating, available at https://www.fatf-gafi.org/content/dam/fatf-gafi/fur/USA-FUR-2024.pdf.coredownload.inline.pdf; see also FATF 
(2020), Anti-money laundering and counter-terrorist financing 
measures--United States, 3rd Enhanced Follow-up Report & Technical 
Compliance Re-Rating [hereinafter 2020 US FUR], available at https://www.fatf-gafi.org/content/dam/fatf-gafi/fur/Follow-Up-Report-United-States-March-2020.pdf.
    \340\ See FATF (2016), Mutual Evaluation of the United States, 
pp. 255-258, available at https://www.fatf-gafi.org/content/dam/fatf-gafi/mer/MER-United-States-2016.pdf.coredownload.inline.pdf. A 
``partially compliant'' rating is generally not considered an 
acceptable rating for purposes of the FATF Follow-Up Process. See 
FATF (2023), Procedures for the FATF Fourth Round of AML/CFT Mutual 
Evaluations [hereinafter FATF Fourth Round Procedures], pp. 22-23, 
available at https://www.fatf-gafi.org/publications/mutualevaluations/documents/4th-round-procedures.html.
---------------------------------------------------------------------------

    As a result of its MER, the United States was put in ``enhanced 
follow-up.'' \341\ For countries in enhanced follow-up, the FATF can 
take several actions, including ``issuing a formal FATF statement to 
the effect that the member jurisdiction is insufficiently in compliance 
with the FATF Standards, and recommending appropriate action.'' \342\ 
These statements and other actions by the FATF can have material 
consequences on the economy of a jurisdiction.\343\ The final rule will 
assist the U.S. in avoiding these consequences and strengthening 
compliance with the FATF standards.
---------------------------------------------------------------------------

    \341\ See 2020 US FUR, supra note 337, at 1.
    \342\ See FATF Fourth Round Procedures, supra note 338, at 24.
    \343\ See Julia Morse, The Bankers Blacklist: Unofficial Market 
Enforcement and the Global Fight against Illicit Financing 131-138 
(Cornell University Press 2021) (discussing the consequences of FATF 
listing).
---------------------------------------------------------------------------

    In addition to the benefits of increased U.S. compliance with the 
FATF standards, the final rule will also support international 
regulatory cooperation, including information sharing, with and among 
allies. For instance, FinCEN could use information from investment 
adviser reporting requirements to support illicit finance typology work 
at the FATF and multilateral information sharing at the Egmont Group of 
Financial Intelligence Units.\344\ This information sharing could 
increase allies' visibility into relevant financial activity that could 
both aid their enforcement efforts and feedback into U.S. efforts, all 
of which would contribute to more robust, mutually beneficial efforts 
to combat financial crimes globally. The final rule could also 
strengthen coordination between SEC and foreign securities and 
financial regulators in identifying and addressing AML/CFT supervisory 
challenges in the investment adviser sector.
---------------------------------------------------------------------------

    \344\ The Egmont Group of Financial Intelligence Units (FIUs) is 
an international body that facilitates and prompts the exchange of 
information, knowledge, and cooperation amongst member FIUs.
---------------------------------------------------------------------------

5. Assessment of Costs
    This section assesses the potential costs to RIAs and ERAs, their 
clients, and government agencies associated with the final rule. 
Specifically, this Impact Analysis estimates the one-time, upfront 
costs and recurring administrative and maintenance costs incurred by 
RIAs and ERAs to establish or modify an existing AML/CFT program, which 
includes conducting ongoing CDD, filings SARs, and the other 
requirements of the final rule. It also estimates costs to customers to 
provide additional information to RIAs and ERAs and to the government 
to enforce those requirements. This Impact Analysis estimates the 
incremental costs of the final rule over a 10-year period.
    Some RIAs and ERAs may have reduced costs because they may already 
perform certain AML/CFT functions because they are dual registrants or 
affiliated advisers, as described in section 2, although, depending on 
the entity and its structure, may not currently be required to do so. 
Under the final rule, RIAs that are dual registrants or affiliated 
advisers are not legally required to establish a separate AML/CFT 
program for their advisory activities, provided that an existing 
comprehensive AML/CFT program covers all of the investment adviser's 
applicable legal and regulatory obligations, as described above. RIAs 
are also exempt from having to apply most of the regulatory 
requirements with respect to the mutual funds, collective investment 
funds, and other investment advisers they advise. As described above 
mutual funds have their own AML/CFT program requirements, must file 
SARs, and are otherwise required to comply with the other reporting and 
recordkeeping requirements included in the final rule. Similarly, other 
investment advisers subject to this rule are also required to implement 
the same requirements. Collective investment funds, while not separate 
legal entities, are subject to the AML/CFT requirements of the bank or 
trust-company that administers the fund. Certain RIAs and ERAs may also 
already collect and verify and certain information in performing AML/
CFT functions provided by customers via contract for a joint customer 
with another financial institution or through a voluntary AML/CFT 
program. To the extent that information pertains to a customer of both 
the investment adviser and the other financial institution, the 
investment adviser may enjoy reduced costs; in any case, the investment 
adviser already has a process in place that can be applied to satisfy 
its new requirements under the final rule.
    This section is organized as follows. First, it describes and 
compiles relevant cost information associated with these activities. 
Based on this information, it

[[Page 72227]]

estimates the costs likely to be incurred by RIAs and ERAs. It then 
describes government implementation costs for oversight and 
enforcement. Finally, it summarizes the total costs of the final rule.
(a) Cost Methodology
    This section describes and compiles relevant cost information for 
this Impact Analysis. Based on this information, FinCEN estimates the 
typical costs RIAs and ERAs are anticipated to incur to comply with the 
requirements of the final rule. The cost information consists of the 
amount of time (in hours) and hourly labor cost of staff involved in 
compliance activities, such as developing and updating AML/CFT policies 
and procedures and training staff on new requirements, as well as costs 
associated with third party software licensing and independent testing. 
The implementation and scope of these activities, however, will vary 
widely and depend on a number of factors, such as the degree of 
automation of compliance activities and level of filer sophistication.
    All costs are reported in 2022 dollars. For transparency, all costs 
in this section are reported on an undiscounted basis. At the end of 
this section, costs are also reported on a discounted basis and the 
annualized costs of the final rule are calculated. To estimate the 
value of time associated with various compliance activities, FinCEN 
identified roles and corresponding staff positions involved in 
reviewing regulatory requirements; developing policies and procedures; 
filling out forms; transmitting data; conducting training; and 
maintaining, updating, and obtaining written approval of AML/CFT 
programs. FinCEN calculated the fully loaded (i.e., wages plus 
benefits, leave, etc.) hourly labor cost for each of these roles by 
using the median hourly wage estimated by the U.S. Bureau of Labor 
Statistics and computing an additional factor accounting for fringe 
benefits as reported in Table 5.1.\345\
---------------------------------------------------------------------------

    \345\ U.S. Bureau of Labor Statistics, May 2022 National 
Industry-Specific Occupational Employment and Wage Estimates for 
NAICS 523000--Securities, Commodity Contracts, and Other Financial 
Investments and Related Activities. The adjustment factor for fringe 
benefits is calculated as 1 + ($18.26 per hour in total benefits / 
$36.57 per hour in wages and salaries) = 1.50. Based on U.S. Bureau 
of Labor Statistics, Table 4. Employer Costs for Employee 
Compensation for Private Industry Workers by Occupational and 
Industry Group--Financial Activities Industry, June 2022.
---------------------------------------------------------------------------

    The final rule requires, at a minimum, that an investment adviser 
designate an AML/CFT compliance officer to implement and monitor its 
AML/CFT program. This Impact Analysis does not include the direct cost 
of hiring a full-time equivalent AML/CFT compliance officer, which is 
not required by the final rule.\346\ RIAs must already designate a 
chief compliance officer responsible for administering policies and 
procedures to comply with the Advisers Act and the rules thereunder. In 
smaller banks and broker-dealers, compliance or legal officers are 
often dual-hatted as AML/CFT compliance officers. Similarly, FinCEN 
assumes many RIAs and ERAs will appoint or dual hat a compliance or 
legal officer as their AML/CFT compliance officer. Therefore, this 
Impact Analysis accounts directly for the fully loaded hourly labor 
costs (i.e., salary plus fringe benefits) for each compliance activity 
that would be performed by this individual rather than by calculating 
an annual salary, to avoid double-counting labor costs for each 
requirement.
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    \346\ This is consistent with how FinCEN assesses burden hours 
and costs associated with the designation of a BSA officer, whereby 
the costs are assessed individually across other BSA regulatory 
requirements that the designated officer may implement. See FinCEN, 
Agency Information Collection Activities; Proposed Renewal; Comment 
Request; Renewal Without Change of Anti-Money Laundering Programs 
for Certain Financial Institutions, 85 FR 49418 (Oct. 13, 2020).
    \347\ See U.S. Bureau of Labor Statistics, May 2022 National 
Industry-Specific Occupational Employment and Wage Estimates for 
NAICS 523000--Securities, Commodity Contracts, and Other Financial 
Investments and Related Activities. The BLS website notes that the 
median wage for chief executives in this subsector is greater than 
or equal to $115 per hour.
    \348\ See U.S. Bureau of Labor Statistics, Table 4. Employer 
Costs for Employee Compensation for Private Industry Workers by 
Occupational and Industry Group--Financial Activities Industry, June 
2022.
[GRAPHIC] [TIFF OMITTED] TR04SE24.009

    FinCEN estimates that, in general and on average, each role would 
spend different amounts of time on each portion of the compliance 
burden associated with the final rule. These assumptions are provided 
in detail below for each compliance activity.
    In addition to incurring labor costs, RIAs and ERAs will likely 
need to invest in new technology to comply with the final rule, 
including purchasing software and entering into licensing agreements 
with third party vendors. Although financial institutions are not 
required to use software to meet their AML/CFT requirements, most 
entities currently subject to the BSA use specialized AML/CFT software 
for this purpose. It is challenging to allocate technology costs to 
specific provisions of the final rule as technology may be

[[Page 72228]]

used to implement and automate several processes.\349\ This Impact 
Analysis uses estimates derived from a 2020 Government Accountability 
Office (GAO) report assessing the costs of financial institutions to 
comply with the BSA to quantify these technology costs.\350\ GAO 
documented a wide range of compliance costs across a diverse group of 
banks. For estimating technology and other costs in this Impact 
Analysis, FinCEN relied on the reported values for ``Large Community 
Bank B,'' for which the costs were assessed to be most similar to the 
costs likely to be incurred by the entities affected by the final rule. 
Table 5.2 reports selected characteristics for this benchmark.
---------------------------------------------------------------------------

    \349\ GAO, Anti-Money Laundering: Opportunities Exist to 
Increase Law Enforcement Use of Bank Secrecy Act Reports, and Banks' 
Costs to Comply with the Act Varied (GAO-20-574), (Sept. 2020), 
available at https://www.gao.gov/products/gao-20-574 [hereinafter 
2020 GAO BSA Report]. The 2020 GAO BSA Report noted that it reported 
software costs separately and did not allocate them by requirement 
because the banks reviewed commonly used the same software to meet 
multiple BSA/AML requirements.
    \350\ Id.
    \351\ Id. at Table 111: Selected Characteristics of Large 
Community Bank B, 2018.
[GRAPHIC] [TIFF OMITTED] TR04SE24.010

    Table 5.3 reports the estimated compliance costs for specialized 
AML/CFT software and an independent annual audit to test the AML/CFT 
program. The costs are based on values for the financial institution 
benchmark described in the previous paragraph adjusted for inflation to 
2022 dollars using the GDP implicit price deflator.\352\
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    \352\ Bureau of Economic Analysis, National Income and Product 
Accounts Tables, Table 1.1.9. Implicit Price Deflators for Gross 
Domestic Product, https://www.bea.gov/itable/national-gdp-and-personal-income.
    \353\ See 2020 GAO BSA Report, supra note 347, at Table 113.
    [GRAPHIC] [TIFF OMITTED] TR04SE24.011
    
(b) Compliance Costs to Industry by Regulatory Provision
    As described in section 3, the regulated universe for purposes of 
the final rule consists of RIAs and ERAs, which vary in terms of their 
business structure, size, client relationships, and degree of existing 
AML/CFT measures already in place. Across these advisers, several 
characteristics vary across groups that directly impact the magnitude 
of the estimated costs, including the average number of employees and 
the number/type of customer relationships. However, the most 
significant cost determinant is the extent of existing AML/CFT measures 
in place: RIAs and ERAs with established AML/CFT programs in place will 
likely incur relatively fewer costs under the final rule, while those 
with few AML/CFT measures in place may incur potentially more 
significant costs.
    For the purposes of estimating the cost impacts of the final rule, 
this Impact Analysis has sub-divided RIAs and ERAs into groups based 
on: (1) whether they are dual registrants, affiliated advisers, or 
other advisers (as described in section 2); and (2) whether they have a 
significant, moderate, or a limited number of AML/CFT measures already 
in place (see Table 3.2). FinCEN believes that these sub-divisions are 
the best available method of estimating the cost impacts.
i. AML/CFT Program Costs
    RIAs and ERAs subject to the final rule will need to implement and 
maintain an AML/CFT program that

[[Page 72229]]

meets the minimum requirements of the BSA. This includes developing 
internal policies, procedures, and controls to comply with the 
requirements of the BSA and address money laundering, terrorist 
financing, and other illicit finance risks. Entities that do not 
already have an AML/CFT program in place will incur costs to establish 
such a program. In addition, those entities will incur costs for 
maintaining, updating, storing, and producing upon request the written 
AML/CFT program. Dual registrants or affiliated advisers do not have to 
establish multiple AML/CFT programs, provided that an existing 
comprehensive AML/CFT program would cover all of the entity's advisory 
businesses. Entities that already have an existing AML/CFT program will 
need to review and/or modify their AML/CFT program to ensure it 
complies with the requirements of the final rule.
    Based on public comments on the 2015 NPRM,\354\ FinCEN estimates it 
will take approximately 120 hours for affiliated or other RIAs and ERAs 
that have a limited number of existing AML/CFT measures in place to 
develop the necessary policies, procedures, and controls to establish 
an AML/CFT program. Once established, FinCEN estimates annually it will 
take approximately 1 hour to maintain and update the existing AML/CFT 
program plus an average of 10 minutes to store and produce upon request 
the written AML/CFT program. In response to public comments on the 
draft Impact Analysis, FinCEN acknowledges that RIAs and ERAs with 
existing AML/CFT policies, procedures, and controls will likely need to 
update those measures as their current measures may not be fully 
consistent with BSA requirements. Therefore, for the final Impact 
Analysis FinCEN assumes that the cost burden for dually registered 
entities covered by an existing AML/CFT program and entities that have 
a significant or moderate number of AML/CFT measures in place to update 
their existing AML/CFT policies, procedures, and controls will be 
approximately 25 percent of the estimated burden for entities without 
an existing AML/CFT program, or about 30 hours. FinCEN assumes the vast 
majority of entities would develop or update a written program within 
the first year after the promulgation of the regulation. Table 5.4 
reports the average costs of establishing and maintaining an AML/CFT 
program to comply with the BSA requirements.
---------------------------------------------------------------------------

    \354\ See Public Comments, Docket ID FINCEN-2014-0003, available 
at https://www.regulations.gov/docket/FINCEN-2014-0003/comments.
[GRAPHIC] [TIFF OMITTED] TR04SE24.012

    In addition, the AML/CFT program must be approved in writing by an 
RIA's or ERA's board of directors or trustees.\355\ FinCEN estimates 
that it will take approximately 4 hours for a trustee or director to 
review and approve a written AML/CFT program the first year it is 
implemented and approximately 2 hours each subsequent year to review 
the program.\356\ For this activity, FinCEN uses an average hourly wage 
based on the minimum BLS estimate for a chief executive as a proxy for 
a trustee of director's hourly compensation. Therefore, using the fully 
loaded labor cost of $172.42 per hour, the estimated labor cost for 
program review and approval is approximately $690 for a new AML/CFT 
program and $345 for an existing AML/CFT program. This represents an 
upfront and recurring cost for RIAs and ERAs that do not have an 
existing AML/CFT program, but only a one-time cost for RIAs and ERAs 
that currently have a significant or moderate number of AML/CFT 
measures in place.
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    \355\ If an RIA or ERA does not have a board, then the program 
must be approved by the adviser's sole proprietor, general partner, 
trustee, or other persons that have functions similar to a board of 
directors. And, as explained above in Section III.D.5 other members 
of senior management may also be appropriately suited to approve the 
AML/CFT program.
    \356\ FinCEN notes that this estimate reflects the time spent by 
one trustee/director, and that for those RIAs or ERAs with a full 
board of directors, there could be incremental cost for each 
additional director.
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    Further, RIAs and ERAs will need to implement an AML/CFT training

[[Page 72230]]

program for employees.\357\ FinCEN estimates approximately two-thirds 
of employees will need to be trained on the AML/CFT program 
requirements, and assumes that such training could occur annually.\358\ 
FinCEN assesses that RIAs and ERAs with a significant or moderate 
number of AML/CFT measures in place are already training staff and will 
not incur additional training costs under the final rule--with the 
exception of reviewing and updating the training materials to ensure 
they cover all of the regulatory requirements. For RIAs and ERAs with a 
limited number of AML/CFT measures in place, FinCEN estimates it will 
initially take 50 hours to develop an AML/CFT training program. For 
entities that have an existing AML/CFT training program (those entities 
with a significant or moderate number of AML/CFT measures in place), 
FinCEN estimates the one-time burden to review and update training 
materials will be 10 hours. Some RIAs and ERAs may choose to use a 
third-party consultant or external training event to conduct trainings, 
but this would not be required under the final rule.\359\ FinCEN 
estimates the training will take approximately 1 hour for each 
employee, assuming such training occurs annually.\360\ Table 5.5 
reports the estimated average cost of developing and conducting AML/CFT 
program compliance training annually. The number of total hours is 
estimated based on the average number of employees for each type of RIA 
or ERA.
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    \357\ Employees of an investment adviser (and of any agent or 
third-party service provider that is charged with administering any 
portion of the AML/CFT program) have to be trained in AML/CFT 
requirements relevant to their functions and to recognize possible 
signs of money laundering, terrorist financing, or other illicit 
finance activity that could arise in the course of their duties.
    \358\ The frequency of the investment adviser's training program 
is determined by the responsibilities of the employees and the 
extent to which their functions bring them in contact with AML/CFT 
requirements or possible money laundering, terrorist financing, or 
other illicit finance activity.
    \359\ The 2020 GAO BSA Report estimated the average cost per 
employee trained ranged between $20 and $400 with a mean estimate of 
approximately $116 per employee (measured in 2022 dollars). For 
``Large Community Bank B'' the average estimated cost per employee 
trained was approximately $130 (measured in 2022 dollars). See 2020 
GAO BSA Report, supra note 349.
    \360\ See id. at p. 52.
    \361\ For annual training, total hours includes 1 hour per 
employee. FinCEN assumes approximately two-thirds of employees will 
require training each year, to include periodic updates and 
refresher training. Total cost may differ from hourly cost 
multiplied by total hours shown in table due to rounding.
[GRAPHIC] [TIFF OMITTED] TR04SE24.013

    In addition, all RIAs and ERAs will need to implement independent 
testing of their AML/CFT program. As described in the previous section, 
FinCEN estimates the average cost of such testing will be approximately 
$17,000.\362\ This reflects a new recurring cost for all RIAs and ERAs 
affected by the final rule with the exception of dually registered 
entities, which are assumed to already use independent auditors.
---------------------------------------------------------------------------

    \362\ See 2020 GAO BSA Report, supra note 349, at Table 113.
---------------------------------------------------------------------------

    Table 5.6 summarizes the average incremental costs per entity of 
developing or maintaining and updating an AML/CFT program by type and 
characteristics of each RIA or ERA.

[[Page 72231]]

[GRAPHIC] [TIFF OMITTED] TR04SE24.014

ii. Customer Due Diligence Costs
    The final rule requires RIAs and ERAs to implement appropriate 
risk-based procedures for conducting ongoing customer due diligence. 
Specifically, RIAs and ERAs are required to (1) understand the nature 
and purpose of customer relationships for the purpose of developing a 
customer risk profile; and (2) conduct ongoing monitoring to identify 
and report suspicious transactions and, on a risk basis, to maintain 
and update customer information.
---------------------------------------------------------------------------

    \363\ Costs are rounded to the nearest thousand dollars.
---------------------------------------------------------------------------

    FinCEN assumes that all RIAs and ERAs have some existing 
information on their customers and processes to identify and conduct 
additional diligence on certain customers. For instance, in reviewing 
the data from the 2016 IMCT Survey, in addition to the 40 percent who 
had implemented a full AML/CFT program consistent with the requirements 
of the 2015 NPRM, an additional 36 percent of RIAs implemented some 
AML/CFT measures.\364\ Based on this information as well as industry 
input about some of the voluntary AML/CFT measures firms have in place, 
it is more common for firms to develop voluntary CDD programs as part 
of their onboarding process as compared to other AML/CFT measures.\365\ 
Therefore, FinCEN assumes that any covered RIAs and ERAs with a 
moderate number of AML/CFT measures in place will likely not need to 
modify their existing ongoing CDD measures, while covered RIAs and ERAs 
with a limited number of AML/CFT measures in place will need to perform 
additional customer review for existing customers and at the time of 
account opening for new customers. Since investment advisers generally 
already collect some of this information, the estimated cost burden is 
less than implementing a fully comprehensive customer review at the 
time of account opening, and accounts primarily for the costs of 
modifying existing procedures. FinCEN assumes the cost of modifying 
existing CDD procedures will be approximately 25 percent of the full 
cost for initial customer review and risk profiling.
---------------------------------------------------------------------------

    \364\ See 2016 IMCT Survey, supra note 303 at Question 15.
    \365\ See, e.g., Managed Funds Association, Sound Practices for 
Hedge Fund Managers (2009), Ch. 6 (Anti-Money Laundering).
---------------------------------------------------------------------------

    Covered RIAs and ERAs with a limited number of AML/CFT measures in 
place will need to collect additional information to develop a customer 
risk profile. Table 5.7 documents key assumptions regarding the number 
of customer accounts at affiliated and other RIAs and ERAs. ERAs only 
have legal entity customers--therefore, they have no natural person 
customers. Based on an analysis of Form ADV Filings, as of July 31, 
2023, RIAs had approximately 49.3 million natural

[[Page 72232]]

person customers, 2.5 million legal entity customers, and 96,000 PIV 
accounts. FinCEN estimates the average number of customer accounts will 
grow at an annual rate of 9.5 percent--and PIV accounts will grow at an 
annual rate of 6 percent--based on average industry growth in 
individual and PIV accounts from 2018 to 2023.\366\
---------------------------------------------------------------------------

    \366\ See Investment Adviser Association, Investment Adviser 
Industry Snapshot 2023 (Jul. 2023), p.26, available at https://investmentadviser.org/wp-content/uploads/2023/06/Snapshot2023_Final.pdf.
    \367\ See supra note 25.
    [GRAPHIC] [TIFF OMITTED] TR04SE24.015
    
    Affiliated and other covered RIAs and ERAs with a limited number of 
existing AML/CFT measures will also need to collect and review customer 
information to implement risk-based procedures for conducting ongoing 
CDD. As described above, FinCEN estimates the costs associated with 
modifying existing customer diligence information and procedures will 
be significantly less than the full cost for developing the initial 
customer risk profile. In this Impact Analysis, FinCEN estimates the 
average cost of collecting additional information for new accounts to 
develop a customer risk profile will be approximately 25 percent of the 
total estimated cost of this information collection (30 minutes per 
natural person or 1 hour per legal entity).\368\ Thus, the estimated 
cost of information collection is approximately 7.5 minutes per natural 
person or 15 minutes per legal entity. For this activity, FinCEN uses 
an average hourly labor cost of $34.76 for a new account clerk. 
Therefore, the estimated labor cost to develop a risk profile is 
approximately $4.34 for per natural person and $8.68 per legal entity. 
In addition to new accounts, FinCEN anticipates that covered RIAs and 
ERAs will need to conduct this information collection for existing 
accounts. FinCEN estimates this information collection for existing 
accounts will be conducted over the first three years after the 
promulgation of the final rule.\369\ The costs to build and maintain 
technology and information systems to house this customer information 
is not reflected here but is included in the annual costs of software 
licensing described elsewhere in this Impact Analysis. These costs are 
multiplied by the average number of natural persons, legal entities, 
and PIV accounts, respectively, for each covered RIA and ERA.
---------------------------------------------------------------------------

    \368\ See 81 FR at 29448.
    \369\ Current industry practices suggest customers are often re-
rated for risk purposes. Industry input suggests high-risk 
customers, which make up a small portion of many RIAs customer base, 
are re-rated at least annually or when SARs are filed, while medium- 
or low-risk customers are re-rated less frequently.
---------------------------------------------------------------------------

    In addition to the costs to the adviser, this requirement likely 
represents an information collection burden for legal entities that 
hold accounts with investment advisers. FinCEN estimates it would take 
between approximately 15 and 30 minutes, or an average of 22.5 minutes, 
for legal entity customers to provide any additional data required for 
this information collection. Since these customers are not employees of 
the regulated entities, but rather other investment advisers in most 
cases, FinCEN uses an hourly burden estimate of $49.17 that is 
representative of the customer base.\370\ Therefore, the average 
information collection cost is approximately $18.44 per customer. This 
average cost is multiplied by the number of legal entity customers for 
each covered RIA or ERA.
---------------------------------------------------------------------------

    \370\ This estimate is based on a population-weighted average of 
$32.79, which represents the median salary for all employees in 
NAICS 522, 523, and 525, multiplied by an adjustment factor for 
fringe benefits of 1.50.
---------------------------------------------------------------------------

    Table 5.8 summarizes the average ongoing CDD costs per entity by 
type and characteristics of each covered RIA or ERA. The relatively 
higher costs in the first three years reflects the compliance burden 
associated with data collection activities to develop a customer risk 
profile for existing customer accounts and new customer accounts, while 
the ongoing costs after 2026 reflect the burden associated with data 
collection for only new customer accounts.

[[Page 72233]]

[GRAPHIC] [TIFF OMITTED] TR04SE24.016

iii. Suspicious Activity Report Filing Costs
    As part of their AML/CFT program, RIAs and ERAs will be required to 
conduct ongoing monitoring of customers' transactions and file SARs 
when appropriate. FinCEN assumes that RIAs and ERAs that are dually 
registered as a broker-dealer or bank are already submitting SARs. The 
extent of SAR filing by affiliated or other advisers is uncertain. 
Therefore, FinCEN assumes that all RIAs and ERAs that are not dually 
registered as a broker-dealer or bank would have to begin filing SARs 
due to the final rule. To the extent that some RIAs and ERAs in this 
category are already filing SARs, this may overestimate the costs of 
the final rule.
---------------------------------------------------------------------------

    \371\ Costs are rounded to the nearest thousand dollars for RIAs 
and to the nearest hundred dollars for ERAs.
    \372\ This category includes dual registrants that are applying 
a significant number of AML/CFT measures and affiliated advisers 
that are applying a moderate number of AML/CFT measures.
---------------------------------------------------------------------------

    Based on an analysis of dual registrant's SAR filings between 2018 
and 2022, FinCEN estimates that RIAs will each file an average of 
approximately 60 SARs per year.\373\ Since no information was available 
for ERAs, FinCEN applies the same estimate of 60 SARs per year. Several 
public comments on the draft Impact Analysis indicated this figure was 
too high, particularly for smaller investment advisers. Because the 
estimated costs include time spent reviewing alerts to determine 
whether a SAR is merited and documenting cases that do not become SARs, 
FinCEN chose to retain this estimate to avoid underestimating the 
burden associated with this review process and those cases that result 
in new SARs.
---------------------------------------------------------------------------

    \373\ Dual registrants were assessed to be the population of 
investment advisers most likely to file SARs and best represent an 
investment adviser subject to SAR filing obligations.
---------------------------------------------------------------------------

    SARs can be submitted as initial or continuing, discrete or batch, 
and standard or extended in different combination, e.g., initial/
discrete/standard, initial/discrete/extended, initial/batch/standard. 
Without a more detailed breakdown available, FinCEN assumes that an 
average of 60 SARs per investment adviser will be proportionally 
distributed across each category as follows: \374\
---------------------------------------------------------------------------

    \374\ Based on summary statistics of SAR filings by dual 
registrants from 2018 to 2022.
---------------------------------------------------------------------------

     51 (85 percent) would be initial SARs and 9 (15 percent) 
would be continuing SARs.
     51 (85 percent) would be discrete SARs and 9 (15 percent) 
would be batch SARs.
     55 (92 percent) would be standard SARs and 5 (8 percent) 
would be extended SARs.
    Each type of filing is expected to have a different reporting 
burden because of differences in the cost per hour and/or the number of 
hours needed for completion.
    In addition, the estimated costs of ongoing monitoring in (Table 
5.8 above) include the review of alerts that do not result in a SAR 
being filed. FinCEN previously estimated that approximately 42 percent 
of suspicious activity alerts were turned into SARs.\375\ Therefore, 
for each case filed as a SAR, approximately 1.4 cases were not filed. 
Table 5.9 reports the average cost of determining whether a SAR is 
needed and filing SARs. While the burden estimates are based on 
FinCEN's previous analysis,\376\ in this Impact Analysis the burden is 
attributed primarily to a compliance officer rather than a financial 
clerk or teller due to the smaller size of RIAs and ERAs relative to 
banks and to avoid potentially underestimating the average hourly labor 
costs associated with these activities. To the extent that a portion of 
this work can be completed by clerical staff that report to a 
compliance officer, this may slightly overestimate certain costs. The 
licensing cost for transaction monitoring software is not reflected 
here but is included in the software costs described elsewhere in this 
Impact Analysis.
---------------------------------------------------------------------------

    \375\ See FinCEN, Proposed Renewal: Reports by Financial 
Institutions of Suspicious Transactions, 85 FR 31598, 31605 (May 26, 
2020).
    \376\ See id.

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[[Page 72234]]

[GRAPHIC] [TIFF OMITTED] TR04SE24.017

    Figure 5.1 illustrates FinCEN's estimates regarding the average 
number and distribution of SARs, including for suspicious activity 
alerts that do not result in a SAR being filed, as well as the hourly 
recordkeeping, reporting, and storing burden estimates by type of 
filing. As an example, the average number of original/discrete/standard 
SARs is estimated as follows: (1) an average of 143 alerts results in 
60 SARs (42% of alerts), (2) approximately 51 of 60 (or 85%) are 
original SARs, (3) approximately 43 of 51 (85%) are discrete SARs, and 
(4) approximately 40 of 43 (92%) are standard SARs. Therefore, of the 
143 alerts, approximately 40 of 143 alerts (28%) are estimated to 
result in original/discrete/standard SARs compared with 83 of 143 (58%) 
estimated to result in a declined case. The remaining SAR categories 
comprise a smaller proportion of all suspicious activity alerts.

[[Page 72235]]

[GRAPHIC] [TIFF OMITTED] TR04SE24.018

    Based on this information, the average annual cost of SAR filings 
is estimated to be approximately $10,000 per entity for any RIA or ERA 
that does not have a full AML/CFT program in place. No incremental 
costs are estimated for dual registrants because those entities are 
already submitting SARs in the baseline.
---------------------------------------------------------------------------

    \377\ Information on the number and distribution of SARs by type 
of filing based on an analysis of SAR filings. Information on the 
number of alerts and burden estimates based on FinCEN, Proposed 
Renewal: Reports by Financial Institutions of Suspicious 
Transactions. 85 FR 31598 (May 26, 2020).
---------------------------------------------------------------------------

iv. Other Compliance Costs
    As discussed above, there are certain costs associated with the 
final rule that may be spread across several of the regulatory 
requirements. It is challenging to allocate those expenditures to 
specific provisions of the final rule described above. These include 
software licensing and general recordkeeping costs.
    Dual registrants, affiliated, and other RIAs and ERAs that already 
apply a significant or moderate number of AML/CFT measures are expected 
to already be using specialized AML/CFT software as part of their AML/
CFT program. Affiliated or non-affiliated entities that have a limited 
number of AML/CFT measures in place will likely have to invest in this 
type of software to implement an AML/CFT program. FinCEN estimates that 
annual licensing fees for specialized AML/CFT software will be 
approximately $12,400.\378\
---------------------------------------------------------------------------

    \378\ See 2020 GAO BSA Report, supra note 349, at Table 113.
---------------------------------------------------------------------------

    The final rule requires RIAs and ERAs to comply with certain 
recordkeeping obligations (under the Recordkeeping and Travel 
Rules),\379\ including recording and maintaining originator and 
beneficiary information for certain transactions. FinCEN assumes that 
RIAs and ERAs that are dually registered as a broker-dealer or as a 
bank with a significant number of AML/CFT measures in place are already 
in compliance with the recordkeeping requirements, while other RIAs and 
ERAs would have to take additional steps to comply with these measures. 
FinCEN estimates the annual recordkeeping burden per RIA or ERA for 
these requirements is 50 hours.\380\ Table 5.10 summarizes the average 
cost associated with these recordkeeping requirements.
---------------------------------------------------------------------------

    \379\ See 31 CFR 1010.410(a), (e).
    \380\ FinCEN, Proposed Renewal: Renewal Without Change of 
Regulations Requiring Records to be Made and Retained by Financial 
Institutions, Banks, and Providers and Sellers of Prepaid Access, 85 
FR 84105 (Dec. 23, 2020).

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[[Page 72236]]

[GRAPHIC] [TIFF OMITTED] TR04SE24.019

    In addition, the final rule requires RIAs and ERAs to implement the 
information sharing procedures contained in section 314(a) of the USA 
PATRIOT Act.\381\ Upon receiving an information request from FinCEN, an 
RIA or ERA will be required to search its records to determine whether 
it maintains or has maintained any account or engaged in any 
transaction with an individual, entity, or organization named in the 
request. Covered financial institutions are instructed not to reply to 
the 314(a) request if a search does not uncover any matching of 
accounts or transactions. Currently, all 314(a) responses are filed 
using automated technology.\382\ FinCEN assumes that dually registered 
entities with a significant number of AML/CFT measures in place are 
already complying with these requirements, while most other RIAs and 
ERAs will likely incur additional reporting costs to comply with these 
measures. FinCEN estimates the average burden will be approximately 4 
minutes per 314(a) request for 365 reports per year per investment 
adviser, an average of one request per calendar day.\383\ Therefore, 
the estimated burden is approximately 24 hours (4 minutes x 365 reports 
= 1,460 minutes) per year per investment adviser. The information 
technology costs associated with 314(a) requests are assumed to be 
included within the overall software costs. Table 5.11 summarizes the 
information collection costs for 314(a) measures.
---------------------------------------------------------------------------

    \381\ FinCEN, Special Information Sharing Procedures to Deter 
Money Laundering and Terrorist Activity, Final Rule, 67 FR 60579 
(Sept. 26, 2002).
    \382\ FinCEN, Proposed Renewal: Renewal Without Change on 
Information Sharing Between Government Agencies and Financial 
Institutions, 87 FR 41186 (Jul. 11, 2022).
    \383\ Id.
    [GRAPHIC] [TIFF OMITTED] TR04SE24.020
    
    As ``covered financial institutions'' under FinCEN regulations, 
RIAs and ERAs will also be required to maintain due diligence measures 
that include policies, procedures, and controls that are reasonably 
designed to detect and report any known or suspected money laundering 
or other suspicious activity conducted through or involving any 
correspondent or private banking account that is established, 
maintained, administered, or managed in the United States for a foreign 
financial institution. FinCEN estimates the annual hourly burden of 
maintaining and updating the due diligence program for such 
correspondent or private banking accounts would be approximately two 
hours for each RIA and ERA--one hour to maintain and update the program 
and one hour to obtain the approval of senior management.\384\ 
Information technology costs associated with this requirement are 
included within the overall software costs. Table 5.12 summarizes the 
cost burden associated with special due diligence measures.
---------------------------------------------------------------------------

    \384\ FinCEN, Proposed Renewal: Due Diligence Programs for 
Correspondent Accounts for Foreign Financial Institutions and for 
Private Banking Accounts, 85 FR 61104 (Sep. 9, 2020).

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[[Page 72237]]

[GRAPHIC] [TIFF OMITTED] TR04SE24.021

    Under the final rule, RIAs and ERAs must also comply with special 
measures procedures and prohibitions contained in section 311 of the 
USA PATRIOT Act.\385\ Section 9714 of the Combating Russian Money 
Laundering Act \386\ allows for similar special measures in the context 
of illicit Russian finance, as does section 7213A of the Fentanyl 
Sanctions Act in connection with illicit opioid trafficking.\387\ 
Generally, these special measures grant FinCEN the authority, upon 
finding that reasonable grounds exist for concluding that a foreign 
jurisdiction, financial institution, class of transactions, or type of 
account is of ``primary money laundering concern,'' to require domestic 
financial institutions and financial agencies to take one or more 
``special measures,'' which impose additional recordkeeping, 
information collection, and reporting requirements on covered U.S. 
financial institutions. Among other authorities, these sections also 
authorize FinCEN to impose prohibitions or conditions on the opening or 
maintenance of certain correspondent accounts. Currently, such 
prohibitions are in place under section 311 for four foreign financial 
institutions and three foreign jurisdictions, and one foreign financial 
institution under section 9714.\388\ The special measures under section 
311 require financial institutions to provide notice to foreign account 
holders and document compliance with the statute. FinCEN assumes that 
dually registered RIAs and ERAs with a significant number of AML/CFT 
measures in place are already complying with these requirements, while 
most other RIAs and ERAs will likely incur additional costs to comply 
with these special measures. FinCEN estimates the average burden will 
be approximately 1 hour per special measure.\389\ Therefore, the 
estimated burden is approximately 6 hours. Table 5.13 summarizes the 
average cost for implementation section 311 special measures.
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    \385\ 31 U.S.C. 5318A; FinCEN, Special Information Sharing 
Procedures to Deter Money Laundering and Terrorist Activity, Final 
Rule, 67 FR 60579 (Sept. 26, 2002).
    \386\ Section 9714 (as amended) can be found in a note to 31 
U.S.C. 5318A.
    \387\ This provision, codified at 21 U.S.C. 2313a, was added to 
the Fentanyl Sanctions Act by the Fentanyl Eradication and Narcotics 
Deterrence Off Fentanyl Act, Public Law 118-50, 3201(a), 138 Stat 
895, 940 (2024).
    \388\ These foreign financial institutions and jurisdictions 
subject to prohibitions under section 311 are: (1) Bank of Dandong, 
(2) Burma, (3) Commercial Bank of Syria, including Syrian Lebanese 
Commercial Bank, (4) FBME Bank Ltd., (5) Al-Huda Bank, (6) Islamic 
Republic of Iran, and (7) Democratic People's Republic of North 
Korea. See FinCEN, Special Measures for Jurisdictions, Financial 
Institutions, or International Transactions of Primary Money 
Laundering Concern, https://www.fincen.gov/resources/statutes-and-regulations/311-and-9714-special-measures. The foreign financial 
institution subject to prohibitions under section 9714 is Bitzlato 
Limited. See FinCEN, Imposition of Special Measure Prohibiting the 
Transmittal of Funds Involving Bitzlato, 88 FR 3919 (Jan. 23, 2023). 
While section 9714 allows for the imposition of similar prohibitions 
to section 311, it does include an explicit notification 
requirement, so FinCEN is not including an estimated burden for 
compliance with the section 9174 action for Bizlato Limited. 
Similarly, while Burma is subject to a section 311 prohibition, 
FinCEN granted exemption relief for U.S. financial institutions to 
maintain correspondent accounts for Burmese banks under certain 
conditions. See FIN-ADMINX-10-2016, Exception to Prohibition Imposed 
by Section 311 Action against Burma (Oct. 7, 2016).
    \389\ See, e.g., FinCEN, Proposed Renewal: Imposition of a 
Special Measure against Bank of Dandong as a Financial Institution 
of Primary Money Laundering Concern, 88 FR 48285, 48286 (Jul. 26, 
2023).
[GRAPHIC] [TIFF OMITTED] TR04SE24.022

    Finally, in addition to filing SARs, financial institutions must 
file CTRs under the BSA's reporting obligations. Currently, all 
investment advisers are required to report transactions in currency 
over $10,000 on Form 8300, which is being replaced by the CTR.\390\ 
Therefore, FinCEN estimates that the

[[Page 72238]]

incremental cost for RIAs and ERAs to use the CTR is de minimis.\391\
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    \390\ FinCEN, Proposed Renewal: Renewal Without Change of the 
Bank Secrecy Act Reports of Transactions in Currency Regulations at 
31 CFR 1010.310 Through 1010.314, 31 CFR 1021.311, and 31 CFR 
1021.313, and FinCEN Report 112-Currency Transaction Report, 85 FR 
29022 (Jul. 13, 2020).
    \391\ In the 2015 NPRM, FinCEN estimated each investment adviser 
would file an average of one CTR per year, at a time cost of one 
hour per CTR. Incorporating these costs in the model would change 
the total hour and dollar burden by less than one percent.
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    Based on this information, the average annual cost of other 
compliance measures not characterized elsewhere in this Impact Analysis 
are estimated to be approximately $4,000 for affiliated or other RIAs 
and ERAs with a moderate number of AML/CFT measures already in place 
and approximately $16,000 for affiliated or other RIAs and ERAs with a 
limited number of AML/CFT measures already in place.
(c) Costs to Government
    This section describes the costs to Federal Government agencies to 
implement and enforce the final rule.
i. Costs to FinCEN
    Administering the regulation is estimated to entail costs to FinCEN 
as well as other government agencies. In terms of technology and IT 
costs, the final rule does not create new kinds or requirements or new 
reporting forms, and instead applies existing SAR and CTR filing 
obligations to investment advisers. As a result, technology and IT 
costs are estimated to be small but are included in this analysis for 
comprehensiveness. The primary costs that FinCEN and other government 
agencies are expected to incur with respect to administering this final 
rule relate to personnel costs for enforcing compliance with the 
regulation, as well as providing guidance and engaging in outreach, 
training, investigations, and policy development in support of this 
regulation. FinCEN estimates the total annual personnel cost relating 
to administering this final rule to be $7.5 million, as reflected in 
Table 5.14, with continuing recurring annual costs of roughly the same 
magnitude for ongoing outreach, policy, and enforcement activities 
thereafter.
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    \392\ U.S. Office of Personnel Management, Salary Table 2023 
Incorporating the 4.1 percent General Schedule Increase and a 
Locality Payment of 32.49 percent for the Washington-Baltimore-
Arlington area, available at https://www.opm.gov/policy-data-oversight/pay-leave/salaries-wages/salary-tables/pdf/2023/DCB.pdf. 
Rounded to three significant digits.
    \393\ The Department of Health and Human Services recommends 
using an adjustment factor of 2 to account for fringe benefits and 
overhead when agency-specific financial data are unavailable. See 
Department of Health and Human Services, Guidelines for Regulatory 
Impact Analysis (2016), p. 30, available at https://www.aspe.hhs.gov/sites/default/files/migrated_legacy_files//171981/HHS_RIAGuidance.pdf.
[GRAPHIC] [TIFF OMITTED] TR04SE24.023

    In addition, FinCEN estimates the average technology and IT costs 
associated with receiving SAR filings will be approximately $0.10 per 
SAR. Based on an average estimate of 60 SARs per entity per year, 
FinCEN anticipates it will receive approximately 1,245,420 SARs each 
year from RIAs and ERAs that do not currently have most AML/CFT 
measures in place. This estimate excludes SAR filings for dually 
registered entities because those entities are expected to be 
submitting SARs in the baseline. Therefore, the incremental technology 
and IT costs to FinCEN associated with the SAR filing requirement are 
estimated to be approximately $125,000 per year. Enforcement of this 
regulation will involve coordination with law enforcement agencies, 
which will incur costs (time and resources) while conducting 
investigations into non-compliance. FinCEN does not currently propose 
an estimate of these costs.
ii. Costs to SEC
    The SEC is also estimated to incur costs, primarily relating to 
additional staff needed to examine for compliance with the requirements 
of the final rule, and to provide any needed regulatory guidance or 
analysis. Costs associated with implementing the final rule are 
expected to primarily affect the Division of Investment Management and 
the Division of Examinations, though certain potential costs may also 
be incurred by the Division of Enforcement. In addition, as the SEC

[[Page 72239]]

receives a significant portion of its revenue from fees on registrants 
and other market participants, many of these costs would ultimately be 
paid for through those fees.\394\
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    \394\ See SEC, FY 2023 Agency Financial Report, p. 32, available 
at https://www.sec.gov/files/sec-2023-agency-financial-report.pdf.
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    The SEC's Division of Investment Management administers the 
Advisers Act and develops regulatory policy for investment advisers, 
among other responsibilities. The Division of Investment Management may 
require two additional staff to provide regulatory guidance or analysis 
related to the final rule. The average salary for a GS-15 equivalent is 
approximately $203,500 based on the SEC's SK series adjusted for the 
locality pay area of Washington, DC.\395\ Applying an adjustment factor 
of 2.0 for fringe benefits and overhead yields an estimated fully 
loaded labor cost of approximately $407,000. Therefore, FinCEN 
estimates the total annual personnel cost to the SEC relating to 
administering this final rule to be approximately $814,000.
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    \395\ This estimate is based on the midpoint salary for a GS-15 
equivalent of $153,600 multiplied by the locality pay rate of 32.49 
percent for Washington, DC. See SEC, SEC Compensation Program (Apr. 
9, 2024), available at https://www.sec.gov/about/careers-securities-exchange-commission/sec-compensation-program.
---------------------------------------------------------------------------

    RIAs are subject to examination by SEC staff in the SEC's Division 
of Examinations. Within the Division of Examinations, the Investment 
Adviser/Investment Company (IA/IC) Examination Program completed more 
than 2,300 examinations of SEC-registered investment advisers in 
FY22.\396\ The SEC maintains authority to examine ERAs as well. While 
the Division of Examinations may conduct examinations for compliance 
with the requirements of the final rule within its existing examination 
program, this may require additional examination staff. FinCEN does not 
currently have an estimate of the additional costs the SEC's Division 
of Examinations may incur for these activities.
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    \396\ See SEC, FY 2024 Congressional Budget Justification, p. 
22, https://www.sec.gov/files/fy-2024-congressional-budget-justification_final-3-10.pdf.
---------------------------------------------------------------------------

(d) Summary of Costs
    This section reports the total costs of the final rule on a per 
entity basis and in aggregate, by type and characteristics of each RIA 
or ERA. As described in section 3, the regulated universe consists of 
RIAs and ERAs that vary in terms of business structure, number of 
employees, number of accounts, and the extent that existing AML/CFT 
measures are being applied (e.g. significant, moderate, limited). Table 
5.15 summarizes the total number of entities by type and 
characteristics of each RIA and ERA.
[GRAPHIC] [TIFF OMITTED] TR04SE24.024

i. Average Cost per Private Entity and Total Costs by Category of 
Investment Adviser
    This section describes the estimated average cost per entity and 
total costs by type and characteristics of each RIA and ERA. The 
average costs per RIA and ERA are multiplied by the number of impacted 
entities to estimate the aggregate cost burden of the final rule, by 
category of RIA and ERA. Table 5.16 summarizes the estimated costs for 
RIAs and ERAs that are dually registered as a broker-dealer or a bank 
with a significant number of AML/CFT measures in place. The estimated 
costs for dually registered entities are minimal because most firms are 
expected to have an existing AML/CFT program in place. The relatively 
small incremental costs are associated with RIAs and ERAs maintaining 
and updating a written AML/CFT program and reviewing and updating AML/
CFT training to ensure they cover the activities of all RIAs and ERAs 
and meet the requirements of the BSA.
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    \397\ For Tables 5.16 to 5.37, costs are rounded to the nearest 
thousand dollars or two significant digits.
[GRAPHIC] [TIFF OMITTED] TR04SE24.025

    Table 5.17 summarizes the estimated costs for affiliated RIAs with 
a moderate number of AML/CFT measures in place.

[[Page 72240]]

[GRAPHIC] [TIFF OMITTED] TR04SE24.026

    Table 5.18 summarizes the estimated costs for affiliated RIAs with 
a limited number of AML/CFT measures in place.
[GRAPHIC] [TIFF OMITTED] TR04SE24.027

    Table 5.19 summarizes the estimated costs for other RIAs with a 
moderate number of AML/CFT measures in place.
[GRAPHIC] [TIFF OMITTED] TR04SE24.028

    Table 5.20 summarizes the estimated costs for other RIAs with a 
limited number of AML/CFT measures in place.

[[Page 72241]]

[GRAPHIC] [TIFF OMITTED] TR04SE24.029

    Table 5.21 summarizes the estimated costs for ERAs, affiliated, 
with a moderate number of AML/CFT measures in place.
[GRAPHIC] [TIFF OMITTED] TR04SE24.030

    Table 5.22 summarizes the estimated costs for ERAs that are 
affiliated with a bank or broker-dealer with a limited number of AML/
CFT measures in place.
[GRAPHIC] [TIFF OMITTED] TR04SE24.031

    Table 5.23 summarizes the estimated costs for other ERAs with a 
moderate number of AML/CFT measures in place.

[[Page 72242]]

[GRAPHIC] [TIFF OMITTED] TR04SE24.032

    Table 5.24 summarizes the estimated costs for other ERAs with a 
limited number of AML/CFT measures in place.
[GRAPHIC] [TIFF OMITTED] TR04SE24.033

ii. Estimated Burden of the Final Rule to Industry
    Table 5.25 summarizes the total costs of the final rule on an 
undiscounted basis.
[GRAPHIC] [TIFF OMITTED] TR04SE24.034

    Table 5.26 summarizes the total costs of the final rule by entity 
and business structure for dual registrants, affiliated advisers, and 
other advisers on an undiscounted basis.

[[Page 72243]]

[GRAPHIC] [TIFF OMITTED] TR04SE24.035

iii. Discounted Estimated Burden of the Final Rule
    In regulatory impact analyses, discount rates are used to account 
for differences in the timing of the estimated benefits and costs. 
Benefits and costs that accrue further in the future are more heavily 
discounted than those impacts that occur today. Discounting reflects, 
among other things, individuals' general preference to receive benefits 
sooner rather than later (and defer costs) and recognizes that costs 
incurred today are more expensive than future costs because businesses 
must forgo an expected rate of return on investment of that 
capital.\398\ OMB recommends using a discount rate of 2 percent.\399\ 
This represents the real (inflation-adjusted) rate of return on long-
term U.S. government debt over the last 30 years, calculated between 
1993 and 2022, and is a reasonable approximation of the social rate of 
time preference.
---------------------------------------------------------------------------

    \398\ U.S. Office of Management and Budget, Circular A-4 (Nov. 
9, 2023) at 75.
    \399\ Id. at 76-77.
---------------------------------------------------------------------------

    Table 5.27 summarizes the total costs of the final rule using a 2 
percent discount rate. As shown in the table, RIAs account for 
approximately 71 percent of the annualized costs to industry, while 
ERAs account for the remaining 29 percent.

[[Page 72244]]

[GRAPHIC] [TIFF OMITTED] TR04SE24.036

    Table 5.28 summarizes the total costs of the final rule by entity 
and business structure for dual registrants, affiliated advisers, and 
other advisers using a 2 percent discount rate. As shown in the table, 
entities that are dual registrants account for less than 0.1 percent, 
affiliated advisers account for approximately 11 percent, and other 
advisers account for approximately 89 percent of the annualized costs 
to industry.

[[Page 72245]]

[GRAPHIC] [TIFF OMITTED] TR04SE24.037

(e) Uncertainty Analysis
    As described in section 3, the number of RIAs and ERAs is well-
defined based on the number of Form ADV filings. However, there is 
uncertainty about the extent of existing AML/CFT measures within each 
group. While an uncertainty analysis could layer various assumptions 
about the percentage of RIAs and ERAs that have in place certain AML/
CFT measures to address each individual requirement--and the degree to 
which those measures would have to be reviewed and modified to comply 
with the requirements of the final rule--such information is 
unavailable and the existing framework described in the section 
presents a simpler approach to account for this uncertainty by varying 
certain assumptions around the categorization of RIAs and ERAs. 
Specifically, this Impact Analysis estimates the impact of varying 
assumptions regarding the distribution of RIAs and ERAs into categories 
of significant, moderate, and limited AML/CFT measures in place. This 
provides a lower and upper bound estimate of the potential costs of the 
final rule. The costs presented earlier in this section represent 
FinCEN's primary estimate of the burden of the final rule.
i. Lower Bound Estimate
    The lower bound estimate assumes that a greater proportion of RIAs 
and ERAs have a significant or moderate number of AML/CFT measures in 
place and will have to implement relatively fewer additional measures 
under the final rule. Table 5.29 summarizes the total number of 
entities according to the business type and characteristics of each RIA 
and ERA. This represents an optimistic, but not implausible, scenario 
based on self-reported assessments indicating that approximately 40 
percent of RIAs already have AML/CFT policies and procedures consistent 
with the BSA.\400\ For the lower bound estimate, FinCEN assumes the 
same proportion of affiliated ERAs and other ERAs have a significant 
number of AML/CFT measures as the corresponding RIA groups. Thus, this 
estimate is optimistic in that the number of ERAs with policies and 
procedures similar to those of RIAs is highly uncertain--although it is 
still likely to be less than the overall percentage of RIAs.
---------------------------------------------------------------------------

    \400\ See 2016 IMCT Survey, supra note 303.

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[[Page 72246]]

[GRAPHIC] [TIFF OMITTED] TR04SE24.038

    Table 5.30 summarizes the total costs of the final rule in the 
lower bound scenario using a 2 percent discount rate. As shown in the 
table, although the overall costs of the final rule are lower, the 
distribution of costs between RIAs and ERAs is similar to the primary 
estimate.
[GRAPHIC] [TIFF OMITTED] TR04SE24.039

    Table 5.31 summarizes the total costs of the final rule by entity 
and business structure for dual registrants, affiliated advisers, and 
other advisers in the lower bound scenario using a 2 percent discount 
rate. As shown in the table, in the lower bound scenario a greater 
proportion of the costs (approximately 95 percent) are attributed to 
other advisers.

[[Page 72247]]

[GRAPHIC] [TIFF OMITTED] TR04SE24.040

ii. Upper Bound Estimate
    The upper bound estimate assumes that a greater proportion of RIAs 
and ERAs have limited number of AML/CFT measures in place and will have 
to implement relatively greater additional measures under the final 
rule. Table 5.32 summarizes the total number of entities by type and 
characteristics of each RIA and ERA.
[GRAPHIC] [TIFF OMITTED] TR04SE24.041

    Table 5.33 summarizes the total costs of the final rule in the 
upper bound scenario using a 2 percent discount rate. As shown in the 
table, although the overall costs of the final rule are higher, the 
distribution of costs between RIAs and ERAs is similar to the primary 
estimate.

[[Page 72248]]

[GRAPHIC] [TIFF OMITTED] TR04SE24.042

    Table 5.34 summarizes the total costs of the final rule by entity 
and business structure for dual registrants, affiliated advisers, and 
other advisers in the upper bound scenario using a 2 percent discount 
rate. As shown in the table, although the overall costs of the final 
rule are higher, the distribution of costs between the different types 
of RIAs and ERAs is similar to the primary estimate.
[GRAPHIC] [TIFF OMITTED] TR04SE24.043


[[Page 72249]]


iii. Comparison of Costs in the Lower and Upper Bound Estimates
    As described in this section, FinCEN estimates the cost of the 
final rule to regulated entities will be approximately $810 million on 
an annualized basis. In comparison to alternative assumptions about the 
degree of existing AML/CFT measures among RIAs and ERAs subject to the 
final rule, FinCEN's primary estimate is relatively conservative in 
that it assumes a greater proportion of RIAs and ERAs have only a 
moderate or limited number of existing AML/CFT measures in place in 
comparison to input provided by industry suggesting that figure may be 
lower. Therefore, the primary estimate is closer to the upper bound 
than the lower bound. Under the most pessimistic assumptions regarding 
the degree of existing AML/CFT measures, the final rule is estimated to 
cost approximately $950 million on an annualized basis. This scenario 
is highly improbable because more than 520 RIAs (out of 690 surveyed) 
indicated that they already have a significant or moderate number of 
AML/CFT measures in place. Under more optimistic assumptions about the 
proportion of RIAs with a significant or moderate number of AML/CFT 
measures in place, FinCEN estimates the cost of the final rule will be 
approximately $470 million on an annualized basis. Table 5.35 provides 
a comparison of the estimated costs of the final rule under each of 
these scenarios.
[GRAPHIC] [TIFF OMITTED] TR04SE24.044

iv. Alternative Higher Third-Party Vendor Cost Scenario
    While the estimated costs of the final rule are not highly 
sensitive to several of the unit cost assumptions described in this 
section--in part because most of the labor costs are generally 
estimated in hours rather than days or weeks--two of the major cost 
drivers are software licensing fees and independent testing. Therefore, 
FinCEN compared how the estimated costs changed if third-party vendor 
costs increased by 100 percent.\401\ The estimated costs are relatively 
sensitive to assumptions regarding third-party fees for certain AML/CFT 
functions because these comprise a large share of the overall costs for 
RIAs and ERAs with a moderate or limited number of existing AML/CFT 
measures in place. Table 5.36 reports alternative cost assumptions for 
third-party vendor costs that are double the primary estimate.\402\ 
FinCEN assessed that the average technology costs used in the primary 
estimate are more likely to be representative of the costs likely to be 
incurred by RIAs and ERAs, which are typically much smaller than the 
bank benchmark in the 2020 GAO BSA Report. Smaller banks generally 
reported lower technology costs. However, for direct comparison this 
regulatory impact analysis reports higher estimated technology costs as 
an alternative scenario.
---------------------------------------------------------------------------

    \401\ Independent testing under the final rule can be conducted 
by an adviser's employees and is not required to be conducted by a 
third-party vendor. The costs identified here could be less than 
estimated to the extent employees (and not third-party vendors) are 
used.
    \402\ The alternative third-party vendor costs are more in line 
with the cost estimates in the 2020 GAO BSA Report for ``Large 
Community Bank A'' ($501 million to $600 million in assets) and 
``Large Credit Union A'' ($101 million to $201 million in assets). 
In comparison, the primary cost estimates are based on ``Large 
Community Bank B'' ($401 million to $500 million in assets) in the 
same report. See 2020 GAO BSA Report, supra note 349.

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[[Page 72250]]

[GRAPHIC] [TIFF OMITTED] TR04SE24.045

    Table 5.37 provides a comparison of the estimated costs of the 
final rule under the higher technology cost scenario. Overall, the 
estimated costs would be approximately 60 percent higher under this 
scenario relative to the primary estimate. FinCEN ascribes a low 
probability to the average technology/third-party vendor costs being 
this high given the typical size of RIAs and ERAs affected by the final 
rule.
[GRAPHIC] [TIFF OMITTED] TR04SE24.046

6. Regulatory Alternatives
    This section evaluates the potential benefits and costs of 
regulatory alternatives in comparison to the final regulation. This 
regulatory impact analysis considers two alternatives as described 
below.
(a) Alternative 1: Inclusion of State-Registered Investment Advisers
    In the first alternative, FinCEN considered including State-
registered investment advisers in the final rule. This alternative 
would bring all investment advisers that file Form ADV and register 
with a Federal or State regulatory authority under the scope of the 
final rule. FinCEN estimates there are approximately 17,000 State-
registered investment advisers, based on reports from the North 
American Security Administrators Association (NASAA).\403\ Table 6.1 
summarizes their characteristics.
---------------------------------------------------------------------------

    \403\ NASAA Investment Adviser Section: 2023 Annual Report, p.2, 
https://www.nasaa.org/wp-content/uploads/2023/09/2023-IA-Section-Report-FINAL.pdf.

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[[Page 72251]]

[GRAPHIC] [TIFF OMITTED] TR04SE24.047

    FinCEN assumed that the costs of the rule would apply to State-
registered investment advisers in the same way as for RIAs that are 
``other advisers.'' If State-registered investment advisers are less 
likely than RIAs to have any AML/CFT measures in the baseline, then 
this assumption would understate the costs of the rule for State-
registered investment advisers. Under the assumptions of the cost model 
in section 3, Table 6.2 summarizes the total costs of Alternative 1 for 
State-registered investment advisers in addition to the other entities 
subject to regulation.
---------------------------------------------------------------------------

    \404\ See id. The average number of employees per investment 
adviser was calculated as a weighted average of the bins reported on 
page 5 of the report, using the following employees for each 
respective bin: 2 [0-2 employees], 6.5 [3-10 employees], 15 [11-20 
employees], 25 [>20 employees].
[GRAPHIC] [TIFF OMITTED] TR04SE24.048

    FinCEN assesses the potential benefits of including State-
registered investment advisers in the definition of ``financial 
institution'' are significantly smaller relative to the likely benefits 
of including RIAs and ERAs. Although the overall benefits may exceed 
those of the final regulation because the requirements extend to a 
larger number of entities, the limited incremental benefits of applying 
the requirements to State-registered investment advisers suggest this 
would be a less cost-effective approach to regulation.
    Specifically, including State-registered investment advisers nearly 
doubles the cost of the final rule, because of the large number of 
State-registered investment advisers. But such inclusion is less likely 
to achieve the same degree of benefits as for other investment 
advisers, partly because State-registered advisers are smaller, in 
terms of number of clients and AUM, and their customers tend to be 
localized. The Risk Assessment found few examples of State-registered 
investment advisers being used to move illicit proceeds or facilitate 
other illicit activity.\405\ Further, the vast majority of their 
clients are natural persons who are not high net-worth customers and 
are U.S. persons.\406\ Therefore, FinCEN

[[Page 72252]]

rejected this regulatory alternative in favor of the more cost-
effective approach in the final regulation.
---------------------------------------------------------------------------

    \405\ See Risk Assessment, supra note 2, at 33.
    \406\ A survey of select State securities regulators found that 
for State-registered investment advisers they supervised, on 
average, less than 3 percent of their customers were non-U.S. 
persons.
---------------------------------------------------------------------------

(b) Alternative 2: Requirements for Private Fund Advisers To Conduct 
Risk-Based Customer Due Diligence and Amendments to Form PF for 
Reporting Beneficial Ownership Information for the Private Funds Being 
Advised
    In the second alternative, FinCEN considered whether to limit the 
rule requirements to only certain reporting requirements among private 
fund advisers. In particular, the alternative rule would require 
private fund advisers to conduct risk-based customer due diligence and 
to report beneficial ownership information.
    Under Alternative 2, investment advisers would incur compliance 
costs associated with the following requirements: (1) identifying 
beneficial ownership for new legal entity and PIV accounts and (2) 
developing a customer risk profile for legal entities. Investment 
advisers would be exempt from other requirements of the BSA, including 
developing and maintaining an AML/CFT program, filing SARs, and other 
recordkeeping requirements. Investment advisers that do not advise 
private funds would also be exempt from any requirement. Alternative 2 
would limit both the covered population and the number of requirements, 
relative to the final rule. FinCEN estimates there are approximately 
8,800 RIAs advising private funds, as well as all ERAs. Some RIAs and 
ERAs already have measures in place that would meet the requirements of 
Alternative 2.
    FinCEN estimated the cost of Alternative 2 based on the same cost 
methodology as in section 3, in this case only for investment advisers 
that report private funds in Form ADV. As described in sections 3 and 
5, FinCEN's cost analysis assumed that RIAs and ERAs with a significant 
or moderate number of AML/CFT measures would already meet the 
requirements of Alternative 2; those RIAs and ERAs would have zero cost 
burden under this alternative. Therefore, the costs are borne only by 
RIAs and ERAs with a limited number of AML/CFT measures in the 
baseline. FinCEN used Form ADV data for those advisers that advise 
private funds, and Table 6.3 summarizes the total costs of Alternative 
2. For Alternative 2, there are no estimated Federal agency costs 
attributed to the CDD requirement.
[GRAPHIC] [TIFF OMITTED] TR04SE24.049

    FinCEN rejected this regulatory alternative in favor of the final 
regulation because, although it is a less costly rule, it is less 
likely to provide a similar level of benefits and thus would not 
achieve FinCEN's objectives in addressing the illicit finance risk for 
investment advisers. The absence of mandatory SAR filing in this 
regulatory alternative would limit the potential benefits to law 
enforcement to investigate financial crimes and interagency cooperation 
on national security threats and their associated financial activity. 
Further, the lack of information sharing authorities would limit the 
ability of law enforcement and other agencies, as well as other 
financial institutions, to provide more specific information on illicit 
finance threats. This alternative would also not be sufficient for the 
U.S. to be in compliance with the international AML/CFT standards 
established by the FATF.
(c) Comparison
    Table 6.4 reports the costs for each of the regulatory alternatives 
in comparison to the final regulation.

[[Page 72253]]

[GRAPHIC] [TIFF OMITTED] TR04SE24.050

    Table 6.5 provides a detailed summary of the costs and benefits 
associated with each regulatory alternative (annualized using a 2 
percent discount rate over 10 years).

[[Page 72254]]

[GRAPHIC] [TIFF OMITTED] TR04SE24.051


[[Page 72255]]



B. Final Regulatory Flexibility Analysis

    The RFA \407\ requires an agency either to provide a final 
regulatory flexibility analysis (FRFA) with a final rule or certify 
that the final rule would not have a significant economic impact on a 
substantial number of small entities. This section, VI.B, contains the 
FRFA prepared pursuant to the RFA.
---------------------------------------------------------------------------

    \407\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

1. Discussion of Comments to the Initial Regulatory Flexibility 
Analysis
    Two commenters provided comments on the initial regulatory 
flexibility analysis. Both commenters objected to FinCEN's use of the 
SEC definition of small entity. One commenter noted that the definition 
was outdated, that most investment advisers are small businesses, and 
that FinCEN should use a different definition of small entity. The 
commenter noted that according to a recent report, approximately 92 
percent of advisers reported having 100 or fewer non-clerical 
employees, and that the median number of employees was eight. The same 
commenter also requested that FinCEN delay the compliance date for an 
additional year for those investment advisers with less than 100 
employees.
    The second commenter, the Small Business Administration (SBA) 
Office of Advocacy, requested that FinCEN prepare a supplemental 
regulatory flexibility analysis that uses the SBA size standards to 
better assess the impact of the proposed rule on small entities. The 
SBA Office of Advocacy noted that the SBA size standards measure a 
firm's receipts, while the SEC size standards measures a firm's AUM, 
and that over 90 percent of investment advisers would be considered 
small entities using the SBA size standards. The SBA Office of Advocacy 
also requested that FinCEN consider other alternatives to reduce the 
impact on small entities, to include additional time for compliance, as 
well as to provide guidance to assist small entities in complying with 
the requirements of the rule.
    As described in the IA AML NPRM, FinCEN determined to use the 
definition of ``small business'' or ``small organization'' under the 
Advisers Act rule adopted for purposes of the RFA, in lieu of using the 
SBA definition.\408\ FinCEN continues to assess that using this 
standard is the most appropriate way to ensure regulatory harmonization 
and consistency in how the impacts of this and other AML/CFT 
regulations, including the IA CIP NPRM, are understood, providing the 
advisory industry with a uniform standard. Using the SEC standard also 
allows FinCEN to use information from Form ADV that is individualized 
to each investment adviser and updated annually. In contrast, 
information on business revenue is derived from the U.S. Economic 
Census, is not individualized, likely includes firms not covered by 
this rule, and is only updated every five years. Further, as noted in 
the IA AML NPRM, using a standard tied to AUM is consistent with how 
Congress (in the 2010 Dodd-Frank Act) and SEC regulations distinguish 
between small, mid-sized, and large investment advisers and how other 
regulatory requirements are applied to investment advisers.\409\ In 
addition, FinCEN's use of the SEC's definition of small entity will 
have no material impact upon the application of this rule to the 
advisory industry. Given its intention to continue to use the SEC small 
entity standard, FinCEN also declines the SBA Office of Advocacy 
suggestion to issue a supplemental initial regulatory flexibility 
analysis.
---------------------------------------------------------------------------

    \408\ See 13 CFR 121.201.
    \409\ See SEC, Rules Implementing Amendments to the Investment 
Advisers Act of 1940 (June 22, 2011) (implementing regulatory 
changes required by the Dodd-Frank Act)(. As described above, SEC 
registration is generally determined by AUM. See supra note 26. In 
addition, investment advisers filing Form PF are required to provide 
additional information if they have more than $1.5 billion in hedge 
fund assets under management or more than $2 billion in private 
equity fund assets under management. See Form PF Instructions on p. 
2 and 3 at https://www.sec.gov/files/formpf.pdf.
---------------------------------------------------------------------------

    Regarding alternatives that would lessen the impact on small 
entities, as described above, FinCEN has determined to exempt from the 
definition of ``investment adviser'' (and so from the scope of the 
final rule) mid-sized and multi-state advisers (among others). FinCEN 
has decided to exempt these entities in response to the concerns raised 
by SBA Office of Advocacy and other commenters, while also addressing 
the identified risk in the investment adviser sector and ensuring any 
exemption for smaller entities does not cause additional challenges in 
administering the AML/CFT requirements in the rule. These exemptions 
have reduced the number of small RIAs subject to the rule from 573 to 
212, significantly reducing the impact of these small entities.
    As noted above, FinCEN is not choosing to exempt advisers with 
fewer than 20 or 100 employees, as was suggested by two 
commenters.\410\ To consider a threshold for application of AML/CFT 
requirements based on employee numbers alone would be inconsistent with 
Treasury's understanding of risk in the investment adviser sector. 
Regarding the suggestion to delay the compliance date for advisers with 
less than 100 employees, FinCEN declines to do so. FinCEN is concerned 
that applying a later compliance date for small advisers could 
incentivize illicit actors or others seeking to avoid compliance with 
AML/CFT measures to seek services from smaller advisers. In addition, 
as noted above, FinCEN is concerned that an employee threshold for 
application of the rule would lead to advisers hiring fewer compliance 
staff. FinCEN will consider if additional guidance targeted at small 
entities is necessary to facilitate compliance with the final rule.
---------------------------------------------------------------------------

    \410\ See supra Section III.B.2.
---------------------------------------------------------------------------

2. Statement of the Need for, and Objectives of, the Final Rule
    As described above in Sections II.C and III.A, FinCEN is finalizing 
this regulation to address identified illicit finance risks in the 
investment adviser industry. The final rule will apply AML/CFT program, 
recordkeeping, and reporting requirements to RIAs and ERAs.
3. Small Entities Affected by the Final Rule
    FinCEN is defining the term small entity in accordance with the 
definition of ``small business'' or ``small organization'' under the 
Advisers Act rule adopted by the SEC for purposes of the RFA, in lieu 
of using the SBA's definition.\411\
---------------------------------------------------------------------------

    \411\ See 13 CFR 121.201. FinCEN consulted with the SBA Office 
of Advocacy in determining to use this definition. In their comments 
to the proposed rule, the SBA Office of Advocacy asserted that it is 
inappropriate for FinCEN to use the SEC's small entity definition 
for this rule and urged FinCEN to use the SBA size standard in its 
analysis to have a more accurate reflection of the impact of this 
rulemaking on small entities. While taking into account the SBA 
Office of Advocacy's comment, for the reasons described in this 
FRFA, FinCEN is relying on the SEC's small entity definition.
---------------------------------------------------------------------------

    Relying on the SEC's definition, which it has adopted by 
regulation, has the benefit of ensuring consistency in the 
categorization of small entities for the SEC's purposes,\412\ as well 
as providing the advisory industry with a uniform standard. Using the 
SEC standard also allows FinCEN to use the most current and precise 
data about investment advisers. Investment advisers must update Form 
ADV, including whether they qualify as a ``small entity,'' at least 
annually. Because Form ADV information is individualized to each 
investment

[[Page 72256]]

adviser, FinCEN can identify the specific entities qualifying as 
``small entities'' under the SEC standard.
---------------------------------------------------------------------------

    \412\ As noted above, FinCEN is amending section 1010.810 to 
include investment advisers within the list of financial 
institutions that the SEC would examine for compliance with the 
BSA's implementing regulations.
---------------------------------------------------------------------------

    In contrast, information on business revenue is derived from the 
Economic Census, and the most recent Economic Census data reflect 
business information for 2017. These data are not individualized to 
specific firms and as detailed below, likely include other firms that 
are not covered by the final rule, requiring FinCEN to make additional 
assumptions. The data represent the average revenues of all firms, not 
just RIAs and ERAs, with less than $50 million in annual receipts 
rather than firms with AUM of less than $25 million. This is likely to 
be an underestimate because those firms that are required to register 
with the SEC tend to be larger and some of the firms reported in the 
SUSB, particularly State-registered investment advisers, would not be 
subject to the final rule. Given the data limitations, it is not 
feasible to directly estimate the average annual revenues of investment 
advisers that fall under the definition of ``small entity'' described 
above.
    Further, using a standard tied to AUM is consistent with how 
Congress (in the 2010 Dodd-Frank Act) and SEC regulations distinguish 
between small, mid-sized, and large investment advisers and how other 
regulatory requirements are applied to investment advisers.\413\ Using 
this standard would also be consistent with the standard applied by 
FinCEN in the 2015 NPRM and the SEC in recent rulemakings for 
investment advisers.\414\ This is a well-known, common-sense 
understanding of investment adviser size based on AUM (e.g., small 
advisers are those managing less than $25 million in customer assets). 
Further, FinCEN notes that over 80 percent of advisers covered by the 
final rule manage at least $110 million in customer assets and 
accordingly would not be understood to be small entities. In addition, 
FinCEN's use of the SEC's definition of small entity will have no 
material impact upon the application of the final rule to the advisory 
industry.
---------------------------------------------------------------------------

    \413\ See SEC, Rules Implementing Amendments to the Investment 
Advisers Act of 1940 (June 22, 2011). As described above, SEC 
registration is generally determined by AUM. See supra note 26. In 
addition, investment advisers filing Form PF are required to provide 
additional information if they have more than $1.5 billion in hedge 
fund assets under management or more than $2 billion in private 
equity fund assets under management. See Form PF Instructions on p. 
2 and 3 at https://www.sec.gov/files/formpf.pdf.
    \414\ See 80 FR at 52695; see also SEC, Private Fund Advisers; 
Documentation of Registered Investment Adviser Compliance Reviews, 
Final Rule, Investment Advisers Act Release No. 6383 (Aug. 23, 2023) 
88 FR 63206, 63381-3, (Sep. 14, 2023).
---------------------------------------------------------------------------

    Under SEC rules under the Advisers Act, for the purposes of the 
RFA, an investment adviser generally is a small entity if it: (i) has, 
and reports on Form ADV, AUM of less than $25 million; (ii) has less 
than $5 million in total assets on the last day of its most recent 
fiscal year; and (iii) does not control, is not controlled by, and is 
not under common control with another investment adviser that has AUM 
of $25 million or more, or any person (other than a natural person) 
that had total assets of $5 million or more on the last day of its most 
recent fiscal year.\415\
---------------------------------------------------------------------------

    \415\ 17 CFR 275.0-7(a).
---------------------------------------------------------------------------

    As of July 31, 2023, there are 573 RIAs who meet the SEC definition 
of small entity. These RIAs, have on average, $5.3 million in AUM and 4 
employees. As of July 24, 2024, there were 8,126 state-registered 
investment advisers who report $25 million or less in AUM and 5,041 
that did not report AUM--these entities account for more than 75 
percent of all state-registered investment advisers. As noted above in 
Table 6.1, state-registered investment advisers have, on average, $24.7 
million in AUM and 3 employees. Those that report $25 million or less 
in AUM have, on average, $7.6 million in AUM and 1.3 employees.
    Generally, only large advisers, having $110 million or more in AUM, 
are required to register with the SEC.\416\ The final rule would not 
affect most investment advisers that are small entities (``small 
advisers'') because they are generally registered with one or more 
State securities authorities and not with the SEC, and as noted above, 
the final rule does not apply to state-registered investment advisers. 
Under section 203A of the Advisers Act, most small advisers are 
prohibited from registering with the SEC and therefore most small 
advisers are regulated by State regulators.\417\ Therefore, these small 
advisers are unlikely to be required to register with the SEC absent a 
statutory change to the SEC registration requirements, and so are being 
excluded from the small entity population for this FRFA.
---------------------------------------------------------------------------

    \416\ See 17 CFR 275.203A-1.
    \417\ Based on Form ADV data as of July 31, 2023, see supra note 
25. To determine the number of RIAs that were ``small entities,'' 
Treasury reviewed responses to Items 5.F. and 12 of Form ADV.
---------------------------------------------------------------------------

    Based on FinCEN's initial regulatory flexibility analysis and 
public comments submitted on the proposed rule, for the final rule 
FinCEN has exempted several additional classes of investment advisers 
to reduce the regulatory burden on small advisers. First, the final 
rule additionally exempts RIAs that report $0 in AUM. Second, the final 
rule additionally exempts RIAs that register with the SEC (as indicated 
on their Form ADV) solely because the RIA is for one or more of the 
following:

 a Mid-Sized Adviser [Item 2.A.(2)]
 a Pension Consultant [Item 2.A.(7)]; or
 a Multi-State Adviser [Item 2.A.(10)]

    No ERAs are exempt from the final rule.
    Based on data as of July 31, 2023, there would be 212 small RIAs 
subject to the final rule.\418\ ERAs are not required to report 
regulatory AUM on Form ADV; therefore, it is not feasible to determine 
whether they meet the conditions above. Based on information in the IA 
CIP NPRM, FinCEN estimates that, due to SEC registration thresholds, 
the only small ERAs that would be subject to the final rule would be 
those that maintain their principal office and place of business 
outside the United States.\419\ Thus, FinCEN estimates there are 173 
small ERAs.\420\ Therefore, approximately 385 investment advisers, or 
1.9 percent of all investment advisers covered by the final rule, 
impacted by the final regulation are estimated to be small advisers. 
Assuming that all stated-registered investment advisers that reported 
$25 million or less in AUM and those that did not report AUM are small 
entities implies that approximately 13,430 or 36.3 percent of all 
investment advisers, including state-registered investment advisers, 
are small entities. However, the 385 small investment advisers noted 
above--the only small entities covered by the final rule--account for 
just 1.0 percent of all investment advisers (including state-registered 
investment advisers). Based

[[Page 72257]]

on a review of Form ADV data between 2018 and 2023, FinCEN calculates 
that the overall population of investment advisers has grown by about 
1.6 percent per year. The population of investment advisers that are 
not dually registered or affiliated with a bank or broker-dealer--the 
group that is most likely to be a small entity--has grown by about 2.5 
percent per year. Assuming that the population of small entities were 
to grow at the same rate as all non-affiliated investment advisers 
suggests that the population of small investment advisers could 
increase from 385 to approximately 500 over 10 years from 2024 to 2033. 
Based on this figure, FinCEN estimates that the final rule will not 
impact a substantial number of small entities.
---------------------------------------------------------------------------

    \418\ As noted above, the exemptions for certain RIAs in the 
final rule have reduced the number of small RIAs subject to the rule 
from 573 to 212.
    \419\ 89 FR 44571, 44592 & n.131 (May 21, 2024).
    \420\ There are no direct data indicating which ERAs that 
maintain their principal office and place of business outside the 
United States are small entities because although ERAs are required 
to report in Part 1A, Schedule D the gross asset value of each 
private fund they manage, advisers with their principal office and 
place of business outside the United States may have additional AUM 
other than what they report in Schedule D. Therefore, to estimate 
how many of the ERAs that maintain their principal office and place 
of business outside the United States could be small entities, an 
analysis was conducted from a comparable data set: SEC-registered 
investment advisers. According to Form ADV data as of July 31, 2023, 
there are 67 small RIAs with their principal office and place of 
business outside the United States and 830 total RIAs with their 
principal office and place of business outside the United States (67 
/ 830 = 8.1 percent). Based on Form ADV data, there are 
approximately 2,145 ERAs with their principal office and place of 
business outside the U.S. Applying the same percentage (8.1 percent) 
to ERAs, FinCEN estimates there are 173 ERAs that are small 
entities.
---------------------------------------------------------------------------

    Regarding the economic impact on small advisers, Form ADV does not 
collect revenue information. Therefore, additional information on 
investment advisers was obtained from the U.S. Economic Census. The 
Economic Census, conducted every five years by the U.S. Census Bureau, 
is the U.S. Government's official measure of American businesses, 
representing most industries and geographic areas of the United States 
and Island Areas.\421\ It provides information on business locations, 
employees, payroll, and revenues. The most recent Economic Census data 
reflect business information for 2017. These data are reported in the 
U.S. Census Bureau's annual Statistics of U.S. Businesses (SUSB).
---------------------------------------------------------------------------

    \421\ U.S. Census Bureau, Economic Census, web page, last 
updated on Aug. 31, 2023, https://www.census.gov/programs-surveys/economic-census.html.
---------------------------------------------------------------------------

    Based on data from the 2017 SUSB, the average firm in NAICS 523930 
had approximately $2.7 million in annual revenue adjusted for inflation 
to 2022 dollars using the GDP price deflator.\422\ According to that 
data, approximately 99 percent of firms had less than $50 million in 
annual receipts, with average revenues of approximately $850,000 
measured in 2022 dollars. Table B.1 reports the distribution of firms 
by firm revenue size.
---------------------------------------------------------------------------

    \422\ Data accessed at https://www.census.gov/data/tables/2017/econ/susb/2017-susb-annual.html.The NAICS code for this industry 
changed between 2017 and 2022. The U.S. Small Business 
Administration's size standard for this industry applies to the 2022 
NAICS code 523940. The SUSB firm revenue size data use the 2017 
NAICS code 523930.

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[[Page 72258]]

[GRAPHIC] [TIFF OMITTED] TR04SE24.052

    Importantly, as discussed above regarding the limitations with 
Economic Census data, the $850,000 figure is an imperfect proxy for the 
annual revenues of investment advisers subject to the final rule that 
meet the SEC's definition of a small entity.

[[Page 72259]]

    As further detailed in the section below, using information from 
the SUSB for firms with revenues below $50 million, FinCEN estimates 
that the annualized cost burden of the final rule would be 
approximately 4.7 percent of revenues or 0.8 percent of AUM for a small 
investment adviser. FinCEN is unable to conclusively determine whether 
such a cost burden would be ``significant'' for purposes of the RFA, 
and so it is unable to certify that the final rule would not ``have a 
significant economic impact on a substantial number of small 
entities.'' Therefore, FinCEN is conducting this FRFA.
4. Compliance Costs
    To examine the potential impact of the final rule on small 
entities, FinCEN estimates the average compliance costs for a small 
firm and compares those costs to small firms' average annual revenues 
and AUM. As described above, 212 RIAs and 173 ERAs would be considered 
small entities under the SEC definition. All small firms affected by 
the final rule will bear upfront costs to revise their internal 
policies, procedures, and controls to establish or update an existing 
AML/CFT program. Small firms that do not already have a significant or 
moderate number of AML/CFT measures in place would need to adopt 
additional measures, such as collecting additional information to 
develop a customer risk profile for new and existing clients and 
conducting ongoing CDD, filing SARs, acquiring AML/CFT software 
licenses, complying with other information collection requests, and 
general recordkeeping activities. To estimate these costs for small 
advisers, FinCEN relies on the methodology described in the Impact 
Analysis applied to the subset of small advisers and their relevant 
financial characteristics. Table B.2 reports the financial 
characteristics of small RIAs compared with all other RIAs impacted 
under the final rule based on information reported in their Form ADV 
filings.\423\ Since information on small ERAs is not directly 
available, estimates of average AUM and number of legal entity clients 
for RIAs are also applied to ERAs to develop representative cost 
estimates for small advisers.
---------------------------------------------------------------------------

    \423\ This information is reported in Table 3.7 of the Impact 
Analysis.
    \424\ See supra Section IV.A.5, supra, for details on how costs 
of the rule were calculated.
[GRAPHIC] [TIFF OMITTED] TR04SE24.053

    Based on this information, the average cost of the final rule for a 
small investment adviser (i.e., those managing up to $25 million in 
client assets) would be approximately $48,000 in the first year of the 
regulation and $39,000 in subsequent years. These costs vary slightly 
across the different categories of RIAs described in the Impact 
Analysis, with a small number of dual registrants likely to incur 
around $3,000 in compliance costs. Table B.3. reports the average costs 
per small entity by compliance activity in the first year and 
subsequent years of the final regulation.
[GRAPHIC] [TIFF OMITTED] TR04SE24.054


[[Page 72260]]


    Therefore, the average annualized cost of the final rule for a 
small investment adviser over the first 10 years would be approximately 
$40,000. This suggests the annualized cost burden of the final rule 
would be approximately 4.7 percent of revenues or 0.8 percent of AUM 
for a small investment adviser when using information from the SUSB for 
firms with revenues below $50 million. However, this estimate assumes 
that less than 1 percent of small investment advisers have a 
significant number of AML/CFT measures in place and more than 60 
percent have a limited number of AML/CFT measures in place and would 
have to develop a full AML/CFT program and initial and ongoing CDD 
measures. If the assumed distribution was overly pessimistic and more 
small investment advisers had a significant or moderate number of 
existing AML/CFT measures in place in the baseline, the average cost 
burden would be lower. Based on the lower bound estimate discussed in 
section 3, the average annualized cost of the final rule for a small 
investment adviser would be approximately $24,000, suggesting the 
average cost burden would be approximately 2.8 percent of revenues or 
0.4 percent of AUM. If fewer small investment advisers had a 
significant or moderate number of existing AML/CFT measures in place in 
the baseline, the average annualized cost of the final rule for a small 
investment adviser would be approximately $46,000, suggesting the 
average cost burden would be approximately 5.4 percent of revenues or 
0.9 percent of AUM. Table B.4 reports the number of small entities, 
annualized cost, and compliance cost as a percentage of revenue and AUM 
for small advisers, broken down by adviser type.
[GRAPHIC] [TIFF OMITTED] TR04SE24.055

5. Duplicative, Overlapping, or Conflicting Federal Rules
    As described above in section V.A.2, there are no Federal rules 
that directly and fully duplicate, overlap, or conflict with the final 
rule. While some investment advisers implement AML/CFT requirements 
because they are dually registered as broker-dealers, as a bank, or 
affiliated with a bank or broker-dealer, the majority of the investment 
adviser industry is not subject to any comprehensive AML/CFT 
requirements. FinCEN is aware that requirements within the Advisers Act 
and other Federal securities laws impose requirements upon investment 
advisers that in some instances are similar to the requirements within 
this rule and perform similar roles (i.e., improving the integrity of 
the U.S. financial system and protecting customers). However, while 
these existing requirements may provide a supporting framework for 
implementing certain obligations in the final rule, they do not impose 
the specific AML/CFT measures in the final rule.
6. Significant Alternatives That Reduce Burden on Small Entities
    FinCEN considered the burden this approach would have on investment 
advisers subject to the final rule. FinCEN is mindful of the effect of 
new regulations on small businesses, given their critical role in the 
U.S. economy and the special consideration that Congress and successive 
administrations have mandated that Federal agencies should give to 
small business concerns. FinCEN considered an alternative scenario in 
the Impact Analysis above (Alternative 2) that would apply a much more 
limited information collection requirement to only those RIAs that 
advise private funds and ERAs. In this scenario, advisers to private 
funds would be required to conduct risk-based customer due diligence 
and to report beneficial ownership information.

[[Page 72261]]

[GRAPHIC] [TIFF OMITTED] TR04SE24.056

    Based on the cost information in the table above and the number of 
legal entity and PIV customers of small entity RIAs identified in Table 
3.7 of the Impact Analysis, FinCEN estimates that the cost of this 
alternative for each small entity would be less than $1,000 on average.
    Despite the significantly lower cost of this alternative, FinCEN 
determined that this alternative would not accomplish the objectives of 
the final rule. As noted above, the absence of a SAR filing requirement 
would limit the potential benefits to law enforcement to investigate 
financial crimes and the potential benefits to interagency cooperation 
on national security threats and their associated financial activity. 
Further, without being defined as financial institutions and thereby 
being able to receive and share information under sections 314(a) and 
314(b), investment advisers would be unable to access useful 
information to help mitigate illicit finance risks.
    As another alternative to reduce the burden on small entities, 
FinCEN considered limiting the applicability of the final rule to 
investment advisers with AUM above a certain threshold, as reported on 
Form ADV. Investment advisers with AUM below the threshold would be 
exempt from the requirements of the final rule.
    FinCEN decided not to pursue this alternative because doing so 
would not apply a risk-based approach to the industry. AUM by itself, 
without considering the attributes of a particular customer (such as 
legal entity v. natural person, or U.S. v. foreign-located person), is 
not a useful indicator of potential risk.\425\ Such an exemption could 
also create a subset of ``smaller'' investment advisers who may 
actually be more vulnerable to illicit finance because they can offer 
the same services as other advisers, but without any AML/CFT 
requirements. Electing instead to use a risk-based approach, for the 
final rule FinCEN has exempted RIAs that report $0 in AUM, or are mid-
sized advisers, pension consultants, and multi-state advisers, as 
indicated by their reporting on Form ADV.
---------------------------------------------------------------------------

    \425\ See supra note 98 and accompanying text.
---------------------------------------------------------------------------

    FinCEN also notes that the AML/CFT requirements in the final rule 
are designed to be risk-based and their cost is largely based on 
factors unrelated to AUM, such as the number of customers and 
transactions, along with the risk level of its advisory activities and 
customers. For instance, according to the 2020 GAO BSA Report, the two 
most costly requirements for banks as a percentage of total AML/CFT 
compliance costs were the customer due diligence and SAR filing 
requirements, accounting for approximately 60 percent of total 
costs.\426\ The cost of other requirements in the final rule, such as 
employee training and designating an AML/CFT officer, are also likely 
to vary with the size of the business. The requirements of the final 
rule therefore have some inherent flexibility whereby small entities 
serving a smaller number of customers are likely to have lower costs.
---------------------------------------------------------------------------

    \426\ 2020 GAO BSA Report, supra note 347, at 3.
---------------------------------------------------------------------------

C. Paperwork Reduction Act

    The reporting requirements in the final rule have been approved by 
OMB in accordance with the Paperwork Reduction Act of 1995 (PRA) and 
assigned control number 1506-0081.\427\ Under the PRA, an agency may 
not conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a valid control number 
assigned by OMB. In accordance with requirements of the PRA, 44 U.S.C. 
3506(c)(2), and its implementing regulations, 5 CFR part 1320, the 
following information concerns the collection of information as it 
relates to the final rule.
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    \427\ 44 U.S.C. 3506(c)(2).
---------------------------------------------------------------------------

    The PRA analysis included herein is for the sections of the final 
rule requiring RIAs and ERAs to (a) establish AML/CFT programs, to 
include risk-based procedures for conducting ongoing customer due 
diligence; (b) report suspicious activity and file CTRs; (c) maintain 
records of originator and beneficiary information for certain 
transactions; (d) apply information sharing provisions with the 
government and between financial institutions; and (e) implement 
special due diligence requirements for correspondent and private 
banking accounts and special measures under section 311 of the USA 
PATRIOT Act.
    Reporting and Recordkeeping Requirements: The final rule would 
require RIAs and ERAs to develop and implement AML/CFT programs, file 
SARs and CTRs, record originator and beneficiary information for 
transactions, respond to section 314(a) requests, and implement special 
due diligence measures for correspondent and private banking accounts. 
The AML/CFT programs must be written (first year

[[Page 72262]]

only), and updated, stored, and made available for inspection by FinCEN 
and the SEC. The AML/CFT program must also be approved by the 
investment adviser's board of directors or trustees.
    OMB Control Numbers: 1506-0081.
    Frequency: As required; varies depending on the requirement.
    Description of Affected Public: investment advisers, as defined in 
the final rule.
    Estimated Number of Respondents: 19,919 investment advisers. Of 
these, there are an estimated 14,073 SEC-registered investment advisers 
and 5,846 exempt reporting advisers. 1,275,990 clients of investment 
advisers in the first year and up to 250,544 new clients in each 
subsequent year, although this figure will vary from year to year.
    Estimated Total Annual Reporting and Recordkeeping Burden: FinCEN 
estimates that during Year 1 the annual burden will be 6,851,861 hours 
for investment advisers and 478,496 hours for their clients. That 
burden will decrease after the first year because several information 
collection activities will only result in costs for these entities in 
Year 1. Specifically, investment advisers that do not already have a 
written AML/CFT program will have to develop one in the first year. In 
addition, entities that do not already conduct customer due diligence 
activities consistent with the requirements under the BSA will have to 
implement those information collection activities in the first year. 
FinCEN estimates that several of these costs will be incurred only in 
the first year of the regulation, but information collection activities 
related to understanding the nature and purpose of all existing 
customer accounts will likely be incurred over the first few years due 
to the large number of accounts--in this case, FinCEN assumes these 
costs will be spread over the first three years of the final rule.
    Furthermore, FinCEN assesses that the information collection burden 
associated with customer due diligence will increase over time because 
the total number of clients is expected to grow each year. The number 
of clients and therefore the total costs associated with due diligence 
measures are expected to grow over time. Thus, there will be stepwise 
decrease in burden hours in Year 2 and Year 4, but a gradual increase 
in burden hours in Year 3 and Years 5 through 10 due to growth in the 
number of clients. In Year 10, FinCEN estimates the annual burden of 
the final rule will be 4,883,961 hours for investment advisers and 
93,954 hours for new clients, with no additional burden for existing 
clients.
    Estimated Total Annual Reporting and Recordkeeping Cost: As 
described in section 3, FinCEN calculated a weighted fully loaded 
hourly labor cost based on the roles, hourly wage rates, and burden 
distribution of staff involved in each information collection activity. 
FinCEN estimates that during Year 1 the annual cost will be 
$409,508,089 for investment advisers and $23,526,799 for their clients. 
In Year 10, FinCEN estimates the total cost of the final rule will be 
$278,696,966 for investment advisers and $4,619,547 for their clients.
    Table C.1 reports the total number of investment advisers, burden 
hours, and costs by information collection activity. Burden hours and 
costs are calculated by multiplying the number of entities by the 
hours/costs per entity for each information collection activity. Burden 
hours and costs are summarized for Year 1 and Year 10.
    Table C.2 reports the total number of clients, burden hours, and 
costs by information collection activity. Burden hours and costs are 
calculated by multiplying the number of clients by the hours per 
entity. Burden hours and costs are summarized for Year 1 and Year 10.
    Table C.3 reports the total cost of information collection by year.
    Tables C.4 through C.10 report additional detail for each subset of 
entities, including information on the distribution of the information 
collection burden across different groups. These tables summarize the 
number of entities, burden hours per entity, total burden hours, 
average cost per entity, and total cost.
    Table C.11 reports the total cost of information collection for the 
customers of investment advisers. This table summarizes the number of 
customers, burden hours per customer, total burden hours, average cost 
per customer, and total cost.

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D. Unfunded Mandates Reform Act

    UMRA (section 202(a)) requires Federal agencies to prepare a 
written statement, which includes an assessment of anticipated costs 
and benefits, before issuing ``any rule that includes any Federal 
mandate that may result in the expenditure by State, local, and Tribal 
governments, in the aggregate, or by the private sector, of $100 
million or more (adjusted annually for inflation) in any one year.'' 
The current threshold after adjustment for inflation is $177 million, 
using the 2022 GDP price deflator.\428\ The final rule would result in 
an expenditure in at least one year that meets or exceeds this amount.
---------------------------------------------------------------------------

    \428\ U.S. Bureau of Economic Analysis, National Income and 
Product Accounts Tables, Table 1.1.9. Implicit Price Deflators for 
Gross Domestic Product.
---------------------------------------------------------------------------

    The total annualized cost of the final rule is estimated to be 
approximately $980 million to the private sector in the first year. The 
annualized cost of the final rule after the first year is estimated to 
be approximately $710 million to the private sector. The final rule 
does not foreseeably impose costs or other compliance burden that would 
impact any State, local, or Tribal government. FinCEN believes that the 
Impact Analysis provides the analysis required by UMRA.

E. Congressional Review Act

    Pursuant to the Congressional Review Act (CRA), OMB's Office of 
Information and Regulatory Affairs has determined that this rule meets 
the requirements of 5 U.S.C. 804(2).

List of Subjects

31 CFR Part 1010

    Administrative practice and procedure, Anti-money laundering, 
Banks, Banking, Brokers, Brokerage, Investment advisers, Money 
laundering, Mutual funds, Reporting and recordkeeping requirements, 
Securities, Suspicious transactions, Terrorist financing.

31 CFR Part 1032

    Administrative practice and procedure, Anti-money laundering, 
Banks, Banking, Brokers, Brokerage, Investment advisers, Money 
laundering, Mutual funds, Reporting and recordkeeping requirements, 
Securities, Small business, Suspicious transactions, Terrorist 
financing.

    For the reason set forth in the preamble, FinCEN amends 31 CFR 
chapter X as follows:

PART 1010--GENERAL PROVISIONS

0
1. The authority citation for part 1010 continues to read as follows:

    Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314 
and 5316-5336; title III, sec. 314, Pub. L. 107-56, 115 Stat. 307; 
sec. 701, Pub. L. 114-74, 129 Stat. 599; sec. 6403, Pub. L. 116-283, 
134 Stat. 3388.


0
2. Section 1010.100 is amended by:
0
a. Removing the word ``or'' at the end of paragraph (t)(9);
0
b. Removing the period at the end of paragraph (t)(10), and adding in 
its place ``; or''; and
0
c. Adding paragraphs (t)(11) and (nnn).
    The additions read as follows:


Sec.  1010.100  General definitions.

* * * * *
    (t) * * *
    (11) An investment adviser.
* * * * *
    (nnn) Investment adviser. (1) Any person, other than a person 
identified in (ii), wherever located, who is registered or required to 
register with the SEC under section 203 of the Investment Advisers Act 
of 1940 (15 U.S.C. 80b-3(a)), or any person who is exempt from SEC 
registration under section 203(l) or 203(m) of the Investment Advisers 
Act of 1940 (15 U.S.C. 80b-3(l), (m)).
    (2) For the purposes of this subpart, investment adviser does not 
include:
    (i) any person who is registered or required to register with the 
SEC under section 203 of the Investment Advisers Act of 1940 (15 U.S.C. 
80b-3(a)) only because such person is an investment adviser that meets 
the conditions of (a) mid-sized adviser, as set forth in Section 
203A(a)(2)(B) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-
3a(a)(2)(B)), (b) a pension consultant, as defined under 17 CFR 275-
203A-2(a), or (c) multi-state adviser, as defined under 17 CFR 275-
203A-2(d).
    (ii) any person who is registered or required to register with the 
SEC under section 203 of the Investment Advisers Act of 1940 (15 U.S.C. 
80b-3(a)) and does not report any assets under management, as defined 
under Section 203A(a)(3) of the Act (15 U.S.C. 80b-3a(a)(3)), on its 
most recently filed initial Form ADV or annual updating amendment to 
Form ADV (17 CFR 279.1).

0
3. Section 1010.410 is amended by:
0
a. Removing the word ``or'' at the end of paragraph (e)(6)(i)(I);
0
b. Removing the word ``and'' at the end of paragraph (e)(6)(i)(J) and 
adding in its place ``or''; and
0
c. Adding paragraph (e)(6)(i)(K).
    The addition reads as follows:


Sec.  1010.410  Records to be made and retained by financial 
institutions.

* * * * *
    (e) * * *
    (6) * * *
    (i) * * *
    (K) An investment adviser; and
* * * * *

0
4. Section 1010.605 is amended by:
0
a. Removing the word ``and'' at the end of paragraph (c)(2)(iii);
0
b. Removing the period at the end of paragraph (c)(2)(iv) and adding in 
its place ``; and'';
0
c. Adding paragraph (c)(2)(v);
0
d. Removing the word ``and'' at the end of paragraph (e)(1)(iii);
0
e. Adding the word ``and'' at the end of paragraph (e)(1)(iv); and
0
f. Adding paragraph (e)(1)(v).
    The additions read as follows:


Sec.  1010.605  Definitions.

* * * * *
    (c) * * *
    (2) * * *
    (v) As applied to investment advisers (as set forth in paragraph 
(e)(1)(v) of this section) means any contractual or other business 
relationship established

[[Page 72275]]

between a person and an investment adviser to provide advisory 
services.
* * * * *
    (e) * * *
    (1) * * *
    (v) An investment adviser except that an investment adviser shall 
not be considered a covered financial institution for the purposes of 
Sec.  1010.230.
* * * * *

0
5. Section 1010.810 is amended by revising paragraph (b)(6) to read as 
follows:


Sec.  1010.810  Enforcement.

* * * * *
    (b) * * *
    (6) To the Securities and Exchange Commission with respect to 
brokers and dealers in securities, investment advisers, and investment 
companies as that term is defined in the Investment Company Act of 1940 
(15 U.S.C. 80a-1 et seq.);
* * * * *

0
6. Add part 1032 to read as follows:

PART 1032--RULES FOR INVESTMENT ADVISERS

Sec.
Subpart A--General Provisions
1032.100 Definitions.
1032.110 Foreign-located investment adviser.
1032.111 Scope of application to foreign-located investment 
advisers.
1032.112 Severability
Subpart B--Programs
1032.200 General.
1032.210 Anti-money laundering/countering the financing of terrorism 
programs for investment advisers.
1032.220 [Reserved]
Subpart C--Reports Required To Be Made by Investment Advisers
1032.300 General.
1032.310 Reports of transactions in currency.
1032.311 Filing obligations.
1032.312 Identification required.
1032.313 Aggregation.
1032.314 Structured transactions.
1032.315 Exemptions.
1032.320 Reports by investment advisers of suspicious transactions.
Subpart D--Records Required To Be Maintained by Investment Advisers
1032.400 General.
1032.410 Recordkeeping.
Subpart E--Special Information-Sharing Procedures To Deter Money 
Laundering and Terrorist Activity
1032.500 General.
1032.520 Special information-sharing procedures to deter money 
laundering and terrorist activity for investment advisers.
1032.530 [Reserved]
1032.540 Voluntary information-sharing among financial institutions.
Subpart F--Special Standards of Diligence, and Special Measures for 
Investment Advisers
1032.600 General.
1032.610 Due diligence programs for correspondent accounts for 
foreign financial institutions.
1032.620 Due diligence programs for private banking accounts.

    Authority:  12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314 
and 5316-5336; title III, sec. 314, Pub. L. 107-56, 115 Stat. 307.

Subpart A--General Provisions


Sec.  1032.100  Definitions.

    Refer to Sec.  1010.100 of this chapter for general definitions not 
noted in this part.


Sec.  1032.110  Foreign-located investment adviser.

    A foreign-located investment adviser is an investment adviser whose 
principal office and place of business is outside the United States.


Sec.  1032.111  Scope of application to foreign-located investment 
advisers.

    (a) The requirements of this part 1032 apply to a foreign-located 
investment adviser only with respect to its advisory activities that:
    (1) Take place within the United States, including through 
involvement of U.S. personnel of the investment adviser, such as the 
involvement of an agency, branch, or office within the United States, 
or
    (2) Provide advisory services to a U.S. person or a foreign-located 
private fund with an investor that is a U.S. person.
    (3) For purposes of this Sec.  1032.111,
    (i) ``Foreign-located private fund'' means any foreign-located 
issuer that is a private fund as that term is defined under 15 U.S.C. 
80b-2(a)(29);
    (ii) ``Investor'' means any investor as that term is defined at 17 
CFR 275.202(a)(30)-1(c)(2); and
    (iii) ``U.S. person'' means any U.S. person as that term is defined 
in 17 CFR 230.902(k).
    (b) For avoidance of doubt, upon request, a foreign-located 
investment adviser shall make records and reports required under this 
part, and any other records it has retained regarding the scope of its 
activities covered by this part, available for inspection by FinCEN or 
the Securities and Exchange Commission.


Sec.  1032.112  Severability

    If any provision of this part, or any provision of Sec. Sec.  
1010.100, 1010.410, 1010.605, or 1010.810 of this chapter referencing 
investment advisers, is held to be invalid, or the application thereof 
to any person or circumstance is held to be invalid, such invalidity 
shall not affect other provisions, or application of such provisions to 
other persons or circumstances, that can be given effect without the 
invalid provision or application.

Subpart B--Programs


Sec.  1032.200  General.

    Investment advisers are subject to the program requirements set 
forth and cross-referenced in this subpart. Investment advisers should 
also refer to subpart B of part 1010 of this chapter for program 
requirements contained in that subpart that apply to investment 
advisers.


Sec.  1032.210  Anti-money laundering/countering the financing of 
terrorism programs for investment advisers.

    (a) Anti-money laundering/countering the financing of terrorism 
program requirements for investment advisers. (1) Each investment 
adviser shall develop and implement a written anti-money laundering/
countering the financing of terrorism (AML/CFT) program that is risk-
based and reasonably designed to prevent the investment adviser from 
being used for money laundering, terrorist financing, or other illicit 
finance activities and to achieve and monitor compliance with the 
applicable provisions of the Bank Secrecy Act (as defined in 31 CFR 
1010.100(e)) and the implementing regulations promulgated thereunder by 
the Department of the Treasury. The investment adviser may deem the 
requirements in this subpart satisfied for any:
    (i) Mutual fund (as defined in 31 CFR 1010.100(gg)),
    (ii) Collective investment fund that is subject to the requirements 
of 12 CFR 9.18 (or other applicable law that incorporates the 
requirements of 12 CFR 9.18), or
    (iii) Any other investment adviser (as defined in 31 CFR 
1010.100(nnn)), provided that such mutual fund, collective investment 
fund, or other investment adviser is advised by the investment adviser 
and subject to an AML/CFT program requirement under this chapter.
    (2) Each investment adviser's AML/CFT program must be approved in 
writing by its board of directors or trustees, or if it does not have 
one, by its sole proprietor, general partner, trustee, or other persons 
that have functions similar to a board of directors.

[[Page 72276]]

An investment adviser shall make its anti-money laundering/countering 
the financing of terrorism program available for inspection by FinCEN 
or the Securities and Exchange Commission.
    (b) Minimum requirements. The AML/CFT program shall at a minimum:
    (1) Establish and implement internal policies, procedures, and 
controls reasonably designed to prevent the investment adviser from 
being used for money laundering, terrorist financing, or other illicit 
finance activities and to achieve compliance with the applicable 
provisions of the Bank Secrecy Act and implementing regulations in this 
chapter;
    (2) Provide for independent testing for compliance to be conducted 
by the investment adviser's personnel or by a qualified outside party;
    (3) Designate a person or persons responsible for implementing and 
monitoring the operations and internal controls of the program;
    (4) Provide ongoing training for appropriate persons; and
    (5) Implement appropriate risk-based procedures for conducting 
ongoing customer due diligence, to include, but not be limited to:
    (i) Understanding the nature and purpose of customer relationships 
for the purpose of developing a customer risk profile; and
    (ii) Conducting ongoing monitoring to identify and report 
suspicious transactions and, on a risk basis, to maintain and update 
customer information.
    (c) Effective date. An investment adviser must develop and 
implement an AML/CFT program that complies with the requirements of 
this section on or before January 1, 2026.


Sec.  1032.220  [Reserved]

Subpart C--Reports Required To Be Made by Investment Advisers


Sec.  1032.300  General.

    (a) Investment advisers are subject to the reporting requirements 
set forth and cross-referenced in this subpart. Investment advisers 
should also refer to subpart C of part 1010 of this chapter for 
reporting requirements contained in that subpart that apply to 
investment advisers. The investment adviser may deem the requirements 
in this subpart satisfied for any: (i) mutual fund (as defined in 31 
CFR 1010.100(gg)), (ii) collective investment fund that is subject to 
the requirements of 12 CFR 9.18 (or other applicable law that 
incorporates the requirements of 12 CFR 9.18), or (iii) any other 
investment adviser (as defined in 31 CFR 1010.100(nnn)), provided that 
such mutual fund, collective investment fund, or other investment 
adviser is advised by the investment adviser and subject to reporting 
requirements under this chapter.


Sec.  1032.310  Reports of transactions in currency.

    The reports of transactions in currency requirements for investment 
advisers are located in subpart C of part 1010 of this chapter and this 
subpart.


Sec.  1032.311  Filing obligations.

    Refer to Sec.  1010.311 of this chapter for reports of transactions 
in currency filing obligations for investment advisers.


Sec.  1032.312  Identification required.

    Refer to Sec.  1010.312 of this chapter for identification 
requirements for reports of transactions in currency filed by 
investment advisers.


Sec.  1032.313  Aggregation.

    Refer to Sec.  1010.313 of this chapter for reports of transactions 
in currency aggregation requirements for investment advisers.


Sec.  1032.314  Structured transactions.

    Refer to Sec.  1010.314 of this chapter for rules regarding 
structured transactions for investment advisers.


Sec.  1032.315  Exemptions.

    Refer to Sec.  1010.315 of this chapter for exemptions from the 
obligation to file reports of transactions in currency for investment 
advisers.


Sec.  1032.320  Reports by investment advisers of suspicious 
transactions.

    (a) General. (1) Every investment adviser shall file with FinCEN, 
to the extent and in the manner required by this section, a report of 
any suspicious transaction relevant to a possible violation of law or 
regulation. An investment adviser may also file with FinCEN a report of 
any suspicious transaction that it believes is relevant to the possible 
violation of any law or regulation, but whose reporting is not required 
by this section. Filing a report of a suspicious transaction does not 
relieve an investment adviser from the responsibility of complying with 
any other reporting requirements imposed by the Advisers Act or the 
Securities and Exchange Commission.
    (2) A transaction requires reporting under this section if it is 
conducted or attempted by, at, or through an investment adviser; it 
involves or aggregates funds or other assets of at least $5,000; and 
the investment adviser knows, suspects, or has reason to suspect that 
the transaction (or a pattern of transactions of which the transaction 
is a part):
    (i) Involves funds derived from illegal activity or is intended or 
conducted in order to hide or disguise funds or assets derived from 
illegal activity (including, without limitation, the ownership, nature, 
source, location, or control of such funds or assets) as part of a plan 
to violate or evade any Federal law or regulation or to avoid any 
transaction reporting requirement under Federal law or regulation;
    (ii) Is designed, whether through structuring or other means, to 
evade any requirements of this chapter or any other regulations 
promulgated under the Bank Secrecy Act;
    (iii) Has no business or apparent lawful purpose or is not the sort 
in which the particular customer would normally be expected to engage, 
and the investment adviser knows of no reasonable explanation for the 
transaction after examining the available facts, including the 
background and possible purpose of the transaction; or
    (iv) Involves use of the investment adviser to facilitate criminal 
activity.
    (3) More than one investment adviser may have an obligation to 
report the same transaction under this section, and other financial 
institutions may have separate obligations to report suspicious 
activity with respect to the same transaction pursuant to other 
provisions of this chapter. In those instances, no more than one report 
is required to be filed by the investment adviser(s) and other 
financial institution(s) involved in the transaction, provided that the 
report filed contains all relevant facts, including the name of each 
financial institution and the words ``joint filing'' in the narrative 
section, and each institution maintains a copy of the report filed, 
along with any supporting documentation.
    (b) Filing and notification procedures--(1) What to file. A 
suspicious transaction shall be reported by completing a Suspicious 
Activity Report (``SAR'') and collecting and maintaining supporting 
documentation as required by paragraph (c) of this section.
    (2) Where to file. The SAR shall be filed with FinCEN in accordance 
with the instructions to the SAR.
    (3) When to file. A SAR shall be filed no later than 30 calendar 
days after the date of the initial detection by the reporting 
investment adviser of facts that may constitute a basis for filing a 
SAR under this section. If no suspect is identified on the date of such 
initial detection, an investment adviser may delay filing a SAR for an 
additional 30 calendar days to identify a suspect, but

[[Page 72277]]

in no case shall reporting be delayed more than 60 calendar days after 
the date of such initial detection.
    (4) Mandatory notification to law enforcement. In situations 
involving violations that require immediate attention, such as 
suspected terrorist financing or ongoing money laundering schemes, an 
investment adviser shall immediately notify by telephone an appropriate 
law enforcement authority in addition to filing timely a SAR.
    (5) Voluntary notification to the Financial Crimes Enforcement 
Network or the Securities and Exchange Commission. Investment advisers 
wishing to voluntarily report suspicious transactions that may relate 
to terrorist activity may call the Financial Crimes Enforcement 
Network's Financial Institutions Hotline at 1-866-556-3974 in addition 
to filing timely a SAR if required by this section. The investment 
adviser may also, but is not required to, contact the Securities and 
Exchange Commission to report in such situations.
    (c) Retention of records. An investment adviser shall maintain a 
copy of any SAR filed by the investment adviser or on its behalf 
(including joint reports), and the original (or business record 
equivalent) of any supporting documentation concerning any SAR that it 
files (or that is filed on its behalf) for a period of five years from 
the date of filing the SAR. Supporting documentation shall be 
identified as such and maintained by the investment adviser, and shall 
be deemed to have been filed with the SAR. An investment adviser shall 
make all supporting documentation available to FinCEN or any Federal, 
State, or local law enforcement agency, or any Federal regulatory 
authority that examines the investment adviser for compliance with the 
Bank Secrecy Act, upon request.
    (d) Confidentiality of SARs. A SAR, and any information that would 
reveal the existence of a SAR, are confidential and shall not be 
disclosed except as authorized in this paragraph (d). For purposes of 
this paragraph (d) only, a SAR shall include any suspicious activity 
report filed with FinCEN pursuant to any regulation in this chapter.
    (1) Prohibition on disclosures by investment advisers--(i) General 
rule. No investment adviser, and no current or former director, 
officer, employee, or agent of any investment adviser, shall disclose a 
SAR or any information that would reveal the existence of a SAR. Any 
investment adviser, and any current or former director, officer, 
employee, or agent of any investment adviser that is subpoenaed or 
otherwise requested to disclose a SAR or any information that would 
reveal the existence of a SAR shall decline to produce the SAR or such 
information, citing this section and 31 U.S.C. 5318(g)(2)(A)(i), and 
shall notify FinCEN of any such request and the response thereto.
    (ii) Rules of construction. Provided that no person involved in any 
reported suspicious transaction is notified that the transaction has 
been reported, this paragraph (d)(1) shall not be construed as 
prohibiting:
    (A) The disclosure by an investment adviser, or any current or 
former director, officer, employee, or agent of an investment adviser 
of:
    (1) A SAR, or any information that would reveal the existence of a 
SAR, to FinCEN or any Federal, State, or local law enforcement agency, 
or any Federal regulatory authority that examines the investment 
adviser for compliance with the Bank Secrecy Act; or
    (2) The underlying facts, transactions, and documents upon which a 
SAR is based, including but not limited to, disclosures:
    (i) To another financial institution, or any current or former 
director, officer, employee, or agent of a financial institution, for 
the preparation of a joint SAR; or
    (ii) In connection with certain employment references or 
termination notices, to the full extent authorized in 31 U.S.C. 
5318(g)(2)(B); or
    (B) The sharing by an investment adviser, or any current or former 
director, officer, employee, or agent of the investment adviser, of a 
SAR, or any information that would reveal the existence of a SAR, 
within the investment adviser's corporate organizational structure for 
purposes consistent with Title II of the Bank Secrecy Act as determined 
by regulation or in guidance.
    (2) Prohibition on disclosures by government authorities. A 
Federal, State, local, territorial, or Tribal government authority, or 
any current or former director, officer, employee, or agent of any of 
the foregoing, shall not disclose a SAR, or any information that would 
reveal the existence of a SAR, except as necessary to fulfill official 
duties consistent with Title II of the Bank Secrecy Act. For purposes 
of this section, ``official duties'' shall not include the disclosure 
of a SAR, or any information that would reveal the existence of a SAR, 
in response to a request for disclosure of non-public information or a 
request for use in a private legal proceeding, including a request 
pursuant to 31 CFR 1.11.
    (e) Limitation on liability. An investment adviser, and any current 
or former director, officer, employee, or agent of any investment 
adviser, that makes a voluntary disclosure of any possible violation of 
law or regulation to a government agency or makes a disclosure pursuant 
to this section or any other authority, including a disclosure made 
jointly with another institution, shall be protected from liability to 
any person for any such disclosure, or for failure to provide notice of 
such disclosure to any person identified in the disclosure, or both, to 
the full extent provided by 31 U.S.C. 5318(g)(3).
    (f) Compliance. Investment advisers shall be examined by FinCEN or 
its delegates for compliance with this section. Failure to satisfy the 
requirements of this section may be a violation of the Bank Secrecy Act 
and of this chapter.

Subpart D--Records Required To Be Maintained by Investment Advisers


Sec.  1032.400  General.

    Investment advisers are subject to the recordkeeping requirements 
set forth and cross referenced in this subpart. Investment advisers 
should also refer to subpart D of part 1010 of this chapter for 
recordkeeping requirements contained in that subpart which apply to 
investment advisers. The investment adviser may deem the requirements 
in this subpart satisfied for any: (i) mutual fund (as defined in 31 
CFR 1010.100(gg)), (ii) collective investment fund that is subject to 
the requirements of 12 CFR 9.18 (or other applicable law that 
incorporates the requirements of 12 CFR 9.18), or (iii) any other 
investment adviser (as defined in 31 CFR 1010.100(nnn)), provided that 
such mutual fund, collective investment fund, or other investment 
adviser is advised by the investment adviser and subject to 
recordkeeping requirements under this chapter.


Sec.  1032.410  Recordkeeping.

    For regulations regarding recordkeeping, refer to Sec.  1010.410 of 
this chapter.

Subpart E--Special Information-Sharing Procedures To Deter Money 
Laundering and Terrorist Activity


Sec.  1032.500  General.

    Investment advisers are subject to the special information-sharing 
procedures to deter money laundering and terrorist activity 
requirements set forth and cross-referenced in this subpart. Investment 
advisers should also refer to subpart E of part 1010 of this chapter 
for special information-sharing procedures to deter money laundering 
and terrorist

[[Page 72278]]

activity contained in that subpart which apply to investment advisers. 
The investment adviser may deem the requirements in this subpart 
satisfied for any: (i) mutual fund (as defined in 31 CFR 1010.100(gg)), 
(ii) collective investment fund that is subject to the requirements of 
12 CFR 9.18 (or other applicable law that incorporates the requirements 
of 12 CFR 9.18), or (iii) any other investment adviser (as defined in 
31 CFR 1010.100(nnn)), provided that such mutual fund, collective 
investment fund, or other investment adviser is advised by the 
investment adviser and subject to special information sharing 
procedures under this chapter.


Sec.  1032.520  Special information-sharing procedures to deter money 
laundering and terrorist activity for investment advisers.

    For regulations regarding special information-sharing procedures to 
deter money laundering and terrorist activity for investment advisers, 
refer to Sec.  1010.520 of this chapter.


Sec.  1032.530  [Reserved]


Sec.  1032.540  Voluntary information-sharing among financial 
institutions.

    For regulations regarding voluntary information-sharing among 
financial institutions, refer to Sec.  1010.540 of this chapter.

Subpart F--Special Standards of Diligence, and Special Measures for 
Investment Advisers


Sec.  1032.600  General.

    Investment advisers are subject to the special standards of 
diligence, prohibitions, and special measures requirements set forth 
and cross referenced in this subpart. Investment advisers should also 
refer to subpart F of part 1010 of this chapter for special standards 
of diligence, prohibitions, and special measures contained in that 
subpart, all of which apply to investment advisers. The investment 
adviser may deem the requirements in this subpart satisfied for any: 
(i) mutual fund (as defined in 31 CFR 1010.100(gg)), (ii) collective 
investment fund that is subject to the requirements of 12 CFR 9.18 (or 
other applicable law that incorporates the requirements of 12 CFR 
9.18), or (iii) any other investment adviser (as defined in 31 CFR 
1010.100(nnn)), provided that such mutual fund, collective investment 
fund, or other investment adviser is advised by the investment adviser 
and subject to special standards of diligence and special measures 
under this chapter.


Sec. 1032.610  Due diligence programs for correspondent accounts for 
foreign financial institutions.

    For regulations regarding due diligence programs for correspondent 
accounts for foreign financial institutions, refer to Sec.  1010.610 of 
this chapter.


Sec.  1032.620  Due diligence programs for private banking accounts.

    For regulations regarding due diligence programs for private 
banking accounts, refer to Sec.  1010.620 of this chapter.

Andrea M. Gacki,
Director, Financial Crimes Enforcement Network.
[FR Doc. 2024-19260 Filed 8-28-24; 8:45 am]
BILLING CODE 4810-02-P

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