Article
Navigating the new FinCEN final rule for investment advisers
Nov 12, 2024 · Authored by Ashley Farrell
Reach out to our financial crimes specialists to discuss how the FinCEN final rule may affect your organization.
The Financial Crimes Enforcement Network (FinCEN) issued a pivotal final rule aimed at fortifying the investment adviser sector against illicit finance activities. This rule, which integrates certain registered investment advisers (RIAs) and exempt reporting advisers (ERAs) into the definition of “financial institution” under the Bank Secrecy Act (BSA), marks a significant shift in regulatory expectations. The final rule is effective on Jan. 1, 2026. As a critical player in the financial services industry, it’s crucial to understand the implications of this rule for investment advisers and their compliance obligations and ensure your program is established and running ahead of the deadline
Follow our series for a full picture of the BSA, the different regulations that are a part of the BSA and how it will affect investment advisers. Read Navigating the new AML landscape: It’s much more than KYC for in-depth explanations of the BSA, AML, CFT and KYC.
Understanding the scope and impact
The final rule mandates that RIAs and ERAs establish a robust anti-money laundering (AML) and countering the financing of terrorism (CFT) program. This requirement is a direct response to the documented risks highlighted in the U.S. Department of the Treasury’s February 2024 risk assessment, which identified numerous instances where criminals, corrupt officials, and foreign adversaries exploited the investment adviser industry to launder funds and access sensitive technologies.
The inclusion of investment advisers under the BSA’s regulatory framework is designed to close significant gaps in the financial system. By requiring these advisers to implement AML/CFT programs and report suspicious activities, FinCEN aims to mitigate the risks posed by illicit finance activities. This move aligns with the broader objectives of the Biden-Harris Administration’s 2021 U.S. Strategy on Countering Corruption.
Key elements of the final rule
The rule expands the definition of “financial institution” to include RIAs and ERAs. Investment advisers generally must register with the U.S. Securities and Exchange Commission (SEC) if they manage over $110 million in assets. This inclusion ensures that a substantial portion of the industry falls under the new regulatory requirements.
FinCEN has finalized a revised definition of "investment adviser" that exempts certain registered investment advisers (RIAs) from compliance. Specifically, exemptions apply to:
- Mid-sized advisers
- Multistate advisers
- Pension consultants
- RIAs without reported assets under management (AUM) on Form ADV
The above RIAs are considered lower risk for misuse in illicit activities. In the final rule, the following example is cited: an RIA that (1) has an AUM of more than $110 million and registered as a “large advisory firm” on the Form ADV; and (2) is required to register with more than 15 states is not exempt.
State-registered advisors are also deemed lower risk and currently do not have to comply, but FinCEN will monitor them for future regulatory actions.
The definition includes exempt reporting advisers (ERAs), which pose higher risks due to their focus on private and venture capital funds, often located in jurisdictions with weaker anti-money laundering controls. FinCEN will coordinate with the SEC for ERA compliance examinations.
Lastly, the definition applies to foreign investment advisers with U.S. activities or clients, specifying that minimal ties to the U.S. do not automatically bring them under this rule.
RIAs and ERAs are now required to develop and implement an AML/CFT program. This program must include policies, procedures, and internal controls designed to detect and report suspicious activities. The rule also emphasizes the need for ongoing training and independent testing of these programs to ensure their effectiveness.
Investment advisers must report any suspicious transactions to FinCEN. This requirement is crucial for identifying and addressing potential money laundering and terrorist financing activities. The SAR filings will provide valuable intelligence to law enforcement agencies and help in the broader fight against financial crimes.
FinCEN’s final rule reflects extensive consultations with the SEC, other government agencies and industry representatives. The agency has made several adjustments based on public comments, demonstrating a commitment to balancing regulatory objectives with industry concerns.
Implications for investment advisers
For investment advisers, the new rule necessitates a comprehensive review and enhancement of existing compliance frameworks. Here are some key steps advisers should consider:
Conduct a gap assessment to determine what AML/CFT activities are already in place and where you will need to add technology and human resources, as well as establish additional procedures and controls to support new compliance requirements.
Conduct a thorough risk assessment to identify potential vulnerabilities in your operations. This assessment should inform the development of your AML/CFT program and ensure it is tailored to your specific risk profile. It should consider factors regarding customer base, services provided and geographies.
Develop detailed AML/CFT policies and procedures that align with FinCEN’s requirements. These policies should cover customer due diligence, transaction monitoring and reporting protocols and describe controls in place to ensure compliance.
Implement ongoing training programs for staff to ensure they are aware of their responsibilities under the new rule. Regular training will help maintain a high level of vigilance and compliance. Training should include relevant trends, new and updated regulatory expectations, and be job-specific for those responsible for compliance.
Establish a process for independent testing of your AML/CFT program. This testing must be conducted periodically by someone independent of the compliance function to identify any weaknesses and ensure the program’s effectiveness.
Maintain open lines of communication with regulators and industry peers. Staying informed about regulatory developments and best practices will help you navigate the evolving compliance landscape.
The FinCEN final rule represents a significant step forward in preventing financial institutions from being used as tools for money laundering, terrorism financing and other financial crimes. Building a robust compliance program that not only meets regulatory requirements but can protect your business, clients, and the integrity of the financial system.
Baker Tilly can help you gain compliance, whether you have existing procedures in place or need to start from scratch. With our flexible managed services approach, we can work with you to build a risk-based program that meets compliance expectations now and ensure flexibility to evolve with you. Reach out to our financial crimes specialists to discuss how the FinCEN final rule may affect your organization.
Baker Tilly can help you gain compliance, whether you have existing procedures in place or need to start from scratch. With our flexible managed services approach, we can work with you to build a risk-based program that meets compliance expectations now and ensure flexibility to evolve with you.
