News & Insights

SEC and FinCEN Propose Customer Identification Program Requirements for Investment Advisers

Louis Dodd
Wed, 15 May, 2024

On 13 May 2024, the Securities and Exchange Commission (SEC) and the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a joint notice of proposed rulemaking (NPRM) to apply customer identification program (CIP) obligations to SEC-registered investment advisers (RIAs) and exempt reporting advisers (ERAs). 

Under the proposal RIAs and ERAs would, amongst other things, be required to implement reasonable procedures to:

  • Implement an Anti-Money Laundering (AML) program;
  • Verify the identity of their customers; and
  • Maintain records of the information used to verify a customer’s identity, including supporting evidence.

The proposed rule aims to prevent illicit finance activity involving customers of investment advisers by strengthening the AML/ CFT framework for the investment adviser sector and is consistent with the CIP requirements for other financial institutions including broker-dealers and mutual funds. 

Clear direction of travel towards greater AML / CFT requirements in the US

This latest NPRM complements a separate FinCEN proposal, issued in February, to designate RIAs and ERAs as “financial institutions” under the Bank Secrecy Act and subject them to AML/CFT program requirements, as well as obligations to file suspicious activity reports.  

It demonstrates a clear direction of travel in terms of US financial regulators’ intentions to address, what FinCen Director, Andrea Gacki described in a recent speech at SIFMA’s AML Conference as “a patchwork of regulatory coverage in the investment adviser sector”.  This facilitates regulatory arbitrage in the sector, enabling illicit investors to “shop around” and creates an “unfair playing field”, as different advisers are required to play by different rules. 

New impetus to address “not new risks

Gacki noted “These are not new risks. In 2003 and 2015, Treasury proposed applying AML requirements to investment advisers, but those proposed rules were never finalised. Since 2015, the sector has almost doubled in assets under management, and we have developed an increasingly detailed understanding of the illicit finance and national security risks associated with this sector.”

The proposed rule would also bring the United States into conformity with international standards and address a significant gap in the jurisdiction’s AML/CFT system identified in the 2016 US mutual evaluation by the Financial Action Task Force (FATF). With the next FATF mutual evaluation of the United States coming up in 2026 Gacki went on to say that “it is important that we move quickly to address this deficiency and remain a global leader in combating money laundering and terrorist financing.”

Next steps

The proposal will be published on and in the Federal Register. The public comment period will remain open for 60 days after publication of the proposing release in the Federal Register.

What can Investment Advisers covered by this proposed legislation do to prepare?

Given the growing scrutiny of AML/CFT systems and procedures in the United States and around the globe, combined with an ongoing focus on complying with global sanctions regimes, advisers not already undertaking measures to identify their customers should be proactive in respect to implementing these procedures. 

IDR’s one-and-done KYC and tax approval for private markets investors provides a solution. With over 50% of private markets investors already verified on our trusted hub, it is likely we hold much of this data already, minimising the time and hassle associated with the customer identification process for you and your investors.  For those investors needing to verify their identity, the process is secure and straightforward via our user-friendly platform with 24-hour support from our expert team. Investors then benefit from a globally compliant single access token which they can use across their portfolios. 

Visit our KYC solutions page for more information or reach out to Louis Dodd


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