Treasury to Propose AML/CFT Rules for Investment Advisers

In a significant development, the U.S. Department of the Treasury has announced plans to introduce new anti-money laundering (AML) and countering the financing of terrorism (CFT) regulations for investment advisers. This initiative aims to address concerns that without consistent AML/CFT requirements, hedge funds and private equity firms could be exploited by corrupt officials and illicit actors to funnel illicit gains into the U.S. financial system.

 Background

Treasury’s move revisits and builds upon its 2015 Proposed Rule, which sought to extend Bank Secrecy Act (BSA) AML/CFT obligations to investment advisers. The 2015 Proposal, which applied to SEC-registered investment advisers, included a range of requirements intended to mitigate risks associated with money laundering and terrorism financing. The new proposal is expected to incorporate additional investment advisers, including those regulated by state authorities and those exempt from SEC registration.

 Key Elements of the 2015 Proposal

The 2015 Proposal aimed to designate investment advisers as financial institutions under the BSA and mandated the following AML/CFT compliance measures:

1. Policy and Procedure Development: Investment advisers would need to establish and implement comprehensive policies, procedures, and internal controls to prevent money laundering and terrorism financing.

2. Independent Testing: Compliance with the AML/CFT program would require independent testing, either by internal personnel or a qualified outside party.

3. Designated Compliance Officer: The program would need oversight by a designated individual or team responsible for its implementation and monitoring.

4. Ongoing Training: Investment advisers would be required to provide continuous training for relevant staff.

Additionally, advisers would have to conduct risk-based evaluations of their clients, considering factors such as the client’s source of funds, location, and the nature of the client’s business. For clients that are entities, advisers would assess the entity’s type, jurisdiction, and regulatory environment.

 Current Status and Future Prospects

The 2015 Proposal faced delays, including a 2017 moratorium on new rules. However, recent developments have rekindled the discussion. The Biden administration’s December 2021 United States Strategy on Countering Corruption emphasized the need for reporting standards for investment advisers, leading to renewed interest in the 2015 Proposal. A letter from U.S. Senators in March 2022 further urged Treasury to revive the rule-making process. Subsequently, Treasury has engaged with industry groups and is now poised to propose a new rule in early 2024.

 Implications for Investment Advisers

Should the new rules be enacted, they will impose significant new obligations on investment advisers, including:

- Enhanced Compliance Costs: Investment advisers will need to allocate resources to develop, implement, and maintain AML/CFT programs.

- Increased Regulatory Scrutiny: The rules will likely lead to more rigorous oversight and enforcement by regulators.

- Operational Adjustments: Advisers may need to revise their client due diligence processes and reporting mechanisms.

Given the potential impact, investment advisers should prepare for these changes by reviewing their current compliance frameworks and considering necessary adjustments to meet anticipated requirements. The final proposal’s progress should be closely monitored, especially as it approaches an election this year, which could influence its legislative trajectory and implementation timeline.

If you are in need of legal guidance to help navigate the key requirements and compliance of the new anti-money laundering (AML) and countering the financing of terrorism (CFT) regulations for investment advisers, contact Lars Soreide, Esq., at Soreide Law Group and speak to an attorney regarding these new changes at: 888-760-6552.