FR Doc 03-10840
[Federal Register: May 5, 2003 (Volume 68, Number 86)]
[Proposed Rules]               
[Page 23646-23653]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05my03-38]                         

-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

31 CFR Part 103

RIN 1506-AA28

 
Financial Crimes Enforcement Network; Anti-Money Laundering 
Programs for Investment Advisers

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

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: FinCEN is proposing to amend its Bank Secrecy Act rules to 
require certain investment advisers that manage client assets to 
establish anti-money laundering programs, to establish minimum 
requirements for such programs, and to delegate its authority to 
examine certain investment advisers for compliance with such program 
requirements to the Securities and Exchange Commission.

DATES: Written comments may be submitted to FinCEN on or before July 7, 
2003.

ADDRESSES: Because paper mail in the Washington area may be subject to 
delay, commenters are encouraged to e-mail comments. Comments may be 
sent to Internet address regcomments@fincen.treas.gov with the caption 
``Attention: Section 352 Investment Adviser Rule Comments'' in the body 
of the text. Comments may be mailed to FinCEN, Section 352 Investment 
Adviser Rule Comments, P.O. Box 39, Vienna, VA 22183. Comments should 
be sent by one method only. Comments may be inspected at FinCEN between 
10 a.m. and 4 p.m. in the FinCEN Reading Room in Washington, DC. 
Persons wishing to inspect the comments submitted must request an 
appointment by telephoning (202) 354-6400 (not a toll-free number).

FOR FURTHER INFORMATION CONTACT: Office of Chief Counsel (FinCEN), 
(703) 905-3590; Office of the General Counsel (Treasury), (202) 622-
1927; or Office of the Assistant General Counsel for Banking & Finance 
(Treasury), (202) 622-0480 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

I. Background

    On October 26, 2001, the President signed into law the Uniting and 
Strengthening America by Providing Appropriate Tools Required to 
Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001 (Public Law 
107-56) (the Act). Title III of the Act makes a number of amendments to 
the anti-money laundering provisions of the Bank Secrecy Act (BSA), 
which are codified in subchapter II of chapter 53 of title 31, United 
States Code. These amendments are intended to promote the prevention, 
detection, and prosecution of international money laundering and the 
financing of terrorism.
    Section 352(a) of the Act, which became effective on April 24, 
2002, amended section 5318(h) of the BSA. As amended, section 
5318(h)(1) requires every financial institution to establish an anti-
money laundering program that includes, at a minimum, (i) the 
development of internal policies, procedures, and controls; (ii) the 
designation of a compliance officer; (iii) an ongoing employee training 
program; and (iv) an independent audit function to test programs. 
Section 5318(h)(2) authorizes the Secretary of the Treasury 
(Secretary), after consulting with the appropriate Federal functional 
regulator, which in the case of investment advisers is the Securities 
and Exchange Commission (SEC), to prescribe minimum standards for anti-
money laundering programs. The Secretary has delegated the authority to 
administer the BSA to the Director of FinCEN. To date, FinCEN has 
issued interim final rules prescribing minimum anti-money laundering 
program requirements for numerous types of financial institutions,\1\ 
has proposed rules for other financial institutions,\2\ and is studying 
how to design such standards for numerous other types of financial 
institutions.
---------------------------------------------------------------------------

    \1\ Anti-Money Laundering Programs for Financial Institutions, 
67 FR 21110 (April 29, 2002); Anti-Money Laundering Programs for 
Mutual Funds, 67 FR 21117 (April 29, 2002); Anti-Money Laundering 
Programs for Money Services Businesses, 67 FR 21114 (April 29, 
2002); Anti-Money Laundering Programs for Operators of a Credit Card 
System, 67 FR 21121 (April 29, 2002).
    \2\ Anti-Money Laundering Programs for Unregistered Investment 
Companies, 67 FR 60617 (Sept. 26, 2002); Anti-Money Laundering 
Programs for Insurance Companies, 67 FR 60625 (Sept. 26, 2002); 
Anti-Money Laundering Programs for Dealers in Precious Metals, 
Stones, or Jewels, 68 FR 8480 (Feb. 21, 2003).
---------------------------------------------------------------------------

    FinCEN is today proposing a similar rule for commodity trading 
advisors, which is published elsewhere in this issue of the Federal 
Register.\3\
---------------------------------------------------------------------------

    \3\ Commodity trading advisors, which are subject to regulation 
by the Commodity Futures Trading Commission (CFTC), were added to 
the statutory BSA list of ``financial institutions'' in section 321 
of the Act.
---------------------------------------------------------------------------

II. Investment Advisers Determined To Be Financial Institutions

    The BSA does not expressly enumerate investment advisers among the 
entities defined as financial institutions under sections 5312(a)(2) 
and (c)(1).\4\ Nevertheless, the BSA

[[Page 23647]]

definition is extremely broad, listing numerous types of businesses, 
and section 5312(a)(2)(Y) authorizes the Secretary to include 
additional types of businesses within the BSA definition if he 
determines that they engage in any activity similar to, related to, or 
a substitute for any of the listed businesses. Because of the types of 
activities certain investment advisers engage in and the services they 
provide, FinCEN is proposing to exercise its authority to define these 
investment advisers as financial institutions solely for purposes of 
section 5318(h) and to require them to establish anti-money laundering 
programs.
---------------------------------------------------------------------------

    \4\ The BSA definition includes institutions that are already 
subject to federal regulation such as banks, savings associations, 
credit unions, securities broker-dealers, and futures commission 
merchants. Money services businesses (such as money transmitters and 
currency exchanges) are also defined as financial institutions under 
the BSA, and, like the former categories, under FinCEN's 
implementing regulations. The BSA definition also includes dealers 
in precious metals, stones, or jewels; pawnbrokers; loan or finance 
companies; private bankers; insurance companies; travel agencies; 
telegraph companies; sellers of vehicles, including automobiles, 
airplanes, and boats; persons engaged in real estate closings and 
settlements; investment bankers; investment companies; and commodity 
pool operators and commodity trading advisors that are registered or 
required to register under the Commodity Exchange Act (7 U.S.C. 1 et 
seq.).
---------------------------------------------------------------------------

    An investment adviser is defined in the Investment Advisers Act of 
1940 (Advisers Act) (15 U.S.C. 80b et seq.) as ``any person who, for 
compensation, engages in the business of advising others * * * as to 
the value of securities or as to the advisability of investing in, 
purchasing, or selling securities, or * * * issues * * * analyses or 
reports concerning securities,'' subject to certain exceptions.\5\ Many 
investment advisers provide investment advice to clients who have 
granted the adviser the power to manage the assets in their accounts, 
frequently on a discretionary basis. As a result, these investment 
advisers engage in activities that are ``similar to, related to, or a 
substitute for'' financial services that are provided by other BSA 
financial institutions.
---------------------------------------------------------------------------

    \5\ Advisers Act, Section 202(a)(11) (15 U.S.C. 80b-2(a)(11)).
---------------------------------------------------------------------------

    Advisers managing clients' assets work so closely with other BSA 
financial institutions--such as by directing broker-dealers to purchase 
or sell client securities or by directing banks to transfer client 
funds--that the advisers' activities are related to those of the other 
financial institutions. Advisers' services can be a substitute for 
products offered by investment companies or insurance companies, for 
example, when clients seek to have advisers manage their assets through 
other forms of pooled investment vehicles or through separate accounts. 
Some investment advisers offer asset management services that are 
similar to, and that may even compete directly with, asset management 
services provided by certain banks through their trust departments. 
FinCEN also notes that the close interrelationship between investment 
advisers and other financial institutions (such as securities broker-
dealers, mutual funds, commodity trading advisors, and commodity pool 
operators) is further demonstrated by the fact that they are often 
jointly registered with, affiliated with, or sponsored by each other.

III. Money Laundering and Investment Advisers

    Money laundering occurs when money from illegal activity is moved 
through the financial system to make it appear that the funds came from 
legitimate sources. Money laundering usually involves three stages, 
known as placement, layering, and integration. In the placement stage, 
cash or cash equivalents are placed into the financial system. 
Investment advisers rarely have occasion to receive currency from or 
disburse it to clients. Nevertheless, in some instances, FinCEN has 
received reports of suspicious activities indicating that clients may 
attempt to use investment advisers in the placement stage. These 
reports include attempts by clients to structure transactions with an 
investment adviser to avoid reports of currency transactions, \6\ as 
well as attempts to fund accounts with fraudulent checks.
---------------------------------------------------------------------------

    \6\ ``Structuring'' is described infra at note 25 and 
accompanying text.
---------------------------------------------------------------------------

    ``Layering'' describes the distancing of illegal proceeds from 
their criminal source through the creation of complex layers of 
financial transactions. A money launderer could use its client account 
with an investment adviser as one of many accounts in a layering 
scheme, frequently transferring funds to the adviser for management and 
then withdrawing the funds or transferring them to accounts at other 
institutions. Layering could also involve establishing an advisory 
account in the name of a fictitious corporation or an entity designed 
to conceal the true owner. For example, FinCEN in one instance received 
reports of suspicious activity involving an investment advisory client 
who established an account under an alias for the family of a Colombian 
narcotics trafficker. Investment advisory firms could also be used for 
integrating illicit income into legitimate assets. ``Integration'' 
occurs when illegal funds previously placed into the financial system 
are made to appear to have been derived from a legitimate source. For 
example, proceeds from investments made on a client's behalf by an 
investment adviser would appear legitimate to any financial institution 
receiving such proceeds.
    The crime of money laundering also encompasses the movement of 
funds to support terrorism or terrorist organizations.\7\ These funds 
may be from illegitimate or legitimate sources. Even where the funds 
derive from legitimate sources, money launderers might attempt to use 
investment advisers to aid movement of the funds through the money 
laundering patterns described above, in order to disguise the identity 
of the originator of the funds.
---------------------------------------------------------------------------

    \7\ 18 U.S.C. 1956, 2339A, and 2339B.
---------------------------------------------------------------------------

    Investment advisers in the United States today control over $21 
trillion in assets.\8\ Although advisers rarely hold financial assets 
themselves and even more rarely accept cash, they are often in a 
critical position of knowledge as to the movement of large amounts of 
financial assets through financial markets.\9\ If some of these assets 
include the proceeds of illegal activities, or are intended to further 
such activities, an anti-money laundering program should help discover 
them. In some cases, an investment adviser may be the only person with 
a complete understanding of the source of invested assets, the nature 
of the clients, or the objectives for which the assets are invested. 
Other market participants may, for example, hold and trade assets in an 
account controlled by the adviser, but these parties often rely solely 
on an investment adviser's instructions and lack knowledge of the 
adviser's clients. In other cases, an adviser may be the only 
participant aware of the overall investment program of a client who may 
use multiple broker-dealers to trade securities in transactions that 
individually may not raise money laundering concerns.\10\ As a result, 
FinCEN believes that investment advisers have an important role to play 
in preventing the use of their services for money laundering and the 
financing of terrorism.\11\
---------------------------------------------------------------------------

    \8\ Information filed by investment advisers registered with the 
SEC shows that these advisers had assets under management of over 
$21 trillion as of February 2003.
    \9\ Rule amendments proposed by the SEC would generally prohibit 
an adviser from holding clients' funds or securities directly; 
instead, the adviser would have to maintain these assets in accounts 
with a broker-dealer, bank, or other qualified custodian. Custody of 
Funds or Securities of Clients by Investment Advisers, Investment 
Advisers Release No. 2044 (July 17, 2002) (67 FR 48579 (July 25, 
2002)).
    \10\ 18 U.S.C. 1956 and 1957 make it a crime for any person, 
including an individual or company, to engage knowingly in a 
financial transaction with the proceeds from any of a long list of 
crimes or ``specified unlawful activity.'' Although the standard of 
knowledge required is ``actual knowledge,'' actual knowledge 
includes ``willful blindness.'' Thus, a person could be deemed to 
have knowledge that proceeds were derived from illegal activity if 
he or she ignored ``red flags'' that indicated illegality.
    \11\ Moreover, FinCEN is concerned that the failure of advisers 
to implement effective anti-money laundering programs may result in 
money launderers seeking their services to access financial markets 
while avoiding detection by banks, broker-dealers, mutual funds, and 
other financial institutions that have adopted programs.

---------------------------------------------------------------------------

[[Page 23648]]

IV. Section-by-Section Analysis

A. Definition of Investment Adviser for Purposes of the Proposed Rule

    The SEC regulates investment advisers under the Advisers Act. The 
proposed rule relies on terms and definitions used by the Advisers Act 
and in the SEC's regulations to define the scope of the rule.\12\ 
Section 103.150(a) of the proposed rule defines two groups of advisers 
located within the United States required to have anti-money laundering 
programs.
---------------------------------------------------------------------------

    \12\ This approach would permit advisers to determine easily 
whether they are subject to the proposed rule, and would permit both 
Treasury and the SEC to identify which advisers have obligations 
under the proposed rule.
---------------------------------------------------------------------------

    The first group consists of advisers that (i) have a principal 
office and place of business in the U.S. (U.S. advisers), (ii) are 
registered with the SEC, and (iii) report to the SEC that they have 
assets under management.\13\ This group includes advisers registered 
with the SEC that have either discretionary or non-discretionary 
authority to manage client assets.\14\ It excludes, however, advisers 
that are not registered with the SEC because they are smaller, state-
registered firms that have less than $30 million of assets under 
management, as well as advisers that are registered with the SEC but do 
not manage client assets.\15\ Because these excluded firms, unlike many 
``financial institutions'' such as banks or broker-dealers, do not 
accept funds or hold financial assets directly, and have relatively few 
(or no) assets under management, these firms are unlikely to play a 
significant role in money laundering.
---------------------------------------------------------------------------

    \13\ SEC-registered advisers report their assets under 
management in Part 1A of Form ADV (17 CFR 279.1), which is the 
investment adviser registration form. The item currently requiring 
this information is Item 5.F of Part 1A.
    \14\ When a client places its assets with an advisory firm for 
management, the client authorizes the advisory firm to buy or sell 
securities for the client's account, and the account itself is 
maintained with a broker-dealer, bank, or other custodian. However, 
many advisory firms, such as financial planners or pension 
consultants, do not manage clients' assets. While these investment 
advisers may recommend securities or asset allocations, their 
clients make their own arrangements to purchase and sell securities; 
in some cases, the adviser may not be told whether the client has 
acted on the firm's advice.
    \15\ Section 203A of the Advisers Act generally prohibits 
advisers with assets under management of less than $25 million from 
registering with the SEC. Primary responsibility for regulating 
these firms rests with state securities authorities. Under SEC 
rules, however, firms with between $25 and $30 million in assets 
under management may choose whether to register with the SEC or with 
the states, and certain other investment advisers--such as certain 
pension consultants--register with the SEC even though they may not 
manage $25 million in assets. 17 CFR 275.203A-1; 17 CFR 275.203A-2.
---------------------------------------------------------------------------

    The second group consists of U.S. advisers that are not registered 
with the SEC, but have $30 million or more of assets under management 
and are relying on the registration exemption provided by section 
203(b)(3) of the Advisers Act (15 U.S.C. 80b-3(b)(3)) (unregistered 
advisers). Under section 203(b)(3), advisers that have fewer than 15 
clients and do not hold themselves out generally to the public as 
investment advisers are exempted from SEC registration.\16\ Many of the 
advisers that use this registration exemption may control substantial 
client assets, either because they have a few individual clients with 
very large accounts or because they advise certain types of pooled 
investment vehicles, such as limited partnerships.\17\
---------------------------------------------------------------------------

    \16\ Section 203(b)(3) exempts from registration any investment 
adviser who during the course of the preceding 12 months has had 
fewer than 15 clients and who neither holds himself out generally to 
the public as an investment adviser nor acts as an investment 
adviser to any registered investment company or business development 
company that has elected to be regulated as such.
    \17\ An SEC rule permits the adviser to count the partnership or 
other pooled investment vehicle as a single client, rather than 
count each limited partner or other investor as a client. 17 CFR 
275.203(b)(3)-1. As a result, the adviser may have only one or two 
pooled investment vehicle clients, yet manage tens or hundreds of 
millions of dollars. While some of these pooled investment vehicles 
may be subject to FinCEN's proposed rule requiring unregistered 
investment companies to implement anti-money laundering programs, 
these advisers may have other clients not subject to that rule. See 
Anti-Money Laundering Programs for Unregistered Investment 
Companies, 67 FR 60617 (Sept. 26, 2002) (UIC NPRM).
---------------------------------------------------------------------------

    With respect to this second group of investment advisers, the 
proposed rule would exclude those entities that would qualify as 
unregistered advisers but that are otherwise required to have an anti-
money laundering program under the BSA because they are dually 
registered as a financial institution in another capacity and are 
examined by a Federal functional regulator for compliance with the 
requirement in that other capacity.\18\ This explicit exclusion will 
avoid potential duplicative anti-money laundering regulation of these 
financial institutions by the SEC and other Federal functional 
regulators and promote the efficient allocation of scarce government 
resources.
---------------------------------------------------------------------------

    \18\ For example, as noted above, FinCEN is proposing today a 
similar rule for commodity trading advisors. FinCEN is also 
considering requiring that commodity pool operators (which are also 
BSA financial institutions subject to regulation by the CFTC) 
establish and implement the anti-money laundering programs required 
pursuant to the UIC NPRM, supra note 17, for commodity pools that 
they operate.
---------------------------------------------------------------------------

    In some instances, investment advisers that would be subject to the 
proposed rule advise pooled investment vehicles that are themselves 
required to maintain anti-money laundering programs under BSA rules, 
such as mutual funds, or that are sponsored or administered by 
financial institutions subject to such requirements.\19\ To prevent 
overlap and redundancy, the proposed rule would permit investment 
advisers covered by the rule to exclude from their anti-money 
laundering programs any investment vehicle they advise that is subject 
to an anti-money laundering program requirement under BSA rules.
---------------------------------------------------------------------------

    \19\ For example, an investment adviser may be adviser to a 
mutual fund, or adviser to a bank's common or collective trust fund. 
BSA rules obligate mutual funds and banks to maintain anti-money 
laundering programs to protect against attempted money laundering by 
their customers. Anti-Money Laundering Programs for Mutual Funds, 67 
FR 21117 (April 29, 2002); Anti-Money Laundering Programs for 
Financial Institutions, 67 FR 21110 (April 29, 2002). An adviser may 
also act as adviser to other investment pools, such as an insurance 
company's separate accounts or certain unregistered investment 
companies, that will be similarly subject to anti-money laundering 
program rules under pending FinCEN proposals. See, e.g., Anti-Money 
Laundering Programs for Insurance Companies, 67 FR 60625 (Sept. 26, 
2002); UIC NPRM, supra note 17.
---------------------------------------------------------------------------

B. The Anti-Money Laundering Programs

1. Individualized Program
    Section 103.150(b) of the proposed rule would require each 
investment adviser subject to the proposed rule to develop and 
implement its own anti-money laundering program reasonably designed to 
prevent the firm from being used to launder money or finance terrorist 
activities and to achieve and monitor compliance with the other 
applicable requirements of the BSA and FinCEN's implementing 
regulations. Every program must incorporate four minimum requirements, 
discussed below, but each adviser will tailor its program to address 
the risks presented by the nature of its services and clients. In 
addition, each adviser may implement its program in a manner reasonably 
practicable in light of the firm's size and resources. For example, 
according to recent information filed by the approximately 7,750 
investment advisers registered with the SEC, only ten percent of them 
reported that their firms had more than 50 employees, whereas nearly 
half reported having one to five employees. While FinCEN expects that 
large firms will adopt detailed procedures addressing the 
responsibilities of the individuals and departments involved in 
carrying out each aspect of the program, smaller firms may adopt 
procedures consistent

[[Page 23649]]

with their simpler, centralized organizational structure.\20\
---------------------------------------------------------------------------

    \20\ The legislative history of the Act reflects that Congress 
intended that each financial institution should have the flexibility 
to tailor its program to fit its business, taking into account 
factors such as size, location, activities, and risks or 
vulnerabilities to money laundering, so long as the program meets 
the four minimum statutory requirements. This flexibility is 
designed to ensure that all firms subject to the Act, 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. 
S10990-02 (October 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 (October 17, 2001) (statement of Rep. Kelly) (provisions of 
the Financial Anti-Terrorism Act of 2001 were incorporated as Title 
III in the Act).
---------------------------------------------------------------------------

    To assure that the requirement to have an anti-money laundering 
program receives the highest level of attention, the proposed rule 
would require that each investment adviser's program be approved in 
writing by the board of directors or trustees or, if it doesn't have 
one, by its sole proprietor, general partner, or other persons who have 
similar functions.\21\ The four required elements of the anti-money 
laundering program are discussed below.
---------------------------------------------------------------------------

    \21\ The board's approval could be given at its first regularly 
scheduled meeting after the program is adopted.
---------------------------------------------------------------------------

2. The Four Required Elements of Each Anti-Money Laundering Program
    (1) Establish and Implement Policies, Procedures, and Internal 
Controls Reasonably Designed to Prevent the Investment Adviser From 
Being Used to Launder Money or Finance Terrorist Activities, Including 
but not Limited to Achieving Compliance with Applicable Provisions of 
the BSA and FinCEN's Implementing Regulations.
    Each investment adviser subject to the proposed rule would be 
required to develop a written program reasonably designed to prevent 
the firm from being used to launder money or finance terrorist 
activities and to achieve compliance with applicable requirements of 
the BSA and FinCEN's implementing regulations. As described below, this 
would require each investment adviser to review the types of services 
it provides and the nature of its clients to identify its 
vulnerabilities to money laundering and terrorist financing activity. 
The adviser would then develop and implement procedures and controls 
that would reasonably address each vulnerability and assure compliance 
with these requirements, and periodically assess the effectiveness of 
its procedures and controls.
    An adviser's vulnerabilities to money laundering and terrorist 
financing activity are minimal with respect to clients for whom the 
adviser does not manage assets. Many advisers that manage portfolios 
for some clients have other clients to whom the firm provides very 
different services, such as pension consulting, securities newsletters 
or research reports, or financial planning. Accordingly, in designing 
its anti-money laundering procedures, an adviser could exclude clients 
for whom the firm does not manage assets.
    Advisers face higher vulnerability to money laundering when clients 
place their assets under management with the firm. An adviser's 
procedures for these clients would seek to identify unusual 
transactions whereby clients place funds under the firm's management 
through checks drawn on (or wire transfers made from) accounts of third 
parties with no family or business relationship to the client, or 
through numerous checks or transfers from one or more issuers or 
institutions. In addition, an adviser's procedures would identify 
unusual transactions upon the subsequent withdrawal of assets from 
management with the firm, such as payments in numerous separate 
monetary instruments, transfers to unrelated or numerous accounts,\22\ 
or to accounts in countries in which drugs are known to be produced or 
other countries at high-risk for money laundering or terrorist 
financing.\23\
---------------------------------------------------------------------------

    \22\ Securities account custodians typically handle the actual 
deposit and withdrawal of funds in a client's account. In most 
cases, these custodians are broker-dealers, banks, or other entities 
that are ``financial institutions'' under FinCEN's BSA rules. 
Commonly, the client selects and contracts for account services with 
the custodian and instructs the custodian to permit the adviser to 
trade securities in the account. In such cases, the custodian's 
personnel may have exclusive access to the information needed to 
assess whether the source or destination of funds transfers in and 
out of the account are unusual. If the adviser selects and retains 
the account custodian, however, the adviser should coordinate review 
of these transactions with the custodian, as is discussed in 
connection with service providers, below.
    \23\ See, e.g., http://www.state.gov for International Narcotics 
Control Reports evaluating the effectiveness of countries' controls 
against narcotics trafficking and for lists of state sponsors of 
terrorism, and http://www.fincen.gov for FinCEN Advisories 
identifying countries whose anti-money laundering regimes do not 
meet international standards.
---------------------------------------------------------------------------

    An adviser's vulnerability rises further with respect to clients 
who make frequent additions to or withdrawals from their advisory 
accounts with the firm. An adviser would need to establish procedures 
to identify which clients engage in such activity, and assess the 
reasonableness of the additions or withdrawals in light of the clients' 
investment objectives and the firm's existing knowledge of the clients' 
personal finances or business operations.
    An investment adviser faces the highest degree of vulnerability 
when clients place or attempt to place assets under management in the 
form of cash, or require investment options or brokerage, banking, or 
other custodial arrangements that allow the client to remain anonymous 
to other intermediaries. The adviser would need to establish procedures 
to assess whether there are legitimate circumstances underlying the 
client's request before proceeding with the relationship.
    An adviser's program should also take into account the extent to 
which the adviser provides investment advice to, and creates or 
administers, pooled investment vehicles, as well as whether the adviser 
provides advice to pooled investment vehicles that are created and 
administered by the adviser or by a third party. As discussed above, 
investment advisers to pooled investment vehicles that are subject to 
anti-money laundering program requirements under BSA rules may exclude 
the vehicles from their anti-money laundering programs. However, an 
investment adviser must include other pooled vehicles it advises in its 
anti-money laundering program, using different approaches depending on 
whether the adviser is also the entity creating or administering the 
pooled vehicle.
    Advisers providing investment advice to pooled investment vehicles 
that are not subject to BSA anti-money laundering requirements, and 
that are created and administered by a third party, would have little 
or no information about the investors in the pooled vehicle or their 
transactions. In this situation, the adviser would need to establish 
procedures to assess whether the entity that created and administers 
the vehicle, or the nature of the vehicle itself, reduces the risk of 
money laundering. For example, an employee retirement savings plan 
sponsored by a public corporation that accepts assets only in the form 
of payroll deductions or rollovers from other similar plans presents no 
realistic opportunity for money laundering activity, whereas an 
offshore vehicle not itself subject to any anti-money laundering 
program requirement would present a more significant risk. The 
adviser's program would need to analyze the money laundering risks 
posed by a particular investment vehicle by using a risk-based 
evaluation of relevant factors including: the type of entity; its 
location; the statutory and regulatory regime of that location (e.g., 
if the entity is organized

[[Page 23650]]

or registered in a foreign jurisdiction, does the jurisdiction comply 
with the European Union anti-money laundering directives, and has the 
jurisdiction been identified by the Financial Action Task Force as non-
cooperative); and the adviser's historical experience with the entity 
or the references of other financial institutions. As the entity's 
potential vulnerability to money laundering increases, the adviser's 
procedures would need to reasonably address these increased risks, such 
as by obtaining and reviewing information about the identity and 
transactions of the investors in the vehicle.
    In contrast, if the adviser also creates or administers a pooled 
investment vehicle not subject to BSA anti-money laundering program 
requirements, then the adviser's program would need to address the 
investors in the vehicle under the same type of criteria as the adviser 
uses for non-pooled vehicle clients, as discussed above. If, however, 
any of the investors are themselves pooled investment vehicles (e.g., 
hedge funds or pension funds), the adviser would need to address the 
money laundering risks posed by the pooled entity investing in the 
adviser's vehicle (and any other intermediary that may be involved), 
under the same type of criteria an adviser would use for pooled 
entities it advises directly, as described above.\24\
---------------------------------------------------------------------------

    \24\ See 67 FR 60617, 60621 (Sept. 26, 2002) (Treasury's UIC 
NPRM, supra note 17, provides for similar treatment for ``funds of 
hedge funds''), and 67 FR 21117, 21119-21120 (April 29, 2002) 
(Treasury's interim final rule requiring mutual funds to establish 
anti-money laundering programs provides for similar treatment for 
omnibus accounts).
---------------------------------------------------------------------------

    Anti-money laundering programs at larger firms would allocate the 
responsibility for carrying out these procedures among affected 
departments, managers, and employees, whereas implementation 
responsibilities at smaller firms would typically be more centralized. 
In either case, if the adviser needs to look to affiliated or 
unaffiliated service providers to evaluate some transactions or perform 
parts of its anti-money laundering program, it would be permissible to 
delegate the implementation and operation of appropriate elements of 
its program by contract. The investment adviser, however, would remain 
fully responsible for the effectiveness of its anti-money laundering 
program, as well as for ensuring that federal examiners are able to 
obtain information and records relating to the program and to inspect 
the third party for purposes of the program. Accordingly, the adviser 
would still be required to identify the particular 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.''
    Some investment advisers, such as advisers that are dually-
registered as broker-dealers, may already have anti-money laundering 
programs in place. FinCEN does not require that such investment 
advisers establish multiple anti-money laundering programs. The same 
program may apply to an entity that functions as more than one type of 
financial institution, so long as the program is appropriately designed 
to address the different risks posed by the different aspects of the 
entity's business and satisfies each of the anti-money laundering 
program requirements to which it is subject in each of its capacities.
    The adviser's anti-money laundering program should also be 
reasonably designed to ensure compliance with BSA requirements. The BSA 
currently requires investment advisers to report on Form 8300 the 
receipt of cash totaling more than $10,000 in one transaction or two or 
more related transactions.\25\ In order to develop a compliant anti-
money laundering program, the program should be reasonably designed to 
detect and report not only transactions required to be reported on Form 
8300, but also to detect activity designed to evade such requirements. 
Such activity, commonly known as ``structuring,'' may involve making 
deposits into a trading or investment account of $10,000 or more with 
multiple money orders, travelers' checks, or cashier's checks or other 
bank checks, each with a face amount of less than $10,000. Such methods 
of payment may be indicative of money laundering, particularly when the 
payment instruments were obtained from different sources or the 
payments were made at different times on the same day or on consecutive 
days or close in time.
---------------------------------------------------------------------------

    \25\ See Financial Crimes Enforcement Network; Amendments to the 
Bank Secrecy Act Regulations--Requirement that Nonfinancial Trades 
or Businesses Report Certain Currency Transactions, 66 FR 67679 
(Dec. 31, 2001). The reporting requirement also covers cashier's 
checks, bank drafts, traveler's checks, or money orders having a 
face amount of not more than $10,000 received in certain retail 
sales or in any transaction in which the recipient knows that such 
instrument is being used in an attempt to avoid the reporting of the 
transaction.
---------------------------------------------------------------------------

    FinCEN is currently considering whether investment advisers should 
be subject to additional BSA requirements, including filing suspicious 
activity reports pursuant to section 5318(g) of the BSA and complying 
with accountholder identification and verification procedures pursuant 
to section 326 of the Act. If advisers become subject to additional 
requirements, they will need to update their compliance programs to 
include appropriate procedures, training, and testing functions. In 
addition, FinCEN encourages investment advisers to implement promptly 
procedures for voluntarily filing suspicious activity reports with 
FinCEN and for reporting suspected terrorist activities to FinCEN using 
its Financial Institutions Hotline (1-866-566-3974).
    (2) Provide for Independent Testing of Compliance to be Conducted 
by Company Personnel or by a Qualified Outside Party.
    An investment adviser would be required to provide for testing of 
its program periodically, to assure that the program is functioning as 
designed. Personnel conducting the testing--whether a third party, an 
affiliate of the firm, or an employee of the firm--should have a 
working knowledge of applicable BSA requirements, but should not be the 
person designated to implement and monitor the program under 
requirement (3) below. The frequency of such a review would depend upon 
factors such as the size and complexity of the adviser's business and 
the extent to which its business model may be subject to a higher risk 
of money laundering than other business models. A written assessment or 
report should be a part of the review, and any recommendations 
resulting from such review should be promptly addressed.
    (3) Designate a Person or Persons Responsible for Implementing and 
Monitoring the Operations and Internal Controls of the Program.
    The investment adviser would be required to charge an individual 
(or group of individuals) with the responsibility for overseeing the 
anti-money laundering program. The person or group of persons should be 
competent and knowledgeable regarding applicable requirements and money 
laundering risks, and empowered with full responsibility and authority 
to develop and enforce appropriate policies and procedures. The person 
or group should also have adequate time and resources to carry out 
these oversight duties, taking into account the nature and complexity 
of the firm's program and their other responsibilities. In addition, a 
person responsible for

[[Page 23651]]

overall supervision of the program should be an officer of the 
investment adviser.
    (4) Provide Ongoing Training for Appropriate Persons.
    Employee training is an integral part of an anti-money laundering 
program in any firm that has multiple employees involved in managing 
client assets. Employees of the adviser must be trained in BSA 
requirements relevant to their functions and in recognizing possible 
signs of money laundering that could arise in the course of their 
duties, so that they can carry out their responsibilities effectively. 
Such training could be conducted by outside or in-house seminars, and 
could include computer-based training. The level, frequency, and focus 
of the training would be determined by the responsibilities of the 
employees and the extent to which their functions bring them in contact 
with BSA requirements or possible money laundering activity. 
Consequently, the training program should provide both a general 
awareness of overall BSA requirements and money laundering issues, as 
well as more job-specific guidance regarding particular employees' 
roles and functions in the anti-money laundering program.\26\ For those 
employees whose duties bring them in contact with BSA requirements or 
possible money laundering activity, the requisite training should occur 
when the employee assumes those duties. Moreover, these employees 
should receive periodic updates and refreshers regarding the anti-money 
laundering program.
---------------------------------------------------------------------------

    \26\ Appropriate topics for an anti-money laundering program 
include, but are not limited to: BSA requirements, a description of 
money laundering, how money laundering is carried out, what types of 
activities and transactions should raise concerns, what steps should 
be followed when suspicions arise, and the Office of Foreign Assets 
Control and other government lists of suspected terrorists and 
terrorist organizations.
---------------------------------------------------------------------------

C. Administration

    The proposed rule includes a provision under which FinCEN would 
generally delegate examination authority to the SEC, to enable the SEC 
to examine investment advisers' compliance with the anti-money 
laundering program requirement. In addition, because certain investment 
advisers subject to the rule are not necessarily registered with the 
SEC or otherwise identifiable to FinCEN, the proposed rule contains a 
notice provision requiring the firms subject to the rule that are not 
SEC-registered to file a brief notice with FinCEN providing identifying 
information about the firm. Without a methodology for identifying these 
unregistered entities, there would be no way for FinCEN to assure that 
they are in compliance with the rule.\27\
---------------------------------------------------------------------------

    \27\ The Secretary of the Treasury is authorized to promulgate 
this notice requirement under the BSA. For a discussion of this 
authority, see UIC NPRM, supra note 17.
---------------------------------------------------------------------------

V. Request for Comment

    FinCEN requests comment on all elements of the proposed rule. 
FinCEN specifically requests comment on the proposed definition of 
``investment adviser,'' whether it is appropriate to determine that 
investment advisers are financial institutions under the BSA and to 
require these investment advisers to implement anti-money laundering 
programs, and whether other categories of investment advisers should be 
covered by or excluded from the rule. FinCEN also requests comment 
regarding the proposed provisions designed to avoid imposing 
overlapping or duplicative regulation of investment advisers and other 
financial institutions that are (or are proposed to be) subject to 
anti-money laundering program requirements.

VI. Regulatory Flexibility Act

    It is hereby certified that this proposed rule will not have a 
significant economic impact on a substantial number of small entities. 
The proposed rule will not impose significant burdens on those 
investment advisers covered by the rule because they are already 
subject to Form 8300 reporting and may build on their existing risk 
management procedures and prudential business practices to ensure 
compliance with this rule. In addition, investment advisers subject to 
the proposed rule will not be compelled to obtain more sophisticated 
legal or accounting advice than that already required to run their 
businesses.
    Finally, FinCEN believes that the flexibility incorporated into the 
proposed rule will permit each investment adviser to tailor its anti-
money laundering program to fit its own size and needs. In this regard, 
FinCEN believes that expenditures associated with establishing and 
implementing an anti-money laundering program will be commensurate with 
the size of an investment adviser. If an investment adviser is small, 
the burden to comply with the proposed rule should be de minimis.

VII. Executive Order 12866

    It has been determined that this is not a significant regulatory 
action for purposes of Executive Order 12866. Accordingly, a regulatory 
impact analysis is not required.

VIII. Paperwork Reduction Act

    The collections of information contained in this proposed rule are 
being submitted to the Office of Management and Budget for review in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)). Comments on the collections of information should be sent 
(preferably by fax (202-395-6974)) to Desk Officer for the Department 
of the Treasury, Office of Information and Regulatory Affairs, Office 
of Management and Budget, Paperwork Reduction Project (1506), 
Washington, DC 20503 (or by the Internet to jlackeyj@omb.eop.gov), with 
a copy to FinCEN by mail or the Internet at the addresses previously 
specified. Comments on the collections of information should be 
received by July 7, 2003.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information subject to the Paperwork 
Reduction Act unless it displays a valid control number assigned by the 
Office of Management and Budget.
    The collections of information in this proposed rule are in 31 CFR 
103.150(b) and (d). The information will be used by federal agencies to 
verify compliance by investment advisers with the provisions of 31 CFR 
103.150. The collections of information are mandatory.
    Description of Recordkeepers and Reporters: Investment advisers as 
defined in 31 CFR 103.150(a).
    Estimated Number of Recordkeepers: 10,000.
    Estimated Average Annual Burden Per Recordkeeper: The estimated 
average burden associated with the recordkeeping requirement in this 
proposed rule is 1 hour per recordkeeper.
    Estimated Total Annual Recordkeeping Burden: 10,000 hours.
    Estimated Number of Respondents (Notice Requirement): 3,000.
    Estimated Average Annual Burden Per Respondent: The estimated 
average burden associated with the notice requirement in this proposed 
rule is 15 minutes per respondent.
    Estimated Total Annual Reporting Burden: 750 hours.
    FinCEN specifically invites comments on the following subjects: (a) 
Whether the collections of information are necessary for the proper 
performance of the mission of FinCEN, including whether the information 
shall have practical utility; (b) the accuracy of FinCEN's estimate of 
the burden of the

[[Page 23652]]

collection of information; (c) ways to enhance the quality, utility, 
and clarity of the information to be collected; (d) ways to minimize 
the burden of the collections of information on investment advisers, 
including through the use of automated collection techniques or other 
forms of information technology; and (e) estimates of capital or start-
up costs and costs of operation, maintenance, and purchase of services 
to provide information.

List of Subjects in 31 CFR Part 103

    Administrative practice and procedure, Authority delegation 
(Government agencies), Investment advisers, Counter money laundering, 
Counter-terrorism, Currency, Reporting and recordkeeping requirements, 
Securities.

PART 103--FINANCIAL RECORDKEEPING AND REPORTING OF CURRENCY AND 
FOREIGN TRANSACTIONS

    1. The authority citation for part 103 is revised to read as 
follows:

    Authority: 12 U.S.C. 1786(q), 1818, 1829b and 1951-1959; 31 
U.S.C. 5311-5314 and 5316-5332; title III, secs. 312, 313, 314, 319, 
321, 352, Pub. L. 107-56, 115 Stat. 307.

    2. In subpart E, revise Sec.  103.56(b)(6) to read as follows:


Sec.  103.56  Enforcement.

* * * * *
    (b) * * *
    (6) To the Securities and Exchange Commission with respect to 
brokers and dealers in securities; investment companies as that term is 
defined in the Investment Company Act of 1940 (15 U.S.C. 80-1 et seq.); 
and investment advisers as that term is defined in Sec.  103.150(a) of 
this part;
* * * * *
    3. In subpart I, add new Sec.  103.150 to read as follows:


Sec.  103.150  Anti-money laundering programs for investment advisers.

    (a) Definition. For purposes of this section, the term investment 
adviser means a person whose principal office and place of business is 
located in the United States that:
    (1) Is registered or required to be registered with the Securities 
and Exchange Commission (SEC) under section 203(a) of the Investment 
Advisers Act of 1940 (15 U.S.C. 80b-3(a)) and reports or is required to 
report in Part 1A of SEC Form ADV (see 17 CFR 279.1) that it has assets 
under management; or
    (2) Is exempt from registration with the SEC pursuant to section 
203(b)(3) of the Investment Advisers Act (15 U.S.C. 80b-3(b)(3)) and 
that would be required, if it were registered with the SEC, to report 
in Part 1A of SEC Form ADV that it has $30 million or more of assets 
under management, unless such person is otherwise required to have an 
anti-money laundering program pursuant to another provision of this 
subpart, and is subject to examination by a Federal functional 
regulator.
    (b) Anti-money laundering program required. Effective [the date 
that is 90 days after the date of publication of the final rule in the 
Federal Register]:
    (1) Each investment adviser shall develop and implement a written 
anti-money laundering program reasonably designed to prevent the 
investment adviser from being used for money laundering or the 
financing of terrorist activities and to achieve and monitor compliance 
with the applicable provisions of the Bank Secrecy Act (31 U.S.C. 5311 
et seq.) (BSA) and this part. The 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.
    (2) Each investment adviser's anti-money laundering 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, or other 
persons who have similar functions. An investment adviser shall make 
its anti-money laundering program available for inspection by FinCEN or 
the SEC upon request.
    (c) Minimum requirements. The anti-money laundering program shall 
at a minimum:
    (1) Establish and implement policies, procedures, and internal 
controls reasonably designed to prevent the investment adviser from 
being used for money laundering or the financing of terrorist 
activities and to achieve and monitor compliance with the applicable 
provisions of the BSA and this part;
    (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; and
    (4) Provide ongoing training for appropriate persons.
    (d) Notice requirement for unregistered advisers. Each investment 
adviser described in paragraph (a)(2) of this section (unregistered 
adviser) must provide information to FinCEN as required by this 
paragraph (d).
    (1) Each unregistered adviser must file with FinCEN a Notice 
described in Appendix D of this subpart. Completed notices may be 
submitted to FinCEN:
    (i) By accessing FinCEN's Internet Web site, http://www.fincen.gov, 
and entering the appropriate information as directed; or
    (ii) By mail to: FinCEN, P.O. Box 39, Vienna, VA 22183.
    (2) The Notice required by paragraph (d)(1) of this section must be 
filed not later than 90 days after the unregistered adviser first 
becomes subject to this section, and thereafter annually not later than 
90 days after the end of the fiscal year of the unregistered adviser. 
If an unregistered adviser subsequently terminates its advisory 
business or ceases to be subject to this section, the unregistered 
adviser must so advise FinCEN not later than 90 days thereafter 
indicating such termination or cessation.
    (3) Each unregistered adviser must include the following 
information in the Notice required by paragraph (d)(1) of this section:
    (i) The name of the unregistered adviser, including all family or 
complex names, trade names, and doing-business-as names;
    (ii) The complete street address, telephone number, and, if 
applicable, the e-mail address of the unregistered adviser;
    (iii) The name, telephone number, and, if applicable, e-mail 
address of the person or persons designated pursuant to paragraph 
(c)(3) of this section;
    (iv) The total number of clients of the unregistered adviser; and
    (v) The total assets under management of the unregistered adviser, 
as determined under the instructions to SEC Form ADV, Part 1A, as of 
the end of the adviser's most recent fiscal year.
    (4) An unregistered adviser must file a revised Notice with FinCEN 
if there is a change in any of the information required by paragraph 
(d)(3)(i), (ii), or (iii) of this section. The revised Notice must be 
filed in accordance with paragraph (d)(1) of this section not later 
than 30 days after the date of any such change.
    4. Add appendix D to subpart I of part 103 to read as follows:

Appendix D to Subpart I of Part 103 Unregistered Investment Advisers

Notice for Purposes of 31 CFR 103.150(d)

    Complete either PART I or PART II of this Notice, as 
appropriate.

Notice is given, on behalf of (insert all names of unregistered 
adviser) ------ that:--------------------------------------------------

Part I

(1) The investment adviser is an unregistered adviser described in 
31 CFR 103.150(a)(2)


[[Page 23653]]


(2) The address, e-mail address (if applicable), and telephone 
number of the unregistered adviser are as follows:
ADDRESS:

-----------------------------------------------------------------------
-----------------------------------------------------------------------
E-MAIL ADDRESS (if applicable):
-----------------------------------------------------------------------
TELEPHONE NUMBER:
-----------------------------------------------------------------------
(3) The name, e-mail address (if applicable), and telephone number 
of the designated anti-money laundering program compliance officer 
of the unregistered adviser are as follows:

NAME:------------------------------------------------------------------
E-MAIL ADDRESS:--------------------------------------------------------
TELEPHONE NUMBER:------------------------------------------------------

(4) The total number of clients of the unregistered adviser:-----------

(5) The total amount of assets under management of the unregistered 
adviser, as determined under the instructions to SEC Form ADV, Part 
1A, as of the end of the adviser's most recent fiscal year:
-----------------------------------------------------------------------

Part II

    The unregistered adviser is terminating its advisory business or 
is otherwise no longer an unregistered adviser described in 31 CFR 
103.150(a)(2) as of the following date:
-----------------------------------------------------------------------
SUBMITTED BY:

Name:
-----------------------------------------------------------------------
Title:
-----------------------------------------------------------------------
Date:
-----------------------------------------------------------------------

    Dated: April 28, 2003.
James F. Sloan,
Director, Financial Crimes Enforcement Network.

[FR Doc. 03-10840 Filed 5-2-03; 8:45 am]

BILLING CODE 4810-02-P