[Federal Register Volume 89, Number 32 (Thursday, February 15, 2024)]
[Proposed Rules]
[Pages 12108-12193]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-02854]



[[Page 12107]]

Vol. 89

Thursday,

No. 32

February 15, 2024

Part V





 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; Proposed Rule

Federal Register / Vol. 89 , No. 32 / Thursday, February 15, 2024 / 
Proposed Rules

[[Page 12108]]


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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: Notice of proposed rulemaking.

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SUMMARY: FinCEN, a bureau of the U.S. Department of the Treasury 
(Treasury), is issuing this notice of proposed rulemaking (NPRM) 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 covered investment 
advisers, require covered investment advisers to report suspicious 
activity to FinCEN pursuant to the BSA, and make several other related 
changes to FinCEN regulations. FinCEN is proposing this action to 
address gaps in the existing AML/CFT regulatory framework in this 
sector. The proposed regulations will apply to investment advisers that 
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 via investment advisers and threaten U.S. national security.

DATES: Written comments on this notice of proposed rulemaking (NPRM) 
must be submitted on or before April 15, 2024.

ADDRESSES: Comments may be submitted by any of the following methods:
    <bullet> Federal E-Rulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments. Refer to Docket Number 
FINCEN-2024-0006 and RIN 1506-AB58.
    <bullet> Mail: Policy Division, Financial Crimes Enforcement 
Network, P.O. Box 39, Vienna, VA 22183. Refer to Docket Number FINCEN-
2024-0006 and RIN 1506-AB58.
    Please submit comments by one method only.

FOR FURTHER INFORMATION CONTACT: The FinCEN Resource Center at (800) 
767-2825 or email <a href="/cdn-cgi/l/email-protection#dcbaaebf9cbab5b2bfb9b2f2bbb3aa"><span class="__cf_email__" data-cfemail="2640544566404f4845434808414950">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION:

I. Executive Summary

    To address illicit finance risks in the investment adviser 
industry, FinCEN is proposing to apply certain AML/CFT requirements to 
certain investment advisers. Currently, there are no Federal or State 
regulations requiring investment advisers to maintain AML/CFT programs 
\1\ or records under the BSA, although some investment advisers may do 
so, for example, if they are also licensed as banks (or are bank 
subsidiaries), registered as broker-dealers, or advise mutual funds.\2\ 
This means that thousands of investment advisers overseeing the 
investment of tens of trillions of dollars into the U.S. economy 
currently operate without legally binding AML/CFT obligations.
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    \1\ Section 6101 of the AML Act, codified at 31 U.S.C. 5318(h), 
amended the BSA's requirement that financial institutions implement 
AML programs to also combat terrorist financing. This NPRM refers to 
``AML program'' when discussing the obligation prior to the 
enactment of the AML Act, and to ``AML/CFT program'' in reference to 
the current obligation contained in the BSA and the proposed rule.
    \2\ See infra section IV.E3 and n. 51.
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    These proposed regulations aim to close this gap by amending 
chapter X of title 31 of the Code of Federal Regulations to add 
``investment adviser'' to the definition of ``financial institution'' 
at 31 CFR 1010.100(t). FinCEN has statutory authority to define 
additional types of businesses as financial institutions where it 
determines that such businesses engage in any activity ``similar to, 
related to, or a substitute for'' those in which any of the businesses 
listed in the statutory definition are authorized to engage.\3\ FinCEN 
proposes to make such a determination with respect to investment 
advisers, which would be defined to include two types of advisers: 
those that are (1) registered or required to register with the U.S. 
Securities and Exchange Commission (SEC, and, such investment advisers, 
RIAs) and (2) investment advisers that report to the SEC as Exempt 
Reporting Advisers (ERAs) pursuant to the Investment Advisers Act of 
1940, as amended (Advisers Act),\4\ and the rules thereunder.
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    \3\ 31 U.S.C. 5312(a)(2)(Y).
    \4\ 15 U.S.C. 80b-1 et seq.
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    Accordingly, this proposed rule would establish AML/CFT 
requirements for RIAs and ERAs. In full, the proposed rule would 
require RIAs and ERAs to implement an AML/CFT program, file Suspicious 
Activity Reports (SARs) with FinCEN, keep records relating to the 
transmittal of funds (Recordkeeping and Travel Rule), and other 
obligations of financial institutions under the BSA. The proposed rule 
would also apply information-sharing provisions between and among 
FinCEN, law enforcement government agencies, and certain financial 
institutions, and would subject investment advisers to the ``special 
measures'' imposed by FinCEN pursuant to section 311 of the USA PATRIOT 
Act.
    Concurrent with this proposal, FinCEN is withdrawing the 2015 
proposed rule that would have applied AML program, SAR filing, and 
other AML/CFT requirements to RIAs.\5\
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    \5\ See FinCEN, Anti-Money Laundering Program and Suspicious 
Activity Report Filing Requirements for Registered Investment 
Advisers, 80 FR 52680 (Sept. 1, 2015).
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    In this rulemaking, FinCEN is not proposing to include a customer 
identification program (CIP) requirement, nor is it proposing to 
include within the AML/CFT program requirements an obligation to 
collect beneficial ownership information for legal entity customers at 
this time. FinCEN anticipates addressing CIP via a future joint 
rulemaking with the SEC and addressing the requirement to collect 
beneficial ownership information for legal entity customers in 
subsequent rulemakings.
    Moreover, because mutual funds are already defined as ``financial 
institutions'' under the BSA (31 CFR 1010.100(t)(10)), and because of 
the regulatory and practical relationship between mutual funds and 
their investment advisers, the proposed regulations would also not 
require investment advisers to apply AML/CFT program or SAR reporting 
requirements to mutual funds.\6\ The proposed regulations would also 
remove the existing requirement that investment advisers file reports 
for the receipt of more than $10,000 in cash and negotiable instruments 
using the joint FinCEN/Internal Revenue Service Form 8300 (Form 
8300).\7\ Investment advisers would instead be required to file a 
Currency Transaction Report (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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    \6\ As described below, FinCEN does not propose to permit 
investment advisers to exempt mutual funds that they advise from the 
requirements of 31 CFR part 1010, subparts E and F (31 CFR 1010.520, 
540, 600-670) that FinCEN proposes to apply to covered investment 
advisers in the proposed rule (e.g., certain information sharing, 
special standards, prohibitions, and other requirements).
    \7\ 31 CFR 1010.330(a)(1)(i), (e)(1); 26 CFR 1.6050I-1(e).
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    Finally, FinCEN is proposing to delegate its examination authority 
to the SEC given the SEC's expertise in the regulation of investment 
advisers and

[[Page 12109]]

the existing delegation to the SEC of authority to examine brokers and 
dealers in securities (broker-dealers) and certain investment 
companies.\8\
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    \8\ 31 CFR 1010.810(b)(6).
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    This NPRM is divided into six main sections including this 
executive summary in section I. Section II provides background on the 
existing AML/CFT regulatory framework; the illicit finance risks that 
this rulemaking will address; the SEC's regulatory framework for 
investment advisers; the limited extent to which certain RIAs and ERAs 
may already implement AML/CFT measures; and a summary of past proposed 
rules to apply AML/CFT obligations with respect to investment advisers. 
Section III discusses the scope of the proposed rule. Section IV 
includes the section-by-section analysis of the elements of the 
proposed rule. Section V lays out questions on which FinCEN seeks 
comment, and section VI addresses the severability of the proposed 
rule's requirements. Section VII includes the Regulatory Analysis 
required by relevant statutes and executive orders.

II. Background

A. Current BSA Framework

    Enacted in 1970, the Currency and Foreign Transactions Reporting 
Act, generally referred to as the BSA, is designed to combat money 
laundering, the financing of terrorism, and other illicit financial 
activity, and to safeguard the national security of the United 
States.\9\ This includes ``through the establishment by financial 
institutions of reasonably designed risk-based programs to combat money 
laundering and the financing of terrorism.''\10\ 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 international terrorism.'' \11\ 
The Secretary delegated the authority to implement, administer, and 
enforce the BSA and its implementing regulations to the Director of 
FinCEN.\12\
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    \9\ 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. 5311-5314 and 5316-5336, and 
includes notes thereto.
    \10\ 31 U.S.C. 5311(3).
    \11\ 31 U.S.C. 5311(1).
    \12\ 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.
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    Pursuant to this authority, FinCEN may define a business or agency 
as a ``financial institution'' if it 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.\13\ Additionally, the BSA 
requires financial institutions to maintain programs to combat money 
laundering and the financing of terrorism and authorizes the 
Secretary--and thereby FinCEN--to issue regulations prescribing 
``minimum standards'' for such AML/CFT programs.\14\ Similarly, under 
the BSA, FinCEN may require financial institutions to ``report any 
suspicious transactions relevant to a possible violation of law or 
regulation.'' This provision authorizes FinCEN to require the filing of 
SARs.\15\ FinCEN also has authority under the BSA to authorize the 
sharing of financial information by financial institutions \16\ 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.\17\
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    \13\ 31 U.S.C. 5312(a)(2)(Y).
    \14\ 31 U.S.C. 5318(h)(1), (2).
    \15\ 31 U.S.C. 5318(g)(1).
    \16\ See Uniting and Strengthening America by Providing 
Appropriate Tools Required to Intercept and Obstruct Terrorism Act 
of 2001 (USA PATRIOT Act), Public Law 107-56, sec. 314(a), (b).
    \17\ 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.\18\ Some of the advisory 
services that investment advisers may provide include portfolio 
management, financial planning, and pension consulting. Advisory 
services can be provided on a ``discretionary'' or ``non-
discretionary'' basis.\19\ Investment advisers provide their expertise 
to a wide range of customers, including retail investors, high-net-
worth individuals, private institutions, and governmental entities 
(including local, State, and foreign government funds).\20\ Investment 
advisers often work closely with their customers to formulate and 
implement their customers' investment decisions and strategies. 
Investment advisers may be organized in a variety of legal forms, 
including corporations, sole proprietorships, partnerships, or limited 
liability companies.\21\
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    \18\ This proposed 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.
    \19\ An adviser has discretionary authority or manages assets on 
a discretionary basis if it has the authority to decide which 
securities to purchase and sell for the client. An adviser also has 
discretionary authority if it has the authority to decide which 
investment advisers to retain on behalf of the client. See Glossary 
to Form ADV, general Instructions at p. 28, available at https://www.sec.gov/about/forms/formadv-instructions.pdf. According to the 
Investment Advisers Association (IAA), as of 2021, over 90 percent 
of RIAs manage client assets on a discretionary basis. Investment 
Adviser Association, Investment Adviser Industry Snapshot 2022, p. 
53 (IAA Snapshot), available at https://investmentadviser.org/wp-content/uploads/2022/06/Snapshot2022.pdf.
    \20\ See Part 1A, Item 5 of Form ADV for a list of examples of 
different types of advisory clients.
    \21\ See Part 1A, Item 3.A of Form ADV.
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    The Advisers Act and its implementing rules and regulations form 
the primary framework governing advisory activity, along with other 
Federal securities laws and their implementing rules and regulations, 
such as the Investment Company Act of 1940, the Securities Act of 1933, 
and the Securities Exchange Act of 1934.\22\ Since the Advisers Act was 
amended in 1996 and 2010, generally only investment advisers who have 
at least $100 million in assets under management (AUM) or advise a 
registered investment company \23\ may register with the SEC.\24\ Other 
investment advisers typically register with the State in which the 
adviser maintains its principal place of business.
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    \22\ See generally 15 U.S.C. 80a-1 et seq. (Investment Company 
Act of 1940 (Investment Company Act)); 15 U.S.C. 77a et seq. 
(Securities Act of 1933); 15 U.S.C. 78a et seq. (Securities and 
Exchange Act of 1934).
    \23\ 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 and cannot rely on an exception or an 
exemption from registration, generally it must register with the SEC 
under the Investment Company Act and must register its public 
offerings under the Securities Act.
    \24\ Investment advisers with more than $100 million assets 
under management may register with the SEC, and investment advisers 
with more than $110 million in assets under management must register 
with the SEC, unless eligible for an exception. See 17 CFR 275.203A-
1.
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    SEC-Registered Investment Advisers. Unless eligible to rely on an 
exception,

[[Page 12110]]

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.\25\ The SEC administers and enforces the Federal 
securities laws applicable to RIAs. As of July 31, 2023, there were 
15,391 RIAs, reporting approximately $125 trillion in AUM for their 
clients.\26\
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    \25\ See id.; 17 CFR 275.204-1. Investment advisers register 
with the SEC by filing Form ADV and are required to file periodic 
updates. Form ADV is available at https://www.sec.gov/files/formadv.pdf. A detailed description of Form ADV's requirements is 
available at https://www.sec.gov/oiea/investor-alerts-bulletins/ib_formadv.html.
    \26\ 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. This Form ADV data is available at Frequently 
Requested FOIA Document: Information About Registered Investment 
Advisers and Exempt Reporting Advisers, http://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.
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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 such requirement \27\ because: (1) it is an adviser solely to one 
or more venture capital funds; 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, ERAs must still file an abbreviated Form 
ADV with the SEC, and the SEC maintains authority to examine ERAs. As 
of July 31, 2023, there were 5,846 ERAs that were exempt from 
registering with the SEC but had filed an abbreviated Form ADV.\31\
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    \27\ 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.
    \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 Investment 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 n. 26.
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    <bullet> Private Fund Advisers. Private fund advisers, a type of 
ERA, are exempt from registering with the SEC if they exclusively 
advise private funds and have less than $150 million AUM in the United 
States. As of July 31, 2023, there were approximately 4,400 exempt 
private fund advisers, approximately 500 of which were also venture 
capital advisers.\32\
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    \32\ Based on a Treasury review of Form ADV information filed as 
of July 31, 2023. See supra n. 26.
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    <bullet> Venture Capital Advisers. Venture capital advisers, 
another type of ERA, are exempt from registering with the SEC if they 
provide services only to venture capital funds,\33\ regardless of the 
amount of AUM.\34\ As of July 31, 2023, there were approximately 2,000 
exempt venture capital advisers, approximately 500 of which were also 
private fund advisers.\35\
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    \33\ See 17 CFR 275.203(l)-1 (defining ``venture capital 
fund'').
    \34\ Certain venture capital advisers may be registered with the 
SEC if they no longer satisfy the criteria to be ERAs (e.g., they no 
longer pursue a venture capital strategy (by seeking to hold 
securities in companies past the initial public offering stage or 
pursuing hedge-fund like investment strategies)) or otherwise opt to 
register with the SEC.
    \35\ Based on a Treasury review of Form ADV information filed as 
of July 31, 2023. See supra n. 26.
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    State-Registered Investment Advisers. State-registered investment 
advisers generally have less than $100 million in AUM. 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.\36\ 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 who have approximately $420 billion in AUM.\37\
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    \36\ See 17 CFR 275.203A-2. 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'' may register as such with the SEC. Investment advisers 
with a principal office and place of business in New York and over 
$25 million AUM are required to register with the SEC.
    \37\ See North American Security Administrators Association, 
NASAA Investment Adviser Section 2023 Annual Report, p.3, https://www.nasaa.org/wp-content/uploads/2023/09/2023-IA-Section-Report-FINAL.pdf.
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    Non-U.S. Investment Advisers. Non-U.S. advisers whose principal 
offices and places of business are outside the United States, but 
solicit or advise ``U.S. persons,'' are subject to the Advisers Act and 
must register with the SEC unless eligible for an exception. One of 
those exceptions is the ``foreign private adviser'' exemption, and an 
adviser relying on this exemption is not required to make any filing 
with the SEC.\38\ For those non-U.S. advisers registered with the SEC, 
the Commission states that it does not intend to seek to apply the 
substantive provisions of the Advisers Act to a non-U.S. adviser that 
is registered with the SEC with respect to its non-U.S. clients.\39\ 
Non-U.S. advisers may also report to the SEC as ERAs if they meet the 
requirements to report as ERAs.
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    \38\ 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 
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. See 15 U.S.C. 80b-2(a)(30), 80b-3(b)(3).
    \39\ 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. Existing Regulatory Framework for Investment Advisers
    Oversight of the investment adviser industry by Federal and State 
securities regulators generally 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 a 
Federal or State securities regulator.\40\ RIAs are subject to various 
SEC rules and

[[Page 12111]]

regulations governing, among other things, their marketing and 
disclosures to clients, best execution for client transactions, and 
disclosures of conflicts of interest and disciplinary information. 
State-registered investment advisers may have similar requirements 
under State securities laws and regulations.\41\ 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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    \40\ For instance, an investment adviser may be exempt from both 
Federal and State registration requirements if they had less than 
$25 million AUM and fewer than six clients in a State. These 
advisers are not required to register, nor are they ERAs.
    \41\ See, e.g., Cal. Corp. Code, Ch.3, 25230-25238.
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    However, these requirements are not designed to address money 
laundering, terrorist financing, and other illicit financial activity 
risks associated with investment advisers. Further, although some 
investment advisers implement AML/CFT requirements in certain 
circumstances or for certain customers, as described below in section 
II.C, application of AML/CFT measures is not uniform across the 
industry, and investment advisers' implementation of such measures is 
not subject to comprehensive enforcement or examination. 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.\42\
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    \42\ For instance, FinCEN research identified two investment 
advisers with a focus on Russian customers that advertised 
investment structures that would allow customers to avoid going 
through ``know your customer'' procedures.
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    Generally, RIAs, State-registered investment advisers, and ERAs are 
required to file (and annually update) Form ADV with the SEC, the 
relevant State securities regulator, or both.\43\ 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. ERAs who are not registered with the SEC 
or a State securities regulator are only required to file an 
abbreviated version of Form ADV--they are required to answer fewer 
client-related questions and provide less information about the 
services they provide. Form ADV does not require investment advisers to 
disclose the names of individual clients or investors.\44\
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    \43\ See 17 CFR 275.203-1 and 204-4.
    \44\ Advisers to private funds are, however, required to name 
their private fund clients on section 7.B.(2) of Schedule D of Form 
ADV Part 1A. In some cases, those names may be coded.
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    Some RIAs are also required to file a Form PF, which collects 
information on private funds advised by the RIA.\45\ Information 
collected on Form PF includes the approximate percentage of a fund's 
equity that is beneficially owned by different types of investors, 
including U.S. and non-U.S. investors. Some private fund advisers, 
including ERAs, that are required to report on Form ADV are not 
required to file Form PF.\46\ Unlike Form ADV, Form PF is non-public. 
It is provided to both the SEC and the Financial Stability Oversight 
Council (FSOC) and is intended to enhance investor protection and 
provide the FSOC with data for use in assessing systemic risk.
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    \45\ See 15 U.S.C. 80b-4(b). A Form PF must be submitted by any 
RIA that manages one or more private funds and collectively (with 
its related persons) had at least $150 million in private fund AUM 
as of the last day of its most recently completed fiscal year. See 
17 CFR 275.204(b)-1. ``Related person'' is defined in Form PF, which 
is available at https://www.sec.gov/files/formpf.pdf.
    \46\ See 17 CFR 275.204(b)-1.
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C. Illicit Finance Risk Associated With Investment Advisers

    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 the BSA and applying 
comprehensive AML/CFT measures to these investment advisers are likely 
to reduce this risk.
1. Illicit Finance Vulnerabilities
    RIAs and ERAs are vulnerable to misuse or exploitation by criminals 
or other illicit actors for several reasons. First, the lack of 
comprehensive AML/CFT regulations directly and categorically applicable 
to investment advisers means they, as a whole, are not required to 
understand their customers' ultimate sources of wealth or identify and 
report potentially illicit activity to law enforcement. The current 
patchwork of 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 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, 
underlying investor in the private fund. Further, these entities may be 
unable to collect relevant investor information from the RIA or ERA to 
comply with the entities' existing obligations \47\ (either because the 
adviser is unwilling to provide, or has not collected, such 
information). Third, the existing Federal securities laws are not 
designed to comprehensively detect illicit proceeds or other illicit 
activity that is ``integrating'' into the U.S. financial system \48\ 
through an RIA or ERA. Fourth, RIAs and ERAs routinely rely on third 
parties for administrative and compliance activities, and these 
entities are subject to varying levels of AML/CFT regulation. 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 to collect 
information relevant to understand illicit finance risk under existing 
frameworks.
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    \47\ See, e.g., FinCEN and Federal Functional Regulators 
(including SEC,), Joint Release, ``Guidance on Obtaining and 
Retaining Beneficial Ownership Information'' (Mar. 5, 2010) (noting 
that customer due diligence procedures for legal entity customers 
may include ``obtaining information about the structure or ownership 
of the entity so as to allow the [financial] institution to 
determine whether the account poses heightened risk.'')
    \48\ 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.
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(a) Lack of Comprehensive and Uniform AML/CFT Obligations
    ``Investment advisers'' is not presently included in the definition 
of ``financial institution'' under the BSA or its implementing 
regulations.\49\ This means that, although they have Form 8300 
obligations to report cash transactions above $10,000, 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.\50\ For example, 
investment advisers are not required to maintain an AML/CFT program

[[Page 12112]]

(consisting of internal controls, an AML/CFT officer, independent 
testing, and employee training), and do not have independent SAR 
filing, customer due diligence (CDD), or CIP obligations. These are key 
elements of AML/CFT compliance through which an investment adviser 
would identify and report to law enforcement and regulators a customer, 
investor, or transaction that may be associated with illicit finance 
activity.
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    \49\ See 31 CFR 1010.100(t).
    \50\ Investment advisers are, like any other ``person,'' subject 
to an obligation to file Form 8300. 31 CFR 1010.330(a)(1)(i), 
(e)(1); 26 CFR 1.6050I-1(e).
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    As noted above, some RIAs and ERAs may perform certain AML/CFT 
functions if the entity is also a registered broker-dealer or is a bank 
(i.e., a dual registrant), or is an operating subsidiary of a bank;\51\ 
other investment advisers are affiliates of banks or broker-dealers, 
which may implement an enterprise-wide AML/CFT program that would 
include that investment adviser. A Treasury analysis of Form ADV data 
found that approximately three percent of RIAs were dually registered 
as a broker-dealer or licensed as a bank, and that these entities held 
about 10 percent of the AUM held by all RIAs. The same analysis found 
that approximately 20 percent of RIAs, representing approximately 75 
percent of the total AUM of RIAs, were affiliated with either a bank or 
broker-dealer.
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    \51\ Investment advisers that are banks (or bank subsidiaries) 
subject to the jurisdiction of the Office of the Comptroller of the 
Currency, the Board of Governors of the Federal Reserve System, the 
Federal Deposit Insurance Corporation, and the National Credit Union 
Administration (collectively, the 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).
---------------------------------------------------------------------------

    In other circumstances, an investment adviser may perform AML/CFT 
functions via contract with a broker-dealer (e.g., CIP for joint 
customers) or other financial institution, such as when the adviser 
advises an open-end registered investment company (e.g., mutual fund). 
For instance, some RIAs have already implemented voluntary AML/CFT 
programs 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 if a broker-dealer relies on RIAs to perform some or 
all aspects of the broker-dealer's CIP obligations or the portion of 
CDD requirements regarding beneficial ownership requirements for legal 
entity customers, provided that certain conditions are met, including 
that the RIA implements its own AML/CFT program.\52\ Mutual funds,\53\ 
which are advised by approximately 10 percent of RIAs \54\ and hold 
approximately $22.1 trillion in assets,\55\ are also subject to AML/CFT 
obligations under the BSA and its implementing regulations.\56\
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    \52\ 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 
(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.
    \53\ As used in this NPRM, ``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 Investment 
Company Act (15 U.S.C. 80a-3)) that is an ``open-end company'' (as 
that term is defined in section 5 of the Investment Company Act (15 
U.S.C. 80a-5)) that is registered or is required to register with 
the SEC under section 8 of the Investment 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 Investment 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 Investment 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 Investment Company Act).''
    \54\ Information derived from a Treasury review of Form ADV 
information. See supra n. 26.
    \55\ According to the Investment Company Institute 2023 
Investment Company Factbook, as of December 31, 2022, U.S. mutual 
funds held approximately $22.1 trillion in AUM, while ETFs held 
approximately $6.4 trillion in AUM. Investment Company Institute, 
2023 Investment Company Factbook, p.2, https://www.ici.org/system/files/2023-05/2023-factbook.pdf.
    \56\ See 31 CFR 1010.100(gg); 31 CFR part 1024.
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    Outside of these circumstances, some investment advisers have 
voluntarily implemented certain AML/CFT measures, such as CDD or other 
CIP requirements. However, because these programs are not required by 
any regulations under the BSA, advisers have wide discretion in what 
information to request from their customers and private fund investors. 
Additionally, RIAs and ERAs are not examined for compliance with 
voluntary AML/CFT measures not required by law, so the adviser may not 
be made aware of deficiencies or gaps in their programs via 
examination, and thereafter make improvements, and there are more 
limited enforcement mechanisms to pursue against the adviser for 
failing to implement such measures.
    While the programs discussed above provide some AML/CFT coverage 
for parts of the investment adviser industry, they mean that RIAs and 
ERAs providing the same financial services have differing AML/CFT 
obligations. For example, depending on corporate policies and practice, 
stand-alone RIAs or ERAs are likely subject to different AML/CFT 
compliance approaches than RIAs or ERAs that are part of a bank or 
financial holding company; and an investor or customer seeking to 
obscure the origin of its funds or its identity can choose an RIA or 
ERA that has limited or no AML/CFT obligations.
    The fact that investment advisers are not currently BSA-defined 
financial institutions also limits the ability of investment advisers 
to provide highly useful information to law enforcement, regulators, 
and other relevant authorities. For instance, unless they are BSA-
defined financial institutions, RIAs and ERAs would not be afforded the 
protection from liability (safe harbor) that applies to financial 
institutions when filing SARs.\57\ Even though investment advisers are 
able to file voluntary SARs, they could face increased legal risk from 
customers or other counterparties without the safe harbor. RIAs and 
ERAs are also currently unable to receive and respond to law 
enforcement requests for information under section 314(a) of the USA 
PATRIOT Act as they are not BSA-defined financial institutions.\58\
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    \57\ 31 U.S.C. 5318(g)(3)(A).
    \58\ See 31 CFR 1010.520.
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    Additionally, investment advisers, or associations of investment 
advisers, that are not BSA-defined financial institutions cannot 
voluntarily share information under section 314(b) of the USA PATRIOT 
Act. Moreover, at present, existing BSA-defined financial institutions 
are limited in their ability to share with RIAs and ERAs, or receive 
from investment advisers, information potentially related to money 
laundering or terrorist financing that are not themselves BSA financial 
institutions.\59\ Becoming a BSA-defined financial institution would 
allow RIAs and ERAs to share information potentially related to money 
laundering or terrorist financing with, and receive requests from, 
other financial institutions that already utilize section 314(b), such 
as broker-dealers. This could help financial institutions gain 
additional insight into their customers' transactions with RIAs and 
ERAs and,

[[Page 12113]]

potentially, a more accurate and holistic understanding of their 
customers' activities.
---------------------------------------------------------------------------

    \59\ See 31 CFR 1010.540.
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(b) Existing AML/CFT Obligations Often Apply to Intermediaries, But Not 
the Customer-Facing Entity
    Investment advisers engage in trading or transactional activities 
on behalf of their customers through relationships with financial 
institutions that are subject to AML/CFT obligations, such as broker-
dealers and banks, among others. For instance, Rule 206(4)-2 (the 
Custody Rule) under the Advisers Act requires RIAs that have custody of 
client funds or securities generally to maintain those funds and 
securities with a qualified custodian, defined primarily to encompass 
BSA-defined financial institutions.\60\
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    \60\ 17 CFR 275.206(4)-2. 17 CFR 275.206(4)-2. The SEC recently 
proposed amendments to the Custody Rule. See SEC, Safeguarding 
Advisory Client Assets, Investment Advisers Act Release No. 6240 
(Feb. 15, 2023), 88 FR 14672 (Mar. 9, 2023).
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    While investment advisers often do not take possession of financial 
assets, they nonetheless may have the most direct relationship with the 
customers they advise and thus be best positioned to obtain the 
necessary documentation and information from and about the customers 
concerning their assets that the investment adviser is deploying in 
public or private financial markets.\61\ If some of these assets 
include the proceeds of illegal activities, or are intended to further 
such activities, an investment adviser's AML/CFT program could help 
discover such issues and prevent the customer from further using the 
U.S. financial system, while reporting such information for law 
enforcement purposes. For example, 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.
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    \61\ See SIFMA No-Action Letter supra n.52 (incoming letter to 
SEC stating ``RIAs often have the most direct relationship with the 
customers they introduce to broker-dealers and are best able to 
obtain the necessary documentation and information from and about 
the customers'').
---------------------------------------------------------------------------

    Other market participants may, for example, hold and trade assets 
in an account controlled by an adviser, but these parties, as 
intermediaries, often rely solely on the investment adviser's 
instructions and lack independent knowledge of the adviser's customers. 
Further, an investment adviser may use multiple broker-dealers or banks 
for trading and custody services, making it difficult for one financial 
institution in the chain to have a complete picture of an investment 
adviser's activity or to detect suspicious activity involving the 
investment adviser. Without complete information, such an institution 
may not have sufficient information to file a SAR, or it may be 
required to file a SAR that only has partial information concerning the 
investment adviser's transactions on behalf of a particular customer. 
This limits the ability of law enforcement to identify illicit activity 
that may be occurring through investment advisers.
(c) Non-AML/CFT Regulations Do Not Fully Address Illicit Finance Risks
    RIAs are subject to various SEC rules and regulations governing, 
among other things, their marketing and disclosures to clients, best 
execution for client transactions, and disclosures of conflicts of 
interest and disciplinary information. In some circumstances, Federal 
securities, tax, or other rules and regulations may impose obligations 
similar to some AML/CFT measures by requiring the collection or 
disclosure of certain information by RIAs and ERAs. However, these 
regulatory requirements 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. Accordingly, even if 
they require an RIA or ERA to report certain kinds of illegal conduct 
or collect relevant information, they do not provide a comprehensive 
framework that incorporates the AML/CFT and national security purposes 
of the BSA, an understanding of relevant illicit finance risks and 
activity, and a process to assess and report suspicious activity to law 
enforcement and other appropriate authorities.
    For example, the SEC's Custody Rule \62\ generally requires RIAs 
with custody of client funds and securities to maintain client assets 
at a qualified custodian and comply with other safeguards, subject to 
certain limited exceptions. This rule is intended to protect advisory 
client assets from loss, misuse, theft, or misappropriation by, and the 
insolvency or financial reverses of, the adviser. Qualified custodians 
may be able to detect and report certain suspicious activity involving 
a RIA's customer, such as a high volume of trading or indications of 
layering activity, but they often may lack identifying information 
about the RIA's customer and their source of funds because that 
customer is not their institution's customer. As a result, qualified 
custodians can be limited in their ability to detect other types of 
illicit proceeds associated with that RIA's customer.
---------------------------------------------------------------------------

    \62\ See 17 CFR 275.206(4)-2.
---------------------------------------------------------------------------

    Other financial intermediaries providing services to an investment 
adviser or its customers, such as banks, clearing brokers, executing 
brokers, and futures commission merchants, may have AML/CFT 
obligations, but often, they may not be well-positioned to have a 
complete understanding of the identity, source of funds, and investment 
objectives of the adviser's underlying customer. For instance, some 
investment advisers may be reluctant to have a broker-dealer contact 
their customers because they view the broker-dealer as a 
competitor.\63\
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    \63\ See SIFMA No-Action Letter, supra n.520.
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    Similarly, the Compliance Rule \64\ under the Advisers Act does not 
require an RIA to implement AML/CFT-related policies and procedures. 
Under the Compliance Rule, an RIA must adopt and implement written 
policies and procedures reasonably designed to prevent violations of 
the Advisers Act and its implementing rules and regulations and to 
designate a chief compliance officer to administer the RIA's compliance 
policies and procedures. These policies and procedures should take into 
consideration the nature of that firm's operations and should be 
designed to prevent, detect, and promptly correct any violations of the 
Advisers Act or the rules thereunder. The Compliance Rule does not 
address the requirements of the BSA. While the Compliance Rule 
establishes a procedural and organizational framework that RIAs may be 
able to build upon to implement AML/CFT measures, the rule does not 
mandate that an RIA address AML/CFT in its policies and procedures. 
Some investment advisers may have policies and procedures to comply 
with Office of Foreign Assets Control (OFAC) sanctions, which similarly 
may provide a framework for implementing certain AML/CFT measures 
included in the proposed rule.\65\
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    \64\ See 17 CFR 275.206(4)-7.
    \65\ 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.

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[[Page 12114]]

(d) Investment Advisers to Private Funds Routinely Rely on Third-Party 
Administrators Located Outside of the United States
    Routine reliance on third-party administrators by investment 
advisers to private funds for a range of administrative tasks, 
including investor due diligence and identity verification, poses a 
material illicit finance risk. While some third-party administrators 
are located in the United States and may be affiliated with larger 
financial institutions, others are located in offshore financial 
centers where private funds are routinely domiciled, usually for tax or 
other commercial reasons unrelated to AML/CFT regulation, such as the 
Cayman Islands.\66\ The due diligence and verification practices of 
these offshore fund administrators are not uniform, and may vary based 
upon the requirements of the local regulatory regime as well as the 
requirements of the fund's adviser. While some investment advisers may 
rely on these administrators to manage their perceived risk or to 
comply with local regulatory requirements, the piecemeal review of 
investor information is not a substitute for comprehensive AML/CFT 
compliance measures. These third-party administrators may also face 
legal and regulatory challenges in receiving and verifying 
documentation from foreign legal entity investors in funds they 
service. Further, effective AML/CFT supervision of fund administrators 
based outside the United States is often still nascent, with foreign 
regulators taking few enforcement actions to date.\67\
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    \66\ See Caribbean Financial Action Task Force Mutual Evaluation 
of the Cayman Islands (Mar. 2019), p. 26, 30-31, https://www.fatf-gafi.org/media/fatf/documents/reports/mer-fsrb/CFATF-Cayman-Islands-Mutual-Evaluation.pdf. While a fund may be domiciled or registered 
in the Cayman Islands, the adviser managing that fund may be located 
in the United States and/or registered with the SEC.
    \67\ Id. at pp. 135-140 (Cayman Islands received the lowest 
possible rating for supervision). Additionally, fund administrators 
in the Cayman Islands filed only 37 SARs in 2017. Id. at p. 117.
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(e) Use of Multiple Legal Entities for Cross-Border Investment 
Structure
    Some investment advisers provide advisory services to customers 
that structure their investments through several layers of U.S. and 
foreign legal entities or arrangements, such as limited liability 
companies (LLCs) and trusts, often referred to colloquially as ``shell 
companies.'' Such structures may be used for legitimate tax reasons, 
but can be used to obfuscate the source of funds for either natural 
person or legal entity investors and obscure unlawful conduct.
    An additional challenge is the use of nominee arrangements, in 
which an intermediary (often a foreign bank or overseas custodial 
service provider) agrees to be identified as the nominal investor and 
essentially acts as a ``shield'' for individuals who want to make 
investments without disclosing their identities or source of funds. 
These nominee arrangements can be used in connection with other 
intermediaries in the ownership chain (e.g., the nominee may be acting 
on behalf of a foreign asset manager, who in turn has the relationship 
with an illicit actor or politically exposed person (PEP)). While these 
nominee arrangements often can have legitimate purposes, if they are 
not explicitly identified in required reports or records, they can be 
abused to obscure potentially illicit funds and make it extremely 
difficult (if not impossible) for regulators to identify and fully 
understand the nature and extent of illicit finance risks in this 
sector. As of Q4 2022, private fund advisers reporting on Form PF noted 
that they did not know, and could not reasonably obtain information 
about, the non-U.S. beneficial ownership of approximately $284 billion 
in private fund AUM.\68\
---------------------------------------------------------------------------

    \68\ See SEC, Private Fund Statistics, Fourth Calendar Quarter 
2022, https://www.sec.gov/files/investment/private-funds-statistics-2022-q4.pdf.
---------------------------------------------------------------------------

    In addition, data privacy or other laws or regulations in effect in 
offshore jurisdictions, or contractual obligations, may impact how 
certain customer information is shared with investment advisers, 
broker-dealers, and other financial institutions (and by extension, 
U.S. law enforcement and regulators). While some investment advisers 
are introduced to new foreign investors by foreign entities subject to 
AML/CFT obligations (such as a broker-dealer), this practice is not 
consistent, as other introducers or promoters may be individuals with 
no AML/CFT obligations.
2. Illicit Finance Threats to Investment Advisers
    Treasury, in coordination with Federal law enforcement and 
consultation with the SEC, conducted a comprehensive assessment of 
illicit finance risk in the investment adviser industry. Treasury's 
review included an analysis of SARs filed between 2013 and 2021 that 
were associated with RIAs and ERAs.\69\ That analysis found that 15.4 
percent of RIAs and ERAs 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) during this time. Further, the number of 
SAR filings associated with an RIA or ERA increased by approximately 
400 percent between 2013 and 2021--a disproportionately higher increase 
than the overall increase in SAR filings, which was approximately 140 
percent.\70\
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    \69\ Information derived from an analysis of select BSA 
reporting.
    \70\ From a FinCEN review of the total number of SARs filed 
between 2013 and 2021.
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    This SAR analysis, along with a review of law enforcement cases and 
other information available to the U.S. government, identified several 
illicit finance threats involving RIAs and ERAs. First, in some 
instances, the investment adviser industry has served as an entry point 
into the U.S. market for illicit proceeds associated with foreign 
corruption, fraud, and tax evasion. Second, certain advisers manage 
billions of dollars ultimately controlled by Russian oligarchs and 
their associates who help facilitate Russia's illegal and unprovoked 
war of aggression against Ukraine. Third, certain RIAs and ERAs and the 
private funds they advise 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.
(a) Laundering of Illicit Proceeds Through Investment Advisers and 
Private Funds
    Private funds can be a particularly attractive entry point for 
illicit proceeds because they present a possibility of high returns, in 
contrast to other, more costly forms of money laundering, such as 
trade-based money laundering or informal value transfer systems. Like 
other types of pooled accounts or legal entities, they can be used to 
obscure the names of individual investors or beneficial owners so that 
the investment fund is identified as the owner of a particular asset. 
However, there are a wide variety of private funds, and some have 
characteristics that have traditionally been seen as less attractive to 
money launderers. For instance, some hedge funds may have lock-up 
periods of more than a year while venture capital funds and private 
equity funds may not permit any withdrawals due to the time it takes 
for the private companies in which those funds invest to go public or 
otherwise provide an exit strategy for these funds. While these 
restrictions may deter criminals who need immediate access to illicit

[[Page 12115]]

proceeds, they are unlikely to deter wealthy corrupt foreign actors who 
seek stable returns, and have a medium- to long-term investment 
horizon, and do not need immediate access to capital.
    The mechanisms for laundering illicit proceeds through investment 
advisers and private funds vary, but generally consist of obscuring the 
illicit origins of funds and pooling them with legitimate funds to 
invest in U.S. securities, real estate, or other assets.
    In one significant case involving funds stolen from the Malaysian 
government, an RIA was used to launder illicit proceeds into the U.S. 
financial system. In December 2012, investment funds affiliated with 
Low Taek Jho (Low) laundered approximately $150 million diverted from 
1Malaysia Development Berhad's (1MDB) 2012 bond issuance into the U.S. 
financial system. Low was CEO of Jynwel Capital Limited, an investment 
adviser to a private equity fund in Asia.\71\ Through a subsidiary of 
Jynwel Capital Limited, Low purchased equity interests in a vehicle 
managed by the Electrum Group, a private equity firm in the United 
States ``whose offices are located in New York and Colorado, invests in 
public and private companies involved in the exploration and 
development of natural resources, precious metals, base metals, and oil 
and gas.'' \72\ Electrum Group, LLC is registered with the SEC as an 
RIA. To conceal their origin, the funds were moved through multiple 
accounts owned by different entities on or about the same day in an 
unnecessarily complex manner with no apparent business purpose. This 
illustrates the general problem: without an obligation to determine the 
source of wealth and purpose for a customer, an investment adviser may 
unwittingly permit illicit funds to enter the U.S. financial 
system.\73\
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    \71\ Low represented to counterparties and potential business 
partners that Jynwel Capital Limited was an investment adviser to a 
private equity fund.
    \72\ 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.
    \73\ See id. ] 204-12.
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    In some instances, the investment adviser or other financial 
professional may form a private fund through which illicit proceeds can 
be transferred as part of a money laundering scheme. While past 
examples have featured investment advisers complicit in illegal 
activity, 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. Without an obligation to report potential money laundering or 
other illicit finance activity, the adviser could participate without 
inquiring further.
    In July 2018, U.S. law enforcement arrested two alleged 
participants, Matthias Krull and Gustavo Adolfo Hernandez Frieri 
(Hernandez), in a billion-dollar international scheme to launder funds 
obtained through embezzlement, fraud, and bribery from Venezuelan 
state-owned oil company Petroleos De Venezuela S.A. (PDVSA).\74\ 
According to the stipulated factual proffer filed in connection with 
his plea agreement, Hernandez conspired to launder approximately $12 
million in PDVSA bribe proceeds by creating a private fund, domiciled 
in the Cayman Islands, and with a U.S. bank as custodian.\75\ 
Specifically, he admitted that he conspired to launder $7 million in 
bribe payments related to a loan scheme, and $5 million in bribe 
payments related to a separate currency exchange scheme, through his 
investment advisory firm located in the United States. Separately, a 
co-conspirator in the scheme set up fraudulent bond schemes in which 
fake bonds would be issued, money transferred into the private fund, 
and then the bonds would ``default.'' \76\ While in this instance the 
adviser was complicit in the fraudulent scheme, a client could also 
direct an unwitting investment adviser to create a private fund to 
specifications that facilitate money laundering. In the absence of an 
AML/CFT program requirement for investment advisers, the investment 
adviser might not have any obligation to evaluate such risks.
---------------------------------------------------------------------------

    \74\ Department of Justice, ``Former Swiss Bank Executive Pleads 
Guilty to Role in Billion-Dollar International Money Laundering 
Scheme Involving Funds Embezzled from Venezuelan State-Owned Oil 
Company,'' (Aug. 22, 2018), https://www.justice.gov/opa/pr/former-swiss-bank-executive-pleads-guilty-role-billion-dollar-international-money-laundering; Department of Justice, ``Two Members 
of Billion-Dollar Venezuelan Money Laundering Scheme Arrested'' 
(Jul. 25, 2018), https://www.justice.gov/opa/pr/two-members-billion-dollar-venezuelan-money-laundering-scheme-arrested. In August 2018, 
Krull pleaded guilty to one count of conspiracy to commit money 
laundering, and in November 2019, Hernandez, a former investment 
adviser, also pleaded guilty to conspiracy to commit money 
laundering in connection with his role in the scheme. Plea Agreement 
(Dkt. 163), United States v. Hernandez, (S.D. Fl. Nov. 26, 2019), 
https://www.justice.gov/criminal-fraud/file/1316826/download.
    \75\ Factual Proffer (Dkt. 164), United States v. Hernandez, No. 
18-cr-20685 (S.D. Fl. Nov. 26, 2019), https://www.justice.gov/criminal-fraud/file/1316831/download.
    \76\ Criminal Compl., United States v. Guruceaga ( ), 18-mj-3119 
(S.D. Fl. Jul. 24, 2018), https://www.justice.gov/criminal-fraud/file/1119981/download.
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(b) Russian Political and Economic Elites' Access to U.S. Investments
    Investment advisers and private funds they advise have served as an 
important entry point into the U.S. financial system for wealthy 
Russians seeking to obscure their ownership of U.S. assets.\77\ 
Although many of these Russian individuals were not sanctioned by the 
U.S. Government prior to Russia's full-scale invasion of Ukraine in 
February 2022, their wealth was sometimes associated with corruption, 
theft of state assets, or other illicit activity well before their 
designation.
---------------------------------------------------------------------------

    \77\ See FinCEN Alert, FIN-2023-Alert002, FinCEN Alert on 
Potential U.S. Commercial Real Estate Investments by Sanctioned 
Russian Elites, Oligarchs, and Their Proxies, p.4 (Jan. 25, 2023). 
In addition to Russian investors, investors tied to China and Saudi 
Arabia have invested in U.S. private funds. See, e.g., The German 
Marshall Fund of the United States, Policy Brief: An Effective 
American Regime to Counter Illicit Finance (Dec. 2018), https://securingdemocracy.gmfus.org/wp-content/uploads/2018/12/An-Effective-American-Regime-to-Counter-Illicit-Finance.pdf.
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    A Treasury review of select BSA reporting filed between January 
2019 and June 2023 identified more than 20 investment advisers located 
in the United States advising private funds where the adviser was 
identified as having significant ties to Russian oligarch investors or 
Russian-linked illicit activities. This review also identified 60 
additional investment advisers located in the United States who managed 
private funds in which identified Russian oligarchs have invested, 
although there was no indication the adviser was engaged in any illicit 
activity.
    According to information available to the U.S. government, often, a 
member of the Russian elite or their trusted proxy invests in a public 
or private U.S. company with the assistance of a wealth management 
firm, which is usually located in an offshore jurisdiction such as 
Bermuda, the Caymans, or Cyprus, but services primarily Russian 
customers. The wealth management firm invests that money in dollars 
through the U.S. financial system, often into U.S. technology companies 
in fields including biotechnology and artificial intelligence. The 
scale of these investments is significant and may include billions of 
dollars invested for a single Russian oligarch. These investments are 
sometimes made directly by the foreign wealth management firm, and in 
other instances through a U.S.-based RIA or ERA.

[[Page 12116]]

    In other instances, funds may be routed through a consulting firm 
or other entity acting as an investment adviser but not registered with 
or reporting to the SEC or State regulator. For instance, on September 
19, 2023, the SEC announced charges against Concord Management LLC 
(Concord) and its owner and principal, Michael Matlin, for operating as 
unregistered investment advisers to their only client--a wealthy former 
Russian official widely regarded as having political connections to the 
Russian Federation.\78\ As of January 2022, Concord and Matlin 
allegedly managed investments for their sole client with an estimated 
total value of $7.2 billion in 112 different private funds.
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    \78\ In March 2022, the United Kingdom and the European Union 
sanctioned Matlin and Concord's client and the client's assets were 
subsequently frozen. The SEC's complaint alleges that, a month 
prior, in February 2022, Concord and Matlin assisted the client in 
his attempts to redeem investments and/or sell his securities 
portfolio. See SEC, Press Release 2023-186, SEC Charges New York 
Firm Concord Management and Owner with Acting as Unregistered 
Investment Advisers to Billionaire Former Russian Official (Sep. 19, 
2023).
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(c) Foreign State Actors Exploiting Investment Advisers To Threaten 
U.S. National Security
    Some strategic nation-state competitors to the United States, most 
notably the PRC, may see private funds as a back door to acquire assets 
of interest in the United States, such as equity stakes in companies 
developing critical or emerging technologies. While there are certain 
transactions for which notice must be provided to the interagency 
Committee on Foreign Investment in the United States (CFIUS),\79\ most 
transactions reviewed by CFIUS are filed voluntarily.\80\ Where 
transactions are not voluntarily submitted to CFIUS for review, CFIUS 
agencies actively work to identify those transactions, including 
whether such transactions may be a covered transaction under the CFIUS 
regulations and may raise national security considerations, and assess 
whether to request that the parties file with CFIUS.\81\
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    \79\ CFIUS is an interagency committee authorized to review 
certain transactions involving foreign investment in the United 
States in order to determine the effect of such transactions on the 
national security of the United States.
    \80\ See Treasury, ``Remarks by Assistant Secretary for 
Investment Security Paul Rosen at the Second Annual CFIUS 
Conference,'' (Sept. 14, 2023), https://home.treasury.gov/news/press-releases/jy1732.
    \81\ Id.
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    Foreign state-funded investment vehicles may seek to hide their 
involvement in foreign investments through offshore legal entities and 
intermediaries 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. These state-funded investment vehicles could persuade an 
investment adviser to a private fund to grant them access to granular 
details about the technology or processes used by a company in which 
the fund is invested, including information that a limited partner 
investor seeking only an economic return may not typically request.
    PRC. According to the Federal Bureau of Investigation (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.\82\ According to a report by the Office of 
the U.S. Trade Representative, State-guided PRC venture capital fund 
activity in the United States is motivated by the Made in China 2025 
plan and the military-civil fusion strategy, directing investments 
towards developing technology with dual-use capabilities.\83\ In 2016, 
the PRC government explicitly endorsed the use of overseas venture 
capital funds to invest in ``seed-based and start-up technology,'' 
demonstrating the link between the funds and government priorities.\84\
---------------------------------------------------------------------------

    \82\ See Hearing Before the U.S.-China Economic and Security 
Review Commission, p.139, ``Chinese Investments in the United 
States: Impacts and Issues for Policymakers'' Jan. 26, 2017, https://www.uscc.gov/sites/default/files/transcripts/Chinese%20Investment%20in%20the%20United%20States%20Transcript.pdf; 
see also Remarks by FBI Director Christopher Wray, ``Countering 
Threats Posed by the Chinese Government Inside the U.S.,'' Jan. 31, 
2022, https://www.fbi.gov/news/speeches/countering-threats-posed-by-the-chinese-government-inside-the-us-wray-013122.
    \83\ Office of the United States Trade Representative, 
``Findings of the Investigation into China's Acts, Policies, and 
Practices Related to Technology Transfer, Intellectual Property, and 
Innovation under section 301 of the Trade Act of 1974,'' Mar. 22, 
2018, 14-15 & 95-96, https://ustr.gov/sites/default/files/Section%20301%20FINAL.PDF.
    \84\ PRC State Council, ``National 13th Five-Year Plan for the 
Development of Strategic Emerging Industries,'' Nov. 29, 2016, 
https://cset.georgetown.edu/publication/national-13th-five-year-
plan-for-the-development-of-strategic-emerging-industries/
#:~:text=During%20the%2013th%20Five%2DYear,healthy%20economic%20and%2
0social%20development.
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    Russia. According to information available to the U.S. government, 
Russian elites and government entities are moving hundreds of millions 
of dollars annually through the U.S. financial system by using U.S. and 
foreign venture capital firms to invest in U.S. technology companies. 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. Further, 
according to information available to the U.S. government, the U.S.-
designated, state-owned Russian Venture Company, which is funded by the 
U.S.-designated Russian Direct Investment Fund, endows Russian seed 
funds to invest in emerging technology. The seed funds create a venture 
capital company, often of a similar name to the seed fund and 
registered outside of Russia, to invest in U.S. technology firms. The 
U.S. government has also identified instances where the leadership of 
certain investment firms has attempted to remove overt ties to Russia 
or Russian names. Russian investors have obfuscated their connections 
to Russia, including by relocating to other jurisdictions and changing 
their names, to continue investing in U.S. technology companies through 
venture capital vehicles.

D. Prior Rulemaking and Regulatory Guidance

    FinCEN has previously proposed AML regulations for investment 
advisers. On September 26, 2002, FinCEN published an NPRM proposing to 
require that unregistered investment companies, to include private 
funds, establish AML programs (Proposed Unregistered Investment 
Companies Rule).\85\ This was followed by the May 5, 2003 NPRM 
proposing to require certain investment advisers to establish AML 
programs (First Proposed Investment Adviser Rule).\86\ Both of these 
proposed rules would have defined these entities as ``financial 
institutions'' under the BSA and required the implementation of AML 
programs only; they did not propose suspicious activity reporting 
requirements.
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    \85\ See FinCEN, Anti-Money Laundering Programs for Unregistered 
Investment Companies, 67 FR 60617 (Sept. 26, 2002).
    \86\ See FinCEN, Anti-Money Laundering Programs for Investment 
Advisers, 68 FR 23646 (May 5, 2003).
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    In June 2007, FinCEN announced that it would be taking a fresh look 
at how its broader AML regulatory framework was being implemented to 
ensure that it was being applied effectively and efficiently across the 
industries covered

[[Page 12117]]

by the BSA.\87\ In conjunction with this initiative, and given the 
amount of time that had elapsed since initial publication of the 
Proposed Unregistered Investment Companies Rule and the First Proposed 
Investment Adviser Rule, FinCEN determined that it would not proceed to 
apply AML requirements for these entities without undertaking further 
public notice and comment, and therefore withdrew the proposed rules on 
November 4, 2008.\88\
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    \87\ See FinCEN, Withdrawal of the Notice of Proposed 
Rulemaking; Anti-Money Laundering Programs for Unregistered 
Investment Companies, 73 FR 65569 (Nov. 4, 2008); and FinCEN, 
Withdrawal of the Notice of Proposed Rulemaking; Anti-Money 
Laundering Programs for Investment Advisers, 73 FR 65568 (Nov. 4, 
2008).
    \88\ Id.
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    On September 1, 2015, FinCEN published an NPRM ``to prescribe 
minimum standards for . . . [AML] programs to be established by certain 
investment advisers and to require such investment advisers to report 
suspicious activity to FinCEN pursuant to the . . . BSA'' (Second 
Proposed Investment Adviser Rule).\89\ This proposed rule would have 
included RIAs within the definition of ``financial institution'' under 
the BSA and required them to maintain AML programs, report suspicious 
activity, and comply with other travel and recordkeeping requirements. 
The Second Proposed Investment Adviser Rule would not have included 
ERAs as financial institutions under the BSA.
---------------------------------------------------------------------------

    \89\ See FinCEN, Anti-Money Laundering Program and Suspicious 
Activity Report Filing Requirements for Registered Investment 
Advisers, 80 FR 52680 (Sept. 1, 2015).
---------------------------------------------------------------------------

    Since 2015, the investment adviser industry has seen substantial 
growth in assets under management and the expansion of new products and 
services. At the time the Second Proposed Investment Adviser Rule was 
published, there were approximately 12,000 RIAs reporting approximately 
$67 trillion in AUM.\90\ As of June 30, 2023, that number had grown to 
more than 15,000 RIAs with approximately $125 trillion in AUM.\91\
---------------------------------------------------------------------------

    \90\ Based on a Treasury review of Form ADV data as of December 
31, 2015.
    \91\ See supra n. 26.
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    Private funds play an increasingly important role in the financial 
system and continue to grow in size, complexity, and number. For 
example, hedge funds engage in trillions of dollars in listed equity 
and futures transactions each month. Private equity and other private 
funds are involved in mergers and acquisitions, non-bank lending, and 
corporate restructurings through leveraged buyouts and bankruptcies. 
Venture capital funds provide funding to start-ups and early-stage 
companies. There are approximately 5,500 RIAs who advise more than $20 
trillion in private fund AUM.\92\ Over the past five years alone, the 
number of private equity funds advised by RIAs increased 60 percent to 
more than 24,000, while the number of venture capital funds advised by 
RIAs increased by almost 300 percent, to more than 3,300 funds.\93\
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    \92\ Id.
    \93\ IAA Snapshot, supra n. 19 at Table 5E.
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    Since 2015, the U.S. Government has also developed a more detailed 
understanding of the illicit finance risks associated with the U.S. 
investment adviser industry. As described in section II, investment 
advisers have been exploited by sophisticated criminals, Russian 
oligarchs, and U.S. strategic competitors.
    Although the Second Proposed Investment Adviser Rule was not 
formally withdrawn,\94\ Treasury does not intend to issue a final rule 
based on it and is hereby withdrawing the Second Proposed Investment 
Adviser Rule. Treasury is issuing this new NPRM to ensure that changes 
in the risk and factual context relevant to the rulemaking since the 
Second Proposed Investment Adviser Rule was published are taken into 
account.
---------------------------------------------------------------------------

    \94\ Treasury withdrew the proposal from the Fall 2020 Unified 
Agenda. See Anti-Money Laundering Program and Suspicious Activity 
Reporting Filing Requirements for Investment Advisers, available at 
https://www.regulations.gov/docket/FINCEN-2014-0003/unified-agenda.
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III. Scope of Proposed Rule

    For all the reasons described above, FinCEN is proposing to cover 
both RIAs and ERAs as ``financial institutions'' subject to AML/CFT 
requirements. FinCEN is not proposing to cover State-registered 
investment advisers because the Treasury risk assessment found few 
examples of State-registered investment advisers being misused for 
money laundering, terrorist financing, or other illicit financial 
activities.\95\ 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 take appropriate steps to mitigate any such activity.
---------------------------------------------------------------------------

    \95\ See Treasury, Investment Adviser Illicit Finance Risk 
Assessment, https://home.treasury.gov/system/files/136/US-Sectoral-Illicit-Finance-Risk-Assessment-Investment-Advisers.pdf.
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    As discussed further below, this proposed rulemaking does not 
impose a CIP requirement or a general requirement that investment 
advisers identify and verify the beneficial ownership of legal entity 
customers. Accordingly, the proposed rule would not subject investment 
advisers to beneficial ownership information identification and 
verification requirement under 31 CFR 1010.230.\96\ Under the BSA, any 
CIP requirement for financial institutions that engage in financial 
activities described in section 4(k) of the Bank Holding Company Act 
``shall be prescribed jointly with each Federal functional regulator.'' 
\97\ This list of activities includes, among others, ``providing 
financial, investment, or economic advisory services.'' \98\ Pursuant 
to these provisions, any future application of CIP requirements would 
be proposed jointly with the SEC in a separate rulemaking. In addition, 
FinCEN intends to amend the CDD Rule to bring it into conformance with 
the Corporate Transparency Act.\99\
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    \96\ As described below, the proposed revised Sec.  
1010.605(e)(1) would expressly provide that an investment adviser 
would not be considered a ``covered financial institution'' for the 
purposes of Sec.  1010.230. See infra section IV.H.1.
    \97\ 31 U.S.C. 5318(l)(4).
    \98\ 12 U.S.C. 1843(k)(4)(C).
    \99\ FinCEN is required to revise the CDD Rule under the 
Corporate Transparency Act. Sec. 6403(d)(1), AML Act. (``Not later 
than 1 year after the effective date of the regulations promulgated 
under section 5336(b)(4) of title 31, United States Code, as added 
by subsection (a) of this section, the Secretary of the Treasury 
shall revise the final rule entitled `Customer Due Diligence 
Requirements for Financial Institutions' . . . .'').
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IV. Section-by-Section Analysis

    FinCEN is proposing to: (1) include certain types of investment 
advisers (both RIAs and ERAs) within the definition of ``financial 
institution'' in the regulations implementing the BSA, and add a 
definition of investment adviser to reflect those covered types; and 
(2) require such investment advisers to (a) establish AML/CFT programs, 
to include risk-based procedures for conducting ongoing CDD; (b) report 
suspicious activity and file CTRs; (c) maintain records of originator 
and beneficiary information for certain transactions; (d) apply 
information-sharing provisions between and among FinCEN, law 
enforcement, agencies, and certain 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. These proposals are discussed in greater detail below.

A. Definitions

    FinCEN is proposing two changes to 31 CFR 1010.100, the general 
definitions section of its regulations. First, this proposed rule would 
amend 1010.100(t) to add ``investment adviser'' to the definition of 
``financial institution.''

[[Page 12118]]

Second, it would add a new provision to 1010.100 defining the term 
``investment adviser.''
1. Adding ``Investment Adviser'' to the ``Financial Institution'' 
Definition
    The BSA expressly defines various entities as ``financial 
institutions,'' \100\ while also providing Treasury with the authority 
to define additional entities as financial institutions in its 
regulations at 31 CFR 1010.100(t). Specifically, the BSA authorizes 
FinCEN to define additional types of businesses as financial 
institutions if FinCEN determines that such businesses engage in any 
activity ``similar to, related to, or a substitute for'' activities in 
which any of the enumerated financial institutions are authorized to 
engage.\101\ Although ``investment adviser'' is not one of the 
specifically enumerated financial institutions in the BSA, FinCEN is 
proposing to make such a determination with respect to the defined set 
of investment advisers, and thereby add investment advisers to Sec.  
1010.100(t)'s definition of financial institution.
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    \100\ 31 U.S.C. 5312(a)(2), (c)(1).
    \101\ 31 U.S.C. 5312(a)(2)(Y). FinCEN may also designate 
businesses ``whose cash transactions have a high degree of 
usefulness in criminal, tax, or regulatory matters'' as financial 
institutions. Id. 5312(a)(2)(Z).
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    Investment advisers provide services that are similar or related to 
services authorized to be provided by BSA-defined financial 
institutions. Many investment advisers provide advice to clients who 
have granted the adviser the power to manage assets on a discretionary 
basis, which is similar or related to services provided by other BSA-
defined institutions, such as broker-dealers or banks. Indeed, many 
investment advisers provide asset management services that are similar 
to, and often substituted for, the asset management services that are 
provided by banks and other financial institutions, such that advisers 
may compete directly with asset management services provided by certain 
banks. Investment advisers also often provide services that can 
substitute for certain products offered by investment companies or 
insurance companies. For example, investment advisers can sponsor and 
provide advisory services to pooled investment vehicles such as private 
funds. As another example, many investment advisers sponsor and provide 
advisory services to mutual funds and advise on the purchase or sale of 
mutual fund shares, similar to banks or broker dealers that provide 
recommendations on mutual fund shares.
    Moreover, investment advisers often work closely with, or are 
otherwise closely associated with, BSA-defined financial institutions. 
For example, 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. In addition, 
investment advisers are frequently owned by or under common ownership 
with banks, broker-dealers, and other financial institutions. For 
example, approximately 20 percent of RIAs and seven percent of ERAs are 
dually registered as a broker-dealer, licensed as a bank, or affiliated 
with a bank or broker dealer.\102\ Investment advisers typically rely 
on broker-dealers, banks, and other financial institutions to perform 
vital functions for them, such as retaining custody of client funds or 
executing trades of securities.\103\ Broker-dealers may recommend 
securities transactions to customers as well.\104\ Accordingly, even 
investment advisers that lack direct relationships with banks, broker-
dealers, or other types of financial institutions engage in activities 
that are ``similar to'' the types of services authorized to be provided 
by certain financial institutions.
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    \102\ See supra n. 26.
    \103\ See, e.g., SEC, Commission Interpretation Regarding 
Standard of Conduct for Investment Advisers, Investment Advisers Act 
Release No. 5248 (Jun. 5, 2019), 84 FR 33669, 33674-75 (Jul. 12, 
2019) (discussing an investment adviser's duty to seek best 
execution of a client's transactions where the investment adviser 
has the responsibility to select broker-dealers to execute client 
trades)
    \104\ See 15 U.S.C. 80b-2(a)(11)(C) (excluding from the 
definition of ``investment adviser'' under the Advisers Act any 
broker or dealer whose performance of advisory services is ``solely 
incidental to the conduct of his business as a broker or dealer and 
[the broker or dealer] receives no special compensation therefor''); 
see also SEC, Commission Interpretation Regarding the Solely 
Incidental Prong of the Broker-Dealer Exclusion from the Definition 
of Investment Adviser, Investment Advisers Act Release No. 5249 
(Jun. 5, 2019), 84 FR 33681 (Jul. 12, 2019). 17 CFR 240.15l-1.
---------------------------------------------------------------------------

    Further, legislative history during drafting of the USA PATRIOT Act 
indicates that RIAs are sufficiently similar to certain other financial 
institutions that Treasury could require them to file SARs: ``The 
Committee [on Financial Services] notes that, under the Bank Secrecy 
Act, the Secretary currently has the authority to require Suspicious 
Activity Reports for all entities similar to futures commission 
merchants, commodity trading advisors, and commodity pool operators, 
namely registered investment advisers and registered investment 
companies.'' \105\
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    \105\ 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 section 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)).
---------------------------------------------------------------------------

    Accordingly, FinCEN hereby determines 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 and, therefore, may be properly included as 
a ``financial institution'' subject to the requirements of the BSA.
2. Adding a Definition of ``Investment Adviser''
    FinCEN is also proposing to add a definition of ``investment 
adviser'' to 31 CFR 1010.100 to clearly define who qualifies as a 
covered adviser--and thus as a ``financial institution'' under these 
proposed amendments to FinCEN regulations. The proposed definition of 
``investment adviser'' is: ``[a]ny person who is registered or required 
to register with the SEC under section 203 of the Advisers Act (15 
U.S.C. 80b-3(a)), or any person that currently is exempt from SEC 
registration under section 203(l) or 203(m) of the Investment Advisers 
Act (15 U.S.C. 80b-3(l), (m)).'' \106\ In other words, under this 
proposed definition, an investment adviser would be any RIA (those 
registered or required to register) or ERA (those exempt from SEC 
registration under the listed provisions).
---------------------------------------------------------------------------

    \106\ See 15 CFR 275.203(l)-1; 15 CFR 275.203(m)-1.
---------------------------------------------------------------------------

    The proposed definition relies on well-established and understood 
terms and definitions used in the Advisers Act and its implementing 
regulations to define who would be an investment adviser under FinCEN 
regulations. FinCEN believes that incorporating existing and well-
understood regulatory definitions into its definition of investment 
adviser would simplify the investment advisers' determinations as to 
whether they are subject to the proposed requirements. FinCEN requests 
comment on whether the proposed definition of ``investment adviser'' is 
sufficiently clear, or whether some other definition may be preferable. 
FinCEN also requests comment on whether the proposed definition 
includes classes of investment advisers or certain services or 
activities provided by investment advisers that present a very low risk 
for money laundering,

[[Page 12119]]

terrorist financing, or other illicit finance activity such that they 
should be excluded from the definition, or whether the proposed 
definition fails to include a type of adviser that presents a risk.
(a) Registered Investment Advisers
    Including RIAs within the proposed definition of investment adviser 
would align FinCEN's regulatory framework with the existing framework 
under the Advisers Act and would also allow FinCEN to work with the SEC 
to develop consistent application and examination of the AML/CFT 
requirements to such advisers. Generally, an investment adviser's 
amount of assets under management determine whether it is required to 
register or is prohibited from registering with the SEC.\107\ In 
implementing the Dodd-Frank Act amendments to the Advisers Act, the SEC 
amended the instructions to Part 1A of Form ADV to further implement a 
uniform method for an investment adviser to calculate its assets under 
management in order to determine whether it is required to register or 
is prohibited from registering with the SEC.\108\ Per the Dodd-Frank 
Act and SEC rules, a ``large'' adviser has $110 million or more in 
regulatory assets under management, and is required to register with 
the SEC. These are RIAs that would be included in the investment 
adviser definition in the proposed rule.\109\ FinCEN notes that large 
advisers would comprise a substantial majority of the total number of 
investment advisers that are included in the definition of investment 
adviser for purposes of the proposed rule.\110\ FinCEN requests comment 
on whether the definition of investment adviser should apply to non-
U.S. advisers registered or required to register with the SEC, or who 
report to the SEC on Form ADV.
---------------------------------------------------------------------------

    \107\ See SEC, Rules Implementing Amendments to the Investment 
Advisers Act of 1940, Investment Advisers Act Release No. 3221 (Jun. 
22, 2011), 76 FR 42950, 42955 (Jul. 19, 2011).
    \108\ See id.; see also Instructions for Part 1A, Item 5.F of 
Form ADV.
    \109\ An investment adviser that is registered with the SEC on a 
basis other than its AUM would also be an ``investment adviser'' 
under the proposed rule and subject to the proposed requirements.
    \110\ Generally, a mid-sized adviser has $25 million or more but 
less than $110 million in regulatory assets under management and is 
registered with the State where it maintains its principal office 
and place of business. A small adviser has less than $25 million in 
regulatory assets under management and is regulated or required to 
be regulated in the State where it maintains its principal office 
and place of business. See 15 U.S.C. 80b-3A(a)(1). Mid-sized and 
small advisers are generally prohibited from registering with the 
SEC, unless an exemption from the prohibition on SEC registration is 
available (see 17 CFR 275.203A-2), and therefore are unlikely to be 
covered by the proposed definition of ``investment adviser'' in the 
proposed rule as RIAs.
---------------------------------------------------------------------------

(b) Exempt Reporting Advisers
    FinCEN is also including ERAs in the definition of investment 
adviser under the proposed rule for the reasons described in section 
II.C above. In addition, ERAs have less detailed reporting requirements 
than RIAs, are not required to file Form PF, and are not examined by 
the SEC on a regular basis.\111\ Further, exempt venture capital 
advisers are able to rely on a registration exemption that is not 
limited by the amount of AUM. FinCEN requests comment on whether ERAs 
should be excluded from the proposed definition of ``investment 
adviser,'' and if ERAs are excluded, how could FinCEN otherwise address 
the money laundering, terrorist financing, and other illicit finance 
risk associated with ERAs. FinCEN also requests comment on whether 
there are differences in the risks associated with ERAs who advise 
private funds versus those that advise venture capital funds.
---------------------------------------------------------------------------

    \111\ See 76 FR 42950, 42963, n.188.
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(c) Other Investment Advisers
    FinCEN recognizes that different investment advisers included 
within the proposed definition may have different degrees of money 
laundering, terrorist financing, or other illicit finance risk. As 
discussed at greater length below, the AML/CFT program requirement is 
risk-based, and FinCEN anticipates that the burden of establishing an 
AML/CFT program, filing SARs, and complying with the other requirements 
of the proposed rule would be commensurate with an adviser's risk 
profile. As noted, the proposed definition of ``investment adviser'' 
would include certain non-U.S. investment advisers that are physically 
located abroad (i.e., do not have a branch, office, or staff in the 
United States), but are nonetheless registered or required to register 
with the SEC (for RIAs) or file Form ADV (for ERAs). Coverage of these 
non-U.S. investment advisers is discussed further at section IV.E.7.
    While FinCEN is limiting the proposed definition to RIAs and ERAs, 
FinCEN recognizes that other types of investment advisers or other 
entities that provide investment advisory services may present risks to 
the U.S. financial system of money laundering, terrorist financing, and 
other types of financial crimes, or otherwise pose a threat to U.S. 
national security. FinCEN, therefore, may consider future rulemakings 
to expand the application of the BSA to include other investment 
advisers or similar entities not covered by the proposed definition. 
FinCEN requests comment on whether other types of investment advisers 
or entities should also be subject to the proposed rule.

B. Delegation of Examination Authority to the Securities and Exchange 
Commission

    FinCEN has overall authority for enforcement of compliance with the 
BSA and its implementing regulations.\112\ FinCEN, however, may 
delegate examination authority to appropriate agencies while retaining 
authority for the coordination and direction of procedures and 
activities of these agencies.\113\ FinCEN has previously delegated 
examination authority for various financial institutions, as reflected 
at 31 CFR 1010.810(b).
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    \112\ Treasury Order 180-1, para. 3; 31 CFR 1010.810(a).
    \113\ Treasury Order 180-1, paras. 3(b), 4(b); 31 CFR 
1010.810(a); 31 U.S.C. 5318(a)(1).
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    FinCEN is proposing to amend 31 CFR 1010.810(b) to add investment 
advisers to the list of financial institutions for which the SEC has 
the authority to examine for compliance with FinCEN's regulations 
implementing the BSA. Persons and entities meeting the proposed 
definition of investment adviser thus would fall under this provision 
and be subject to SEC examination for compliance with FinCEN 
regulations. The SEC has expertise in the regulation of investment 
advisers. The SEC is the Federal functional regulator for certain 
investment advisers and is responsible for examining investment 
advisers for compliance with the Federal securities laws, including the 
Advisers Act and the SEC rules promulgated under those laws.\114\ 
Moreover, FinCEN has delegated to the SEC examination authority for 
broker-dealers in securities and certain investment companies, which 
are BSA-defined financial institutions subject to FinCEN's regulations 
and for which the SEC is the Federal functional regulator.\115\
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    \114\ See 15 U.S.C. 6809(2)(F); 31 CFR 1010.100(r)(6); see also 
15 U.S.C. 80b-1 et seq. and the rules thereunder, 17 CFR part 275.
    \115\ See 31 CFR 1010.810(b)(6).
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    Accordingly, the proposed rule would designate the SEC as examiner 
of investment advisers for compliance with the proposed rule.

C. Investment Advisers' Proposed Obligation To File CTRs Instead of 
Form 8300

    Under FinCEN's regulations that apply to a broad range of persons--
not just financial institutions--investment

[[Page 12120]]

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.\116\ By defining investment 
advisers as ``financial institutions'' under the BSA, the proposed rule 
would require investment advisers to file CTRs with FinCEN pursuant to 
31 CFR 1010.311 instead of filing reports using Form 8300.\117\
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    \116\ 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).
    \117\ See 31 CFR 1010.330(a) (stating that Sec.  1010.330 [the 
BSA provision requiring the filing of the Form 8300] ``does not 
apply to amounts received in a transaction reported under 31 U.S.C. 
5313 and 31 CFR 1010.311.''). To the extent an investment adviser 
conducts transactions other than in currency (as defined in 31 CFR 
1010.100(m) for purposes of the CTR requirement), it would be exempt 
from reporting such transactions because the Form 8300 requirement 
does not apply to such transactions.
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    The BSA authorizes FinCEN to promulgate regulations requiring 
financial institutions to file reports when they participate in certain 
types of financial transactions.\118\ Pursuant to this authority, 31 
CFR 1010.311 requires ``financial institutions'' (other than casinos) 
to file CTRs for ``each deposit, withdrawal, exchange of currency or 
other payment or transfer, by, through, or to such financial 
institution which involves a transaction in currency of more than 
$10,000,'' unless subject to an applicable exemption. FinCEN seeks to 
extend this requirement to investment advisers under the proposed rule. 
This proposed rule would also add several provisions, Sec. Sec.  
1032.310 to 1032.315, specifying how investment advisers should fulfill 
their proposed CTR obligations.
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    \118\ See, e.g., 31 U.S.C. 5313(a); 31 U.S.C. 5326.
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    The threshold in 31 CFR 1010.311 applies to transactions in 
currency of more than $10,000 conducted during a single business 
day.\119\ A financial institution must treat multiple transactions 
conducted in one business day as a single transaction if the financial 
institution has knowledge that the transactions are conducted by or on 
behalf of the same person.\120\ This same requirement would extend to 
investment advisers.
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    \119\ See 31 CFR 1010.311, 1010.313(b). Multiple transactions 
must be treated as a single transaction if they are conducted by or 
on behalf of the same person and result in cash in or cash out of 
more than $10,000 during any one business day. A Form 8300, 
meanwhile, must be filed when currency is received in one 
transaction or two or more related transactions. Transactions 
conducted between a payer (or its agent) and a recipient in a 24-
hour period would be treated as related. Furthermore, a distinction 
is drawn between transactions and the receipt of payments. 
Installment payments made within a period of 12 months may need to 
be aggregated and reported on a Form 8300. See 31 CFR 
1010.330(b)(3).
    \120\ Id.
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    To avoid duplicative requirements, investment advisers would no 
longer have to report applicable transactions involving certain 
negotiable instruments reportable on Form 8300. Moreover, since an 
investment adviser would be required to report suspicious transactions 
under the SAR rule proposed in this rulemaking, investment advisers 
would no longer need to use Form 8300 to voluntarily report suspicious 
transactions.\121\ Finally, imposing CTR and SAR requirements rather 
than a Form 8300 requirement is consistent with the obligations of 
certain other financial institutions, such as banks, broker-dealers, 
and mutual funds.
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    \121\ Currently an investment adviser can report a suspicious 
transaction voluntarily by checking box 1(b) in the Form 8300. In 
addition to the requirement that an investment adviser report on a 
CTR, under the proposed rule, an investment adviser would also be 
required to file a SAR if a suspicious transaction exceeds the 
threshold amount.
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D. Proposed Recordkeeping Requirements for Investment Advisers

    FinCEN has broad authority to impose recordkeeping requirements on 
financial institutions under the BSA.\122\ Pursuant to this authority, 
FinCEN has issued several recordkeeping regulations, codified as 31 CFR 
part 1010, subpart D (Sec. Sec.  1010.400 to 1010.440), which apply 
broadly to financial institutions, subject to specified exceptions. By 
defining RIAs and ERAs as financial institutions, this proposed rule 
would apply these recordkeeping regulations to investment advisers. 
Specifically, 31 CFR 1032.410 (cross-referencing 31 CFR 1010.410) 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, for the purposes of this proposed rule.\123\ The proposed 
regulations would not require investment advisers to comply with these 
recordkeeping requirements with respect to any mutual fund that it 
advises.\124\
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    \122\ See 12 U.S.C. 1953; 31 U.S.C. 5311; and 31 U.S.C. 
5312(a)(2).
    \123\ The Recordkeeping Rule is codified at 31 CFR 1010.410(e) 
and 1020.410(a), but only 1010.410(e) is relevant here: 1020.410(a) 
describes the recordkeeping requirements for banks, while those for 
nonbank financial institutions are described in 1010.410(e). The 
Travel Rule, as codified at 31 CFR 1010.410(f), applies to both bank 
and nonbank financial institutions. See FinCEN, Board of Governors 
of the Federal Reserve System, Amendment to the Bank Secrecy Act 
Regulations Relating to Recordkeeping for Funds Transfers and 
Transmittals of Funds by Financial Institutions, 60 FR 220 (Jan. 3, 
1995); FinCEN, Amendment to the Bank Secrecy Act Regulations 
Relating to Orders for Transmittals of Funds by Financial 
Institutions, 60 FR 234 (Jan. 3, 1995).
    \124\ Specifically, proposed 31 CFR 1032.400 would permit an 
investment adviser to deem requirements in Subpart D to be satisfied 
for any mutual fund it advises that is subject to these same 
reporting requirements under another provision of Subpart D.
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    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.\125\ The Recordkeeping and Travel Rules apply to 
transmittals of funds that equal or exceed $3,000. With certain 
exceptions, ``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.\126\
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    \125\ See 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).
    \126\ 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).
---------------------------------------------------------------------------

    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 Recordkeeping and Travel Rules require 
the transmittor's financial institution to obtain and retain the name, 
address, and other information about the transmittor and the 
transaction.\127\ 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.\128\ And the Travel Rule requires that certain 
information obtained or retained ``travels'' with the

[[Page 12121]]

transmittal order through the payment chain.\129\
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    \127\ See 31 CFR 1010.410(e)(1)(i), (e)(2).
    \128\ See 31 CFR 1010.410(e)(1)(iii), (e)(3) (information that 
the recipient's financial institution must obtain or retain).
    \129\ See 31 CFR 1010.410(f) (information that must ``travel'' 
with the transmittal order); 31 CFR 1010.100(eee) (defining 
``transmittal order'').
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    Under the proposed rule, however, some transmittals involving 
investment advisers would fall within an existing exception to the 
Recordkeeping and Travel Rules designed to exclude transmittals of 
funds from these Rules' requirements when certain categories of 
financial institutions are the transmitter and recipient.\130\ The 
proposed application of this exception to investment advisers is 
intended to provide investment advisers with treatment similar to that 
of banks, brokers or dealers in securities, futures commission 
merchants, introducing brokers in commodities, and mutual funds.
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    \130\ See 31 CFR 1010.410(e)(6), (f)(4); 31 CFR 1020.410(a)(6). 
As relevant here, Sec.  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. The proposed rule would 
amend Sec.  1010.410(e)(6) to add ``investment advisers'' to its 
list of financial institutions.
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    Additionally, FinCEN recognizes that investment advisers operate 
varying business models and, that in some circumstances, an adviser 
would not conduct transactions that meet the definition of 
``transmittal order.'' For example, in some advisory relationships, 
when an investment adviser receives instructions from a customer, the 
investment adviser would not ``be reimbursed by debiting an account of, 
or otherwise receiving payment from,'' the customer, such that the 
investment adviser's receipt of instructions from a customer would not 
meet the definition of transmittal order.\131\
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    \131\ See 31 CFR 1010.100(eee)(2).
---------------------------------------------------------------------------

    Because FinCEN is proposing to include investment advisers in the 
definition of financial institutions, investment advisers would be 
required to comply with the Recordkeeping and Travel Rules when they 
engage in transactions that meet the definition of a transmittal order. 
FinCEN understands that the collection of at least some of this 
information would be required for accounting or other purposes and 
seeks comment on the extent to which investment advisers or other BSA-
defined financial institutions regularly collect information that would 
be required under the Recordkeeping and Travel Rules. Similarly, FinCEN 
seeks comment on understanding the structures that investment advisers 
use to be credited by customers who seek to wire funds out of their 
accounts with the investment adviser. FinCEN seeks comment on how 
investment advisers work with qualified custodians to maintain separate 
accounts to manage customers' funds, including for wire transfers. 
FinCEN is also seeking comment on whether investment advisers should be 
required to comply with the Recordkeeping and Travel Rules as proposed, 
or if the Recordkeeping and Travel Rules should only apply in certain 
circumstances.
    Finally, the proposed rule would subject investment advisers to 
requirements to create and retain records for extensions of credit and 
cross-border transfers of currency, monetary instruments, checks, 
investment securities, and credit.\132\ These requirements currently 
apply to transactions by other BSA-defined financial institutions in 
amounts exceeding $10,000.\133\
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    \132\ See 31 CFR 1010.410(a)-(c). Financial institutions must 
retain these records for a period of five years. 31 CFR 1010.430(d).
    \133\ See 31 CFR 1010.410(a)-(c).
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E. Anti-Money Laundering and Countering the Financing of Terrorism 
Programs

    The BSA requires financial institutions to establish reasonably 
designed risk-based AML/CFT programs to combat the laundering of money 
and financing of terrorism through the institution.\134\ The Annunzio-
Wylie Anti-Money Laundering Act of 1992 amended the BSA by authorizing 
Treasury to issue regulations requiring financial institutions, as 
defined in BSA regulations, to maintain ``minimum standards'' of an 
anti-money laundering program.\135\ These anti-money laundering 
programs must include, at a minimum, the development of internal 
policies, procedures, and controls; the designation of a compliance 
officer; an ongoing employee training program; and an independent audit 
function to test programs.\136\ The USA PATRIOT Act further amended the 
BSA to expand AML program rules applicable to banks to cover certain 
other industries.\137\ The requirements for an anti-money laundering 
program were further amended by section 6101(b) of the AML Act of 2020 
(AML Act), which among other things, expanded the BSA's program rule 
requirement to include a reference to CFT in addition to AML.\138\ 
FinCEN intends to implement more specific changes to AML/CFT program 
requirements as a result of section 6101(b) of the AML Act through a 
separate rulemaking process.\139\ FinCEN does not intend to address 
those more specific changes as part of this rulemaking.
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    \134\ 31 U.S.C. 5311(2), 5318(h)(1).
    \135\ Annunzio-Wylie Anti-Money Laundering Act, Title XV of the 
Housing and Community Development Act of 1992, Public Law 102-550.
    \136\ 31 U.S.C. 5318(h)(1)(A)-(D).
    \137\ Section 352(a) of the Act, which became effective on April 
24, 2002, amended 31 U.S.C. 5318(h).
    \138\ Public Law 116-283 (Jan. 1, 2021); see 31 U.S.C. 
5318(h)(4)(D) (as amended by AML Act section 6101(b)(2)(C)).
    \139\ See FinCEN Regulatory Agenda (Spring 2023), Establishment 
of National Exam and Supervision Priorities, available at https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=202304&RIN=1506-AB52.
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    The BSA authorizes FinCEN, after consultation with the appropriate 
Federal functional regulator (for investment advisers, the SEC), to 
further prescribe minimum standards for such AML/CFT programs.\140\ In 
developing this proposed rule, FinCEN consulted and coordinated with 
the SEC staff, including regarding the statutorily specified factors 
set out in 31 U.S.C. 5318(h)(2)(B). These factors are:
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    \140\ 31 U.S.C. 5318(h)(2)(A).
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    <bullet> financial institutions are spending private compliance 
funds for a public and private benefit, including protecting the United 
States financial system from illicit finance risks;
    <bullet> 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;
    <bullet> 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;
    <bullet> 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.

[[Page 12122]]

    FinCEN has considered these factors in section 5318(h)(2)(B) in the 
drafting of this proposed rule. In proposing this rule, FinCEN has 
considered the fact that comprehensive AML/CFT requirements for 
investment advisers, which would require investment advisers to have 
effective AML/CFT programs and subject them to SAR reporting 
requirements, would aid in preventing the flow of illicit funds in the 
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 financial activity. 
Additionally, FinCEN recognizes that AML/CFT programs at investment 
advisers should be reasonably designed and risk-based consistent with 
investment advisers' respective risk profiles, and therefore is 
proposing an AML/CFT program rule that requires policies, procedures, 
and internal 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 Analysis at section VII, 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.\141\
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    \141\ Further discussion relevant to each factor may be found 
at: Factor (i): the regulatory impact analysis at section VII and 
other discussions of the costs and benefits of the proposed rule; 
Factor (ii): we believe that this factor is not relevant to the 
proposed 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 
IV.B.
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    This proposed rule, by designating investment advisers as financial 
institutions, would subject investment advisers to AML/CFT program 
requirements, as reflected in proposed Sec.  1032.210.\142\
---------------------------------------------------------------------------

    \142\ Additionally, 31 CFR subpart B contains general provisions 
applicable generally to financial institutions' AML/CFT programs. 
Proposed Sec.  1032.200 would subject investment advisers those 
general provisions in subpart B.
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    Investment advisers are already subject to other regulations 
similar in certain ways to the AML/CFT program requirements FinCEN is 
proposing, and thus should be well-positioned to extend their practices 
to incorporate proposed AML/CFT requirements. RIAs are currently 
subject to Federal securities laws, which require the establishment of 
a variety of policies, procedures, and controls. For example, the 
Advisers Act requires an RIA to maintain certain books and records, as 
prescribed by the SEC.\143\ Under 17 CFR 275.204-2, an RIA is required 
to keep certain books and records that relate to its investment 
advisory business.\144\ Under 17 CFR 275.203-1 and 275.204-4, RIAs and 
ERAs, respectively, are also required to complete and submit Form ADV 
to the SEC. The Advisers Act also prohibits an investment adviser from 
engaging in fraudulent, deceptive, and manipulative conduct.\145\ SEC 
rules further require RIAs to adopt and implement written policies and 
procedures reasonably designed to prevent violations of the Advisers 
Act and the rules that the SEC has adopted under that Act.\146\ RIAs 
must conduct annual reviews to ensure the adequacy and effectiveness of 
their policies and procedures and must designate a chief compliance 
officer responsible for administering the policies and procedures.\147\ 
ERAs are also subject to Federal securities laws governing the 
securities industry, required to complete and submit some sections of 
Form ADV, and comply with other select requirements of the Advisers 
Act.\148\ While ERAs may not have the full compliance infrastructure 
that RIAs have, their existing compliance obligations nonetheless offer 
a point of reference and relevant experience for implementing the AML/
CFT requirements in the proposed rule.
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    \143\ See 15 U.S.C. 80b-4(a) (requiring investment advisers to 
make and retain records as defined in section 3(a)(37) of the 
Exchange Act and to make and disseminate reports as prescribed by 
the SEC).
    \144\ See 17 CFR 204-2 (books and records to be maintained by 
investment advisers).
    \145\ See, e.g., 15 U.S.C. 80b-6(1)-(2)), (4) (prohibiting any 
investment advisers from engaging in any activity that would defraud 
a client or prospective client). See also 17 CFR 275.206(4)-8 
(prohibiting any investment advisers from making false or misleading 
statements to, or otherwise defrauding, investors or prospective 
investors to pooled investment vehicles).
    \146\ 17 CFR 275.206(4)-7(a).
    \147\ 17 CFR 275.206(4)-7(b), (c).
    \148\ See, e.g., 15 U.S.C. 80b-6(1)-(2), (4); 17 CFR 275.204-4; 
17 CFR 275.206(4)-5; 17 CFR 275.206(4)-8.
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    As FinCEN has noted, the AML/CFT program requirement is not a one-
size-fits-all requirement but rather is risk-based and is intended to 
give investment advisers the flexibility to design their programs to 
identify and mitigate the specific risks of the advisory services they 
provide and the customers they advise. As such, ERAs would be able to 
tailor their AML/CFT programs to the specific risks, activities, and 
operations associated with their advisory business. Accordingly, FinCEN 
contemplates that investment advisers, as defined in the proposed rule, 
would be able to build upon existing policies, procedures, and internal 
controls, or the processes undertaken to establish those policies, 
procedures, and internal controls, to comply with the proposed AML/CFT 
requirements.
    Moreover, some investment advisers have already implemented AML/CFT 
programs either because they are dually registered as a broker-dealer, 
licensed as a bank, or affiliated with a broker-dealer or bank, or in 
conjunction with a SIFMA No-Action Letter permitting broker-dealers to 
rely on RIAs to perform some or all aspects of broker-dealers' CIP 
obligations.\149\ For instance, according to the 2016 Investment 
Management Compliance Testing Survey of RIAs conducted by ACA 
Compliance Group and the Investment Adviser Association, 76 percent of 
participants had adopted AML policies, and 40 percent of participants 
had adopted AML programs similar to the AML program requirements 
proposed in the Second Proposed Investment Adviser Rule.\150\ FinCEN 
requests comment on what CDD procedures RIAs and/or ERAs already have 
in place to comply with the SIFMA No-Action Letter.
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    \149\ See SIFMA No-Action Letter, supra n. 52. See also 31 CFR 
1023.220(a)(6) (CIP rule permitting a financial institution to rely 
on another financial institution to perform all or part of its 
obligations to verify the identity of its customers as required by 
31 U.S.C. 5318(h)).
    \150\ See 2016 Investment Management Compliance Testing Survey 
(2016 IMCTS Survey), p.21, https://www.investmentadviser.org/eweb/docs/Publications_News/Reports_and_Brochures/Investment_Management_Compliance_Testing_Surveys/2016IMCTppt.pdf. 
This survey included responses from compliance officers at 730 RIAs 
and is the most recent IMCTS survey to have asked detailed questions 
about AML policies and programs.
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1. Overview of AML/CFT Program Requirement
    Section 1032.210(a)(1) of the proposed rule would 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 would also be required to 
make its AML/CFT program available for inspection by FinCEN or the SEC. 
The minimum requirements for the AML/CFT program are set forth in

[[Page 12123]]

Sec.  1032.210(b) and discussed in greater detail below.
    FinCEN reiterates that the proposed 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 proposed 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.\151\ For example, large firms may assign 
responsibilities of the individuals and departments carrying out each 
aspect of the AML/CFT program, while smaller firms would be expected to 
adopt procedures that are consistent with their (often) simpler, more 
centralized organizational structures. This flexibility is designed to 
ensure that all firms subject to FinCEN's AML/CFT program requirements, 
from the smallest to the largest, and the simplest to the most complex, 
have in place policies, procedures, and internal 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. FinCEN requests comment on whether existing requirements 
under the Advisers Act or existing policies and procedures to implement 
OFAC sanctions could assist investment advisers in complying with the 
proposed AML/CFT requirements. FinCEN also requests comment on whether 
any proposed requirements are duplicative of any existing requirements. 
Finally, FinCEN requests comment on whether there are certain services 
or activities provided by investment advisers where applying AML/CFT 
requirements would result in information of limited value to law 
enforcement and regulators.
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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. S10990-02 (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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2. Scope
    As described above, the proposed rule would require all RIAs and 
ERAs to develop an AML/CFT program, and that program would be required 
to cover all advisory activities, with one exception: the program need 
not cover activities undertaken with respect to mutual funds, which 
have their own obligations under the BSA.\152\ As detailed below, 
advisory activities with respect to mutual funds would be exempt from 
the AML/CFT program requirements that would be applied in the proposed 
rule.
---------------------------------------------------------------------------

    \152\ See 31 CFR part 1024.
---------------------------------------------------------------------------

    An investment adviser would apply an AML/CFT program to all 
advisory activities other than with respect to mutual funds. Advisory 
activities subject to an AML/CFT program would include, for example, 
the management of customer assets, the provision of financial advice, 
the execution of transactions for customers, as well as other advisory 
activities. The requirements of the proposed rule would not apply to 
non-advisory services. One example of this would be in the context of 
private equity funds: fund personnel may play certain roles with 
respect to the portfolio companies in which the fund invests. 
Activities undertaken in connection with those roles (e.g., making 
managerial/operational decisions about portfolio companies) would not 
be ``advisory activities'' for purposes of the rule. FinCEN requests 
comment on whether certain advisory activities pose a lower risk in all 
circumstances and on the challenges for advisers in complying with the 
proposed role when engaged in such activities.
    Certain commenters on the Second Proposed Investment Adviser Rule 
proposed to exempt some advisory activities, such as advising clients 
without managing client assets and acting as a subadviser, on the 
ground that such activities are lower risk. Assessing the risk of an 
adviser's activities requires appreciation of the full context of the 
activity. For example, subadvisers and advisers who do not manage 
assets may nonetheless afford their clients access to the U.S. 
financial system, inadvertently guide the layering or integration of 
illicit proceeds or other illicit finance activity, or have 
relationships that provide insight to the investment adviser's AML/CFT 
program. FinCEN is therefore proposing to include those activities 
within the scope of this proposed rule. As discussed in the comment 
request section below, FinCEN requests comment on whether certain 
subadvisory activities should be excluded from coverage of this 
proposed rule.
    Under the risk-based approach, an investment adviser would tailor 
its program according to the specific risks presented by its various 
activities. Factors that may indicate an activity or a customer is 
lower risk include the jurisdiction of registration of legal person 
customers, and whether the customer (where a legal person) is subject 
to U.S. AML/CFT regulatory requirements.
(a) Mutual Funds
    FinCEN is proposing to exempt from the proposed requirements 
activities of investment advisers in advising mutual funds.\153\ FinCEN 
believes that this exemption is appropriate because of the regulatory 
and practical relationship between mutual funds and their investment 
advisers. Specifically, although mutual funds are distinct legal 
entities with distinct legal obligations, mutual funds typically do not 
have their own independent operations. Rather, mutual funds are 
entirely operated, and compliance with their legal obligations is 
undertaken, by their service provider entities, foremost amongst them 
their investment advisers. As a practical matter, we believe that any 
AML/CFT requirement imposed on an RIA to a mutual fund is already 
addressed by the existing AML/CFT requirements imposed on the mutual 
fund itself.\154\ 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. Consequently, we are proposing not to require investment 
advisers to mutual funds to include those mutual funds within the 
investment advisers' own AML/CFT programs, as we believe including a 
mutual fund within its investment

[[Page 12124]]

adviser's AML/CFT program would be redundant. This exemption is 
permissive and not mandatory; an investment adviser could decide to 
include the mutual funds it advises in complying with any of the 
investment adviser's proposed requirements.
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    \153\ FinCEN's definition of a mutual fund under 1010.100(gg) 
applies to an ETF as an ``open-end company'' (as the term is defined 
in section 5 of the Investment Company Act).'' See supra n. 53.
    \154\ FinCEN notes as well that the First Proposed Investment 
Adviser Rule would have permitted mutual funds to be excluded from 
the programs required of investment advisers covered by that 
proposed rule. Commenters to the Second Proposed Investment Adviser 
Rule, which would not have permitted such an exclusion, supported 
instead the 2003 NPRM approach.
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    Mutual funds are already subject to comprehensive AML/CFT 
obligations under the BSA and are required to, among other things, 
establish AML/CFT and customer identification programs, conduct CDD, 
and report suspicious activity, among other obligations.\155\ FinCEN 
believes that, currently, these requirements sufficiently mitigate the 
money laundering, terrorist financing, and other illicit finance risks 
associated with mutual funds and those funds' investors to justify this 
exemption. FinCEN is requesting comment on whether to exempt mutual 
funds from coverage in an adviser's AML/CFT program. FinCEN also 
requests comment on whether there are other categories of entities 
that, like mutual funds, could be reasonably exempted from an 
investment adviser's AML/CFT program.
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    \155\ See 31 CFR 1010.100(gg); 31 CFR part 1024.
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    FinCEN is also proposing to exempt investment advisers from having 
to comply with the reporting and recordkeeping requirements of part 
1032, subparts C and D, for its mutual fund customers. FinCEN believes 
that the proposed regulatory text is sufficiently clear that these 
subparagraphs would not apply with respect to mutual fund customers, 
because the internal policies, procedures, and controls to comply with 
those requirements are closely linked to the AML/CFT program 
requirement. FinCEN requests comment on whether additional regulatory 
text in those subparts is needed to clarify this. FinCEN also requests 
comment on whether the exemption should be dependent on the nature of 
the relationship between the investment adviser and its mutual fund 
customer, and whether the exemption would avoid duplication of existing 
AML/CFT requirements. Lastly, FinCEN requests comment on whether 
investment advisers to mutual funds should still be required to monitor 
for and file SARs.
(b) Provision of Other Advisory Services
    FinCEN understands that investment advisers provide a range of 
services that could affect the nature of their AML/CFT programs. An 
investment adviser may provide customers with advisory services that do 
not include the management of customer assets or knowledge of 
customers' investment decisions, such as pension consulting, securities 
newsletters, research reports, or financial planning.
    In the investment advisory industry, an adviser may also act as the 
``primary adviser'' or ``subadviser.'' \156\ Generally, the primary 
adviser contracts directly with the client, and a subadviser has 
contractual privity with the primary adviser, though there is variation 
across the sector with respect to the relationship and function between 
primary advisers and subadvisers. Because subadvisory services are a 
subcategory of advisory services, the proposed rule would apply to 
investment advisers who provide subadvisory services.
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    \156\ The Advisers Act does not distinguish between advisers and 
subadvisers; all are ``investment advisers.'' See 76 FR 39646, 39680 
(Jul. 6, 2011) at n. 504 and accompanying text.
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    FinCEN requests comment on whether specific services provided by 
investment advisers, such as advisory services that do not involve 
management of client assets or subadvisory services, should be included 
or excluded from coverage of this proposed rule. FinCEN also requests 
comment on any alternative approaches for addressing compliance with 
the proposed rule when advisers provide particular services, such as 
allowing subadvisers to rely on the primary adviser or allowing the 
primary adviser to delegate all AML/CFT obligations to the subadviser. 
FinCEN further requests comment on whether there is an increased risk 
for a subadviser when providing advisory services to a customer with a 
primary adviser that is not an investment adviser as defined in the 
proposed rule. FinCEN also requests comment on the extent a 
subadviser's AML/CFT program would overlap with the primary adviser's 
program and how duplication could be mitigated. Finally, FinCEN 
requests comment on whether there are similar arrangements where an 
investment adviser may be sub-contracted to provide services to another 
investment adviser that should or should not be in the scope of an 
investment adviser's AML/CFT program.
3. Dually Registered Investment Advisers and Advisers Affiliated With 
or Subsidiaries of Entities Required To Establish AML/CFT Programs
    According to a Treasury review of Form ADV filings, approximately 
three percent of RIAs were dually registered with the SEC as investment 
advisers and broker-dealers in securities, and approximately 20 percent 
of RIAs may be affiliated with, or subsidiaries of, banks or broker-
dealers, which are required to establish AML/CFT programs. With respect 
to an investment adviser that is dually registered as a broker-dealer 
or is a bank (or is a bank subsidiary), FinCEN is not proposing to 
require such an adviser 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. The 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 entities' 
businesses 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.\157\ Similarly, an 
investment adviser affiliated with, or a subsidiary of, another entity 
required to establish an AML/CFT program in another capacity would not 
be required to implement multiple or separate programs as one single 
program can be extended 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 the entity's 
business and satisfy each of the risk-based AML/CFT program and other 
BSA requirements to which the organization is subject in all of its 
regulated capacities, as for example an investment adviser and a bank 
or insurance company.\158\
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    \157\ FinCEN notes that while broker-dealers in securities are 
subject to the full panoply of FinCEN's regulations implementing the 
BSA, investment advisers would not immediately be subject to certain 
of those AML/CFT requirements, e.g., the CIP Rule, because the 
proposed rule does not include CIP requirements at this time. FinCEN 
intends to address CIP requirements in a subsequent joint rulemaking 
with the SEC, after notice-and-comment.
    \158\ FinCEN notes that although certain insurance companies are 
required to establish and implement AML programs and report 
suspicious activity, 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 the Recordkeeping and Travel Rules and other related 
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 
required by FinCEN's regulations. Conversely, FinCEN would not 
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 AML/CFT requirements that would not 
be required by the proposed rule.

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[[Page 12125]]

    FinCEN recognizes the importance of enterprise-wide compliance and, 
therefore, believes it would be beneficial and cost-effective for these 
types of entities to implement one comprehensive AML/CFT program that 
includes all activities covered by FinCEN's regulations. However, these 
entities would not be required to establish one comprehensive AML/CFT 
program; they may instead establish multiple programs to satisfy their 
AML/CFT obligations. What would be required, however, is that the 
covered investment adviser and its affiliated financial institution(s) 
identify and mitigate the risks arising across the organization or 
organizations--for example, as they relate to one customer served by 
both an affiliated bank and an investment adviser. If each of these 
affiliates conducts due diligence on the same customer individually, 
without assessing all of this information between both aspects of its 
business, these businesses' understanding of their shared customer 
would be incomplete, which could lead to a less effective understanding 
of risk and detection of suspicious activity.
    FinCEN is requesting comments on how dually registered investment 
advisers and broker-dealers, or investment advisers affiliated with, or 
a subsidiary of, a bank, broker-dealer, or other BSA-defined financial 
institution, should apply their existing AML/CFT program to their 
investment advisory activities. FinCEN also requests comment on whether 
RIAs or ERAs that are affiliated with a bank or broker-dealer presently 
apply enterprise-wide AML/CFT requirements, and whether certain AML/CFT 
requirements are presently tailored for advisory activities.
4. Delegation of Duties
    Investment advisers' services routinely involve other financial 
institutions that have their own AML/CFT program requirements, such as 
broker-dealers, banks, mutual funds, as well as other investment 
advisers. FinCEN also recognizes that an investment adviser may conduct 
some of its operations through agents or third-party service providers, 
such as broker-dealers in securities (including prime brokers), 
custodians, transfer agents, and fund administrators. For instance, 
many investment advisers that operate private funds delegate the 
implementation and operation of certain aspects of their AML program to 
a third party, most often the fund's administrator, which is an 
independent third-party that provides valuation, administrative, and 
other services to the fund and its investors.\159\
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    \159\ FinCEN understands that some fund administrators are 
nonbank subsidiaries of U.S. bank holding companies and, as such, 
are subject to the global AML policies and procedures of these U.S. 
institutions. FinCEN also understands that some investment advisers 
delegate AML compliance to administrators located outside the United 
States. These administrators are generally located in jurisdictions 
that require regulated entities to have their own AML/CFT policies, 
procedures, and controls. See, e.g., Managed Funds Association, 
Letter to Financial Crimes Enforcement Network, Re: AML Program and 
SAR Filing Requirements for Registered Investment Advisers (RIN: 
1506-AB10), Docket Number FinCEN-2014-003 (Nov. 2, 2015).
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    FinCEN recognizes that it is common in the advisory business to 
delegate a range of compliance, administrative, and other activities to 
third-party providers. In the proposed rule, similar to other BSA-
defined financial institutions, FinCEN would permit an investment 
adviser to delegate contractually the implementation and operation of 
aspects of its AML/CFT program. However, if an investment adviser 
delegates the implementation and operation of any aspects of its AML/
CFT program to another financial institution, agent, fund 
administrator, third-party service provider, or other entity, the 
investment adviser would remain fully responsible and legally liable 
for, and need to demonstrate, the program's compliance with AML/CFT 
requirements and FinCEN's implementing regulations. 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.
    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. In certain 
circumstances, for instance, an investment adviser may deem it 
appropriate to delegate certain aspects of its suspicious activity 
monitoring and reporting obligation to a third party, such as a 
qualified custodian.
    In addition to these financial institutions, there are other third-
party service providers that play an important role in advisory 
activities, such as fund administrators. As FinCEN understands it, for 
advisers who presently implement AML/CFT policies and procedures, it is 
often current practice for those advisers to delegate the 
administration of AML/CFT policies and procedures to their fund 
administrator, along with non-AML/CFT activities such as processing 
subscriptions, transfers, and redemptions administrators. Some fund 
administrators are subsidiaries of U.S. financial or bank holding 
companies that may have enterprise-wide AML/CFT programs, while those 
in foreign jurisdictions may be subject to AML/CFT requirements under 
local law.
    However, as noted above, liability for noncompliance would remain 
with the investment adviser. The investment adviser would still be 
required to identify and document the procedures implemented to address 
its vulnerability to money laundering, terrorist financing, and other 
illicit finance activity, and then undertake reasonable steps to assess 
whether the service provider carries 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 AML/CFT program. Similarly, if an investment adviser 
delegates the responsibility for suspicious activity reporting to an 
agent or a third-party service provider, the adviser remains 
responsible for its compliance with the requirement to report 
suspicious activity, including the requirement to maintain SAR 
confidentiality.
    FinCEN requests comment on the scope of information fund 
administrators currently collect that would support implementation of 
the proposed rule, and on the practical effect of permitting an 
investment adviser to delegate some or all of the requirements in the 
proposed rule. FinCEN also requests comment on the quality of AML/CFT 
programs implemented by fund administrators whose operations are 
primarily conducted outside of the United States, the extent to which 
these fund administrators are able to collect and provide information 
on the natural person and legal entity investors in offshore pooled 
investment vehicles when that information is requested by a U.S. 
investment adviser, the ability of the U.S. investment adviser to 
effectively monitor the implementation of proposed requirements by fund 
administrators, and the quality of suspicious activity or suspicious 
transaction reports submitted by those fund administrators.
5. AML/CFT Program Approval
    Section 1032.210(a)(2) of the proposed rule 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. This provision of the 
proposed rule would ensure that the

[[Page 12126]]

requirement to have an AML/CFT program receives the appropriate level 
of attention and is intended to be sufficiently flexible to permit an 
investment adviser to comply with this requirement based on its 
particular organizational structure. The proposed rule would require an 
investment adviser's written program to be made available for 
inspection by FinCEN or the SEC.
6. The Required Elements of an Anti-Money Laundering/Countering the 
Financing of Terrorism Program
(a) Required Policies, Procedures, and Internal Controls
    Section 1032.210(b)(1) would require an investment adviser to 
establish and implement policies, procedures, and internal controls 
reasonably designed to prevent money laundering, terrorist financing, 
and other illicit finance activities. As noted in section II, these 
risks may include not only activities tied to money laundering, such as 
fraud or corruption, but also any affiliation or relationship with 
either persons designated by the United States or other jurisdictions 
with which the United States regularly coordinates sanctions actions, 
or foreign state-sponsored investment activity in critical or emerging 
technologies. FinCEN recognizes that some types of customers or 
customer activities would pose greater risks for money laundering, 
terrorist financing, or other illicit finance activity than others.
    Generally, under the proposed rule, an investment adviser would be 
required to review, among other things, the types of advisory services 
it provides and the nature of the customers it advises to identify the 
investment adviser's vulnerabilities to money laundering, terrorist 
financing, and other illicit finance activities. It would also need to 
review investment products offered, distribution channels, 
intermediaries that it may operate through, and geographic locations of 
customers and business activities. Accordingly, an investment adviser's 
assessment of the risks presented by the different types of advisory 
services it provides to such customers would need to, among other 
factors, consider the types of accounts offered (e.g., managed 
accounts), the types of customers opening such accounts, the geographic 
location of such customers, and the sources of wealth for customer 
assets. FinCEN expects that investment advisers would generally be able 
to adapt existing policies and procedures to meet this 
requirement.\160\ FinCEN requests comment on whether it should require 
an investment adviser to include all the advisory services it provides 
in its AML/CFT program.
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    \160\ See discussion in section II.B, infra, for a discussion of 
existing Advisers Act recordkeeping and reporting obligations that 
may enable investment advisers to adapt existing policies, 
procedures, and internal controls. In addition, as noted above, 
according to one industry survey, as of 2016, 40 percent of 
participants had adopted AML programs similar to the AML program 
requirements proposed in the Second Proposed Investment Adviser 
Rule.
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    The discussion below focuses on 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. In addition, this section describes FinCEN's 
expectations under a risk-based approach regarding advisory services to 
wrap fee programs. FinCEN requests comment on whether closed-end 
registered funds, wrap fee programs, or other types of accounts advised 
by investment advisers should be, on a risk-basis, reasonably exempted 
from an investment adviser's AML/CFT program.
    Registered Closed-End Funds. Based on one available estimate, at 
the end of 2022, there were approximately 440 registered closed-end 
funds that had approximately $250 billion in AUM.\161\ Unlike open-end 
funds, closed-end funds do not have an existing AML/CFT program or SAR 
requirement. Registered closed-end funds, however, are subject to 
comprehensive SEC regulation and oversight and typically trade in the 
secondary market through broker-dealers who have AML/CFT obligations 
and where there are additional required disclosures and greater 
transparency.
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    \161\ See 2023 Investment Company Factbook at p.2,17, supra n. 
55. Unlike traditional mutual funds (or ``open-end funds''), closed-
end funds are not required to buy back shares from shareholders. 
Closed-end funds sell their shares in a public offering. After that, 
their shares trade on national securities exchanges at market 
prices. The market price may be greater or less than the market 
value of the fund's underlying investments.
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    For these reasons, although FinCEN is not proposing to exempt 
closed-end funds from the AML/CFT or SAR requirements in the proposed 
rule, FinCEN would expect, absent other indicators of high-risk 
activity, investment advisers could treat closed-end funds as lower-
risk for purposes of their AML/CFT programs. FinCEN requests comments 
on the money laundering, terrorist financing, and other illicit finance 
risks faced by closed-end funds, and how entities with existing AML/CFT 
requirements, such as banks and broker-dealers, apply those 
requirements to activity involving closed-end funds.
    Private Funds. As described above, the money laundering, terrorist 
financing, or illicit finance activity risk for private funds may vary 
with the individual fund's investment strategy, targeted investors, and 
other characteristics. Some private funds have traditionally been seen 
as less attractive to certain illicit actors. For instance, due to 
their long-term investment focus and illiquid nature, certain private 
equity funds may be less likely to be used by money launderers, 
terrorist financiers, and others engaging in illicit finance.\162\ 
Other relevant characteristics of private funds include minimum 
subscription amounts, restrictions on the type of investors they can 
accept, and the fact that most funds prohibit the receipt of paper 
currency. However, those factors may not be a barrier to more 
sophisticated fraudsters or corrupt officials, among others, that have 
already placed their funds into a foreign bank and are seeking long-
term returns outside of their home country.
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    \162\ For instance, in the Proposed Unregistered Investment 
Companies Rule, FinCEN proposed to exclude from the scope of its 
proposed AML requirements those funds that did not offer their 
investors the right to redeem any portion of their ownership 
interests within two years after those interests were acquired. See 
68 FR at 60619.
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    An investment adviser that is the primary adviser to a private fund 
or other unregistered pooled investment vehicle is required to make a 
risk-based assessment of the money laundering and terrorist financing 
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 clients for whom the adviser manages assets 
directly. As noted above, the risk-based approach of the proposed 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 proposed rule, investment advisers generally 
should gather pertinent facts about the structure or ownership of the 
fund, including both the extent to which they are 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 receive.

[[Page 12127]]

    Under the proposed rule, where an investment adviser attempted to 
and was unable to obtain identifying information about the investors in 
a private fund, the private fund may pose a higher risk for money 
laundering, terrorist financing, or other illicit finance activity. 
When a private fund's potential vulnerability to money laundering, 
terrorist financing, or other illicit finance activity is high, the 
adviser's procedures would need to reasonably address these higher 
risks so that the adviser is able 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 BSA 
(including to obtain sufficient information to monitor and report 
suspicious activity). FinCEN requests comment on what information is 
currently available to advisers to private funds regarding their 
investors that could help advisers comply with the proposed AML/CFT 
requirements. FinCEN also requests comment on whether a subadviser to a 
private fund or other unregistered pooled investment vehicle should be 
required to establish the same policies, procedures, and internal 
controls as when the primary adviser is the investment adviser, or 
should be required to mitigate the risks of money laundering, terrorist 
financing, or other illicit activity to the investing pooled investment 
vehicle's investors, sponsoring entity, and/or intermediaries.
    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 it 
provides to a pooled investment vehicle that presents a lower risk the 
same as it might rate the advisory services it provides to other types 
of pooled investment vehicles that may present higher risks for 
attracting money launderers, terrorist financers, or other illicit 
actors. FinCEN requests comment on factors related to the activities, 
investors, or structure of private funds or other unregistered pooled 
investment vehicles that could be higher- or lower-risk. FinCEN also 
requests comment on how the proposed rule should apply to advisers who 
manage private funds that receive investments from in-funds or who have 
funds-of-funds who are investors.
    Wrap Fee Programs. In a wrap fee program, investment advisory and 
brokerage services are provided together as a single product.\163\ For 
the purposes of this discussion, FinCEN will focus on wrap fee 
arrangements where an investment adviser is solely acting as a 
portfolio manager and generally managing the customer account to a 
selected model. In these programs, even if both advisers or broker-
dealers are providing services, there is a single ``relationship'' 
entity that is responsible for the relationship with the customer, 
managing the account overall, and selecting the account strategy. That 
program sponsor has the primary relationship with the customer, which 
means that the program sponsor is typically best positioned to 
recognize illicit financial activity in the program.
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    \163\ A ``wrap fee program'' for purposes of the proposed rule 
is a program under which investment advisory and brokerage execution 
services (as well as administrative expenses and other fees and 
expenses) are provided for a single ``wrapped'' (i.e., bundled) fee.
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    While FinCEN recognizes the characteristics described above 
regarding the most common structure of wrap fee programs, it is not 
proposing to exempt wrap fee programs from coverage of the proposed 
rule. Depending on the structure of the wrap fee program, the 
investment adviser may be best positioned to spot illicit finance 
activity (if, for example, it is the program sponsor). Moreover, even a 
non-sponsoring investment adviser may have additional insights into the 
activity of the wrap fee program. FinCEN requests comments on how the 
requirements of the proposed rule can be applied to advisers 
participating in a wrap fee program, to include when an adviser acting 
as portfolio manager is either affiliated or not affiliated with the 
sponsoring entity of the program.
(b) Provide for Independent Testing for Compliance To Be Conducted by 
Company Personnel or by a Qualified Outside Party
    Section 1032.210(b)(2) would require that an investment adviser 
provide for independent testing of the AML/CFT program by the adviser's 
personnel or a qualified outside party. The purpose of this provision 
is to ensure that an investment adviser's AML/CFT program complies with 
the requirements of Sec.  1032.210 and that the program functions as 
designed. Employees of either the investment adviser, its affiliates, 
or unaffiliated service providers may conduct the independent testing, 
so long as those same employees are not involved in the operation and 
oversight of the program.\164\ The employees would have to be 
knowledgeable regarding AML/CFT requirements and qualified to conduct 
independent testing. 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. For instance, an adviser could conduct independent 
testing over periodic intervals (e.g., every 12 to 18 months) or when 
there are significant changes in the adviser's risk profile (with 
respect to money laundering, terrorist financing, or other illicit 
finance risks), systems, compliance staff, or processes. More frequent 
independent testing may be appropriate when errors or deficiencies in 
some aspect of the AML/CFT compliance program have been identified or 
to verify or validate mitigating or remedial actions. Any 
recommendations resulting from such testing would need to be promptly 
implemented or submitted to senior management for consideration.
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    \164\ As noted in this NPRM, some investment advisers may 
implement enterprise-wide AML/CFT programs that are evaluated at the 
holding company level. It would not be consistent with the 
requirements of this proposed regulation for an employee at an 
affiliated financial institution, including the holding company, to 
be responsible for testing the adviser's AML/CFT program, or carry 
out such testing, if the affiliate's employee is responsible for 
administering the adviser's AML/CFT program.
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(c) Designate a Person or Persons Responsible for Implementing and 
Monitoring the Operations and Internal Controls of the Program
    Section 1032.210(b)(3) would require 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. 
Under the proposed rule, an investment adviser may designate a single 
person or persons (including in a committee) to be responsible for 
compliance. The person or persons should be knowledgeable and competent 
regarding AML/CFT requirements, the adviser's relevant policies, 
procedures, and controls, as well as the adviser's money laundering, 
terrorist financing, and other illicit finance risk. The person or 
persons should have full responsibility and authority to develop and 
implement appropriate policies, procedures, and internal controls 
reasonably designed to prevent the investment adviser from being used 
for those risks. Whether the compliance officer is dedicated full time 
to AML/CFT compliance would depend on the size and type of advisory 
services the adviser provides and the customers it serves. A person 
designated as a compliance officer should be an officer

[[Page 12128]]

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.\165\
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    \165\ In particular, RIAs who are subject to the SEC's 
Compliance Rule (17 CFR 275.206(4)-7), could designate their chief 
compliance officer under that rule to be responsible for this 
provision of the proposed rule. The proposed rule does not, however, 
require that an investment adviser designate the same person.
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(d) Provide Ongoing Training for Appropriate Persons
    Section 1032.210(b)(4) would require that an investment adviser 
provide for ongoing training of appropriate persons. Employee training 
is an integral part of any AML/CFT program. To carry out their 
responsibilities effectively, employees of an investment adviser (and 
of any agent or third-party service provider that is charged with 
administering any portion of the investment adviser's AML/CFT program) 
would have to 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 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. Consequently, under the proposed rule, 
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.\166\ 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.\167\
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    \166\ 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).
    \167\ 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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(e) Ongoing Customer Due Diligence (CDD)
    Section 1032.210(b)(5) would require 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.
    These obligations were added to the AML/CFT program requirements 
for financial institutions in May 2016, when FinCEN issued the CDD 
Rule.\168\ The CDD Rule clarified and strengthened CDD requirements for 
covered financial institutions (banks, mutual funds, brokers or dealers 
in securities, futures commission merchants, and introducing brokers in 
commodities) and added a new requirement for these covered financial 
institutions to identify and verify the identity of the natural persons 
who own or control (known as beneficial owners of) legal entity 
customers when those customers open accounts.
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    \168\ FinCEN, Customer Due Diligence Requirements for Financial 
Institutions, final rule, 81 FR 29398 (May 11, 2016).
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    The CDD Rule identifies the four core elements of CDD: (1) 
identifying and verifying the identity of customers; (2) identifying 
and verifying the identity of the beneficial owners of legal entity 
customers opening accounts; (3) understanding the nature and purpose of 
customer relationships; and (4) conducting ongoing monitoring.\169\ 
FinCEN requests comment on the types of information investment advisers 
regularly receive from their customers, and how investment advisors 
would exchange information with other financial institutions, that 
could be used to understand the nature and purpose of the customer 
relationship and identify and monitor suspicious transactions.
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    \169\ Id. at 29398.
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    Requiring investment advisers to perform effective CDD so that they 
understand who their customers are and what type of transactions they 
conduct is a critical aspect of combating all forms of illicit finance 
activity, from terrorist financing and sanctions evasion to more 
traditional financial crimes, including money laundering, fraud, and 
tax evasion. These measures would also enable investment advisers to 
identify and report suspicious transactions by filing SARs in the 
manner that best serves the purposes of the BSA. For investment 
advisers covered by the proposed rule, FinCEN expects to address the 
first requirement of customer identification and verification in a 
future joint rulemaking with the SEC, as noted above, while the third 
and fourth elements of the CDD Rule are being incorporated into these 
AML/CFT Program requirements through proposed Sec.  1032.210(b)(5).
    FinCEN will take the first steps towards incorporating the second 
element by including investment advisers in the definition of ``covered 
financial institution'' under 31 CFR 1010.605(e)(1), discussed at 
further length below. However, the requirement to identify and verify 
the beneficial owners of legal entity customer accounts is predicated 
on the existence of a CIP requirement, which, as just stated, FinCEN 
anticipates addressing in the future joint rulemaking with the SEC.
    The CDD Rule is affected by the Corporate Transparency Act (CTA), 
passed as part of the AML Act. The CTA requires certain types of 
domestic and foreign entities, called ``reporting companies,'' to 
submit specified beneficial ownership information (BOI) to FinCEN.\170\ 
In certain circumstances, FinCEN is authorized to share this BOI with 
government agencies, financial institutions, and financial regulators, 
subject to appropriate protocols.\171\
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    \170\ See generally 31 U.S.C. 5336(b), (c).
    \171\ See 31 U.S.C. 5336(c)(2).
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    FinCEN is issuing three key rules pursuant to the CTA. The first 
rule--the BOI reporting rule--requires certain corporations, limited 
liability companies, and other entities created in or registered to do 
business in the United States to report information about their 
beneficial owners.\172\ This rule was promulgated on September 30, 
2022.\173\ The second establishes rules for who may access BOI for what 
purposes, and what safeguards will be required to ensure that the 
information is secured and protected.\174\ This rule was promulgated on 
December 21, 2023

[[Page 12129]]

and goes into effect on February 20, 2024.\175\
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    \172\ See 31 CFR 1010.380.
    \173\ FinCEN, Beneficial Ownership Information Reporting 
Requirements, final rule, 87 FR 59498 (Sep. 30, 2022).
    \174\ See 31 CFR 1010.955.
    \175\ .FinCEN, Beneficial Ownership Information Access and 
Safeguards, final rule, 88 FR 88732 (Dec. 21, 2023).
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    The CTA also requires FinCEN to revise the CDD Rule no later than 
January 1, 2025.\176\ FinCEN is required to rescind the existing 
specific beneficial ownership identification and verification 
requirements of 31 CFR 1010.230(b)-(j), while retaining the general 
requirement for financial institutions to identify and verify the 
beneficial owners of legal entity customers under 31 CFR 
1010.230(a).\177\ FinCEN expects to undertake a third rulemaking to 
revise the CDD Rule and anticipates that, because of the changes 
required by the AML Act, such a rulemaking could have a significant 
impact on financial institutions' CDD obligations.
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    \176\ See AML Act section 6403(d)(1) (``Not later than 1 year 
after the effective date of the regulations promulgated under 
section 5336(b)(4) of title 31, United States Code, as added by 
subsection (a) of this section, the Secretary of the Treasury shall 
revise the final rule entitled `Customer Due Diligence Requirements 
for Financial Institutions' . . . .''). The effective date of the 
relevant final rule is January 1, 2024.
    \177\ See AML Act section 6403(d)(2) (``[T]he Secretary of the 
Treasury shall rescind paragraphs (b) through (j) of section 
1010.230 of title 31 . . . upon the effective date of the revised 
rule promulgated under this subsection. Nothing in this section may 
be construed to authorize the Secretary of the Treasury to repeal 
the requirement that financial institutions identify and verify 
beneficial owners of legal entity customers under section 
1010.230(a).'').
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    In light of these anticipated forthcoming changes to the CDD Rule 
and the statutory deadline of January 1, 2025, to complete them, FinCEN 
assessed that investment advisers should not be required to apply the 
current CDD requirements to identify and verify the beneficial owners 
of legal entity customer accounts during the period between this 
proposed rulemaking and the effective date of the revised CDD Rule. 
Therefore, FinCEN has not included requirements to identify and verify 
the beneficial owners of legal entity customer accounts in this 
proposed rule. However, FinCEN invites comment regarding whether it 
should apply such requirements once a joint rulemaking addressing CIP 
requirements is finalized, notwithstanding the forthcoming CDD Rule.
    Requirement to Identify and Verify Customers. Existing requirements 
for other BSA-defined financial institutions require that the relevant 
financial institution's CIP include risk-based procedures to verify the 
identity of each customer, to the extent reasonable and practicable. 
The elements of such program must include identifying the customer, 
verifying the customer's identity (through documents or non-documentary 
methods, or a combination thereof), procedures for circumstances where 
the institution cannot form a reasonable belief that it knows the true 
identity of the individual, and determining whether the names of 
customers appear on any government-provided list of known terrorists or 
terrorist organizations. As noted above, Treasury expects to address 
CIP requirements through a future joint rulemaking with the SEC, as 
required by section 326 of the USA PATRIOT Act.\178\
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    \178\ See 31 U.S.C. 5318(l).
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    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 
covered investment advisers refers to information gathered--typically 
at the time of account opening or, in the case of a covered investment 
adviser, at the onset of an advisory relationship--about a customer to 
develop the baseline against which customer activity is assessed for 
suspicious activity reporting.
    Under the proposed rule, investment advisers are obligated to 
report suspicious activity by filing SARs on transactions 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 would necessitate that 
an investment adviser understands the nature and purpose of the 
customer relationship, which informs the baseline against which 
aberrant, suspicious transactions are identified. In some 
circumstances, an understanding of the nature and purpose of a customer 
relationship can also be 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 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 net worth, domicile, 
citizenship, or principal occupation or business.
    For investment advisers, the risk associated with a particular type 
of customer may vary significantly. For instance, key risk factors for 
natural person customers may include the source of funds, the 
jurisdiction in which they reside, their country(ies) of citizenship, 
and their status as a PEP,\179\ among other things. For legal entity 
customers, an investment adviser may consider the type of entity, the 
jurisdiction in which it is domiciled and located, and the statutory 
and regulatory regime of that jurisdiction for company formation and 
other financial transparency requirements, if relevant. The investment 
adviser's historical experience with the individual or entity and the 
references of other financial institutions may also be relevant 
factors.
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    \179\ 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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    Regarding the legal entity customers of an adviser, some may be 
financial intermediaries or third parties that are BSA-defined 
financial institutions and have their own AML/CFT requirements. 
Consequently, the investment adviser may not always have a direct 
relationship with the investors in its legal entity customers. Those 
investors may be introduced to the adviser by other entities who or may 
or may not have their own AML/CFT obligations (such as a broker-dealer, 
other investment adviser, or other intermediary). For these 
intermediary entities, and even though investment advisers would not be 
required to categorically collect beneficial ownership information on 
legal entity customers, investment advisers should collect sufficient 
information such that they are able to detect and report suspicious 
activity associated with intermediated accounts, including activity 
related to underlying clients.\180\ FinCEN expects that non-
intermediary legal entity customers that are not BSA-defined financial 
institutions with their own AML/CFT requirements would be subject to a 
different assessment than intermediary customers that are BSA-defined 
financial institutions for understanding the nature and purpose of the 
customer relationship. The requirement to assess customer risk laid out 
in this proposed rule must be understood in this context.
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    \180\ See FinCEN, Customer Due Diligence Requirements for 
Financial Institutions, notice of proposed rulemaking, 79 FR 45141, 
45161 (Aug. 4, 2014).
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    For understanding the nature and purpose of customers who are 
private funds, FinCEN notes that investment advisers can (1) create and 
administer a private fund or (2) provide advice to a

[[Page 12130]]

private fund that is created and administered by a third party or an 
intermediary. While the particular role played by the investment 
adviser will affect the type of information the adviser can collect 
about the investors in such a fund, the adviser should collect 
sufficient information to develop a customer baseline for suspicious 
activity reporting regarding the private fund. FinCEN invites comments 
on other types of information, other than beneficial ownership 
information, that could be collected to understand the nature and 
purpose of a customer relationship with a private fund.
    Ongoing Monitoring to Identify Suspicious Transactions and Update 
Customer Information. This element of CDD would 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.\181\ As proposed, the obligation to update 
customer information would generally only be triggered when the 
investment adviser became aware of information as part of its normal 
monitoring relevant to assessing the potential risk posed by a 
customer; it is not intended to impose a categorical requirement to 
update customer information on a regularly occurring, pre-determined 
basis. Similar to the CDD obligations for mutual funds,\182\ under the 
proposed Sec.  1032.210(b)(5)(ii), investment advisers would be 
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.
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    \181\ FinCEN's proposed SAR filing obligations for investment 
advisers are discussed below.
    \182\ 31 CFR 1024.210(b)(5)(ii); see also FinCEN, 81 FR at 
29424.
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    Ongoing monitoring may be accomplished in several ways. Customer 
information may be integrated into the financial institution'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.
    Regarding legal entity customers, FinCEN assesses that in some 
circumstances, on a risk-basis, an investment adviser would not need 
information relating to investors in those legal entity customers to 
comply with the requirements of the ongoing monitoring obligation. 
However, in other circumstances, investment advisers may need to 
request information regarding investors in their legal entity 
customers. As FinCEN noted in the CDD Rule, the ongoing monitoring 
obligation is intended to apply to ``all transactions by, at, or 
through the financial institution,'' \183\ and not just those that are 
direct customers of the financial institution. Given that risks posed 
by each customer differ, FinCEN finds that the level of risk posed by a 
customer relationship should be a factor influencing the decision to 
request information regarding underlying customers, 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. 
FinCEN is requesting comment on several aspects of the proposed 
requirement to apply CDD obligations described above.
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    \183\ Id.
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    Compliance Date. Section 1032.210(c) states the effective date by 
which an investment adviser would be required to comply with this 
section. Specifically, under this proposed rule, an investment adviser 
would be required to develop and implement an AML/CFT program that 
complies with the requirements of this section on or before twelve 
months from the effective date of the regulation.
7. Duty To Establish, Maintain, and Enforce an AML/CFT Program by 
Persons in the United States
    FinCEN recognizes that many investment advisers are located outside 
the United States or contract certain of their operations outside the 
United States. As FinCEN seeks to harmonize this AML/CFT framework in a 
manner consistent with the SEC's existing framework for investment 
advisers, the proposed rule follows the scope of the SEC's registration 
requirements for RIAs and Form ADV filing requirements for ERAs. 
Consistent with longstanding SEC practice and guidance interpreting 
investment adviser registration requirements under the Advisers 
Act,\184\ unless subject to an exemption, investment advisers located 
abroad generally must register with the SEC if they ``make use of the 
mails or any means or instrumentality of interstate commerce in 
connection with [their] business as an investment adviser.'' \185\ The 
BSA permits FinCEN to regulate financial institutions located outside 
the United States in such circumstances, and FinCEN has previously 
similarly defined certain financial institutions on the basis of SEC 
registration, regardless of their physical location.\186\ In line with 
these requirements and SEC guidance, the proposed rule's requirements 
would therefore apply on the same basis to RIAs and ERAs located 
outside the United States.
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    \184\ 15 U.S.C. 80b-3(a), (d); see also 76 FR 39646, 39668-72 
(Jul. 6, 2011).
    \185\ 15 U.S.C. 80b-3(a).
    \186\ See, e.g., 31 CFR 1023.100(b).
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    FinCEN requests comment on any challenges for investment advisers 
in following the scope of the SEC's registration and filing 
requirements for advisers located outside the United States and any 
potential conflicts with domestic and foreign law. FinCEN also requests 
comment on whether requiring such non-U.S. advisers to file reports of 
suspicious activity with FinCEN is consistent with how the applicable 
SAR rules are applied to broker-dealers or other BSA-defined financial 
institutions or poses any concerns under foreign law, including foreign 
privacy laws.
    For investment advisers covered by the proposed rule, it may be 
appropriate to outsource certain aspects of compliance with the 
proposed rule outside the United States. But 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.\187\ Proposed Sec.  
1032.210(d) would incorporate this statutory requirement with respect 
to the AML/CFT program 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 covered investment advisers, the SEC).\188\
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    \187\ 31 U.S.C. 5318(h)(5).
    \188\ Not all financial institutions that are required to have 
AML/CFT programs under the BSA have Federal functional regulators 
pursuant to 15 U.S.C. 6809.
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    FinCEN recognizes RIAs and ERAs (as well as other financial 
institutions) may currently have AML/CFT staff and operations outside 
of the United States to improve cost efficiencies, to enhance 
coordination particularly with respect to cross-border operations, or 
for other

[[Page 12131]]

reasons. FinCEN requests comment on a variety of potential questions or 
challenges that may arise for financial institutions as they address 
this requirement, including questions about the scope of the 
requirement and the obligations of persons that are covered. FinCEN 
intends to consider whether additional interpretive language would be 
appropriate in a final rule.

F. Reports of Suspicious Transactions

    Under the BSA, FinCEN (through a delegation from the Secretary) is 
authorized to require financial institutions to report suspicious 
transactions relevant to a possible violation of law or 
regulation.\189\ FinCEN has issued regulations under this authority 
requiring banks, casinos, money services businesses, broker-dealers in 
securities, mutual funds, insurance companies, futures commission 
merchants, loan or finance companies, futures commission merchants, and 
introducing brokers in commodities to report suspicious activity by 
submitting SARs to FinCEN.\190\ Suspicious activity reporting by these 
and other types of financial institutions provide information that is 
highly useful to law enforcement and regulatory investigations and 
proceedings, as well as in the conduct of intelligence activities to 
protect against international terrorism.\191\
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    \189\ 31 U.S.C. 5318(g)(1). As amended by the USA PATRIOT Act, 
subsection (g)(1) states generally that ``the Secretary may 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.''
    \190\ See 31 CFR 1020.320, 1021.320, 1022.320, 1023.320, 
1024.320, 1025.320, 1026.320, and 1029.320.
    \191\ See 31 U.S.C. 5311. See also FinCEN, Year in Review for FY 
2022 (Apr. 21, 2023) (providing additional information on the value 
of BSA data), https://www.fincen.gov/sites/default/files/shared/FinCEN_Infographic_Public_2023_April_21_FINAL.pdf.
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    Accordingly, this proposed rule would add a new section to FinCEN 
regulations, proposed Sec.  1032.320, that would similarly require 
investment advisers to file SARs for any suspicious transaction 
relevant to a possible violation of law or regulation. FinCEN would 
expect that requiring investment advisers to report suspicious activity 
would similarly provide highly useful information for investigations 
and proceedings involving domestic and international money laundering, 
terrorist financing, and other illicit finance activity, as well as for 
intelligence purposes. Requiring investment advisers to report 
suspicious activity would also narrow the regulatory gap that may be 
exploited by money launderers, terrorist financiers, or other illicit 
actors seeking access to the U.S. financial system through financial 
institutions not required to report suspicious transactions. The 
proposed requirement is also generally consistent with the existing SAR 
filing requirements for other financial institutions under existing 
regulations. As explained above, the proposed rule would not require 
investment advisers to file SARs with respect to any mutual fund that 
it advises.
1. Reports by Investment Advisers of Suspicious Transactions
    Proposed Sec.  1032.320(a) sets forth the criteria for which an 
investment adviser would be obligated to report suspicious transactions 
that are conducted or attempted by, at, or through an investment 
adviser and involve or aggregate at least $5,000 in funds or other 
assets. 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 Sec.  1032.320(a)(1) contains the general statement of the 
obligation to file reports of suspicious transactions. The obligation 
would extend to transactions conducted or attempted by, at, or through 
an investment adviser. To clarify that the proposed rule imposes a 
reporting requirement that is uniform with those for other financial 
institutions, Sec.  1032.320(a)(1) incorporates language from the SAR 
rules applicable to other financial institutions, such as banks, 
broker-dealers in securities, mutual funds, casinos, and money services 
businesses.
    Proposed Sec.  1032.320(a)(2) would require the reporting of 
suspicious activity that involves or aggregates at least $5,000 in 
funds or other assets. The $5,000 threshold in this proposed rule is 
consistent with the SAR filing requirements for most other financial 
institutions that are subject to a SAR reporting requirement under 
FinCEN's rules implementing the BSA.\192\ Furthermore, proposed Sec.  
1032.320(a)(1) would permit 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. Thus, the rule would 
encourage the voluntary reporting of suspicious transactions, such as 
those below the $5,000 threshold of the proposed rule in Sec.  
1032.320(a)(2). Such voluntary reporting would be subject to the same 
protection from liability as mandatory reporting pursuant to 31 U.S.C. 
5318(g)(3).
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    \192\ See 31 CFR 1020.320(a), 1021.320(a), 1024.320(a), 
1023.320(a), 1026.320(a), and 1029.320(a) (requiring mutual funds, 
broker-dealers in securities, banks, casinos, futures commission 
merchants and introducing brokers, and loan or finance companies to 
report suspicious transactions if they involve in the aggregate at 
least $5,000).
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    Section 1032.320(a)(2)(i) through (iv) specify 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.
    The proposed rule would also require, including through the 
obligation to conduct ongoing CDD, at proposed Sec.  1032.210(b)(5), 
that an investment adviser evaluate customer activity and relationships 
for money laundering, terrorist financing, and other illicit finance 
risks and design a suspicious transaction monitoring program that is 
appropriate for the particular investment adviser in light of such 
risks. For some investment advisers, such a program may include 
information that may be held by a qualified custodian receiving and 
sending customer funds. Some of the types of suspicious activity 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 include an investor in such a fund requesting access to 
detailed non-public technical information about a portfolio company 
that is inconsistent with a professed focus on economic return. 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

[[Page 12132]]

avoid funds being transmitted through certain jurisdictions.
    Suspicious activity could 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. As discussed above, FinCEN believes that 
investment advisers should be able to build upon existing policies, 
procedures, and internal controls they currently have in place to 
comply with the Federal securities laws to which they are subject to 
report suspicious activity.
    Section 1032.320(a)(3) would provide 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. However, where 
more than one investment adviser, or another financial institution with 
a separate suspicious activity reporting obligation,\193\ is involved 
in the same transaction, only one report jointly filed on behalf of all 
involved financial institutions would be required. 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 activity. Furthermore, as 
discussed above, some investment advisers are dually registered or 
affiliated with another financial institution. It would be permissible 
for either the investment adviser or the other financial institution to 
file a single joint report provided that the joint report contained all 
relevant facts and that each institution maintained a copy of the 
report and any supporting documentation. The same approach would apply 
when more than two financial institutions are involved. FinCEN requests 
comment on whether there are existing requirements under the Advisers 
Act or other laws or regulations that could assist investment advisers 
in complying with the proposed SAR requirements. FinCEN also requests 
comment on what guidance would be useful in identifying activity that 
may require the filing of a SAR.
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    \193\ 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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2. Filing and Notification Procedures
    Proposed Sec.  1032.320(b)(1) through (4) 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 reporting investment adviser of facts that may 
constitute a basis for filing a SAR, the adviser would need 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 also need to collect and maintain supporting 
documentation relating to each SAR separately and make such 
documentation available to FinCEN, any Federal, State, or local law 
enforcement agency; 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. 
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 could also 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 be required under 
Sec.  1032.320(b)(4) to notify immediately by telephone the appropriate 
law enforcement authority in addition to filing a timely SAR.
    FinCEN requests comment on how an investment adviser would apply 
the proposed SAR filing obligation for assets held by a qualified 
custodian. FinCEN also requests comment on whether there should be an 
exception to the proposed SAR filing requirement for certain violations 
that are appropriately reported to the SEC under the Federal securities 
laws, or for violations with respect to a mutual fund advised by the 
investment adviser. Lastly, FinCEN requests comment on whether the 
proposed SAR filing requirement would produce operational or other 
challenges.
3. Retention of Records
    Proposed Sec.  1032.320(c) would provide that investment advisers 
must maintain copies of filed SARs and the underlying related 
documentation for a period of five years from the date of filing. As 
indicated above, supporting documentation would need to be made 
available to FinCEN and the prescribed law enforcement and regulatory 
authorities, upon request.
4. Confidentiality of SARs
    Proposed Sec.  1032.320(d) would provide 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 Sec.  
1032.320(d)(1)(ii). Section 1032.320(d)(1)(i) would generally provide 
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 further provide 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. In addition to reports of suspicious activity 
required by the proposed rule, investment advisers would be prohibited 
from disclosing voluntary reports of suspicious activity.
    Proposed Sec.  1032.320(d)(1)(ii) would provide three rules of 
construction that clarify the scope of the prohibition

[[Page 12133]]

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. As discussed above, the 
proposed rules of construction would primarily describe 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 Sec.  
1032.320(d)(1). The rules of construction proposed in this rulemaking 
would remain 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 Sec.  1032.320(d)(1)(ii)(A)(1), 
would authorize 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 Sec.  1032.320(d)(1)(ii)(A)(2), 
would provide 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. An investment 
adviser, or any current or former director, officer, employee, or agent 
of an investment adviser, therefore, would not be 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.\194\ 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 connection with certain employment references or 
termination notices, to the full extent authorized in 31 U.S.C. 
5318(g)(2)(B).
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    \194\ To the extent permitted by existing FinCEN regulations and 
guidance, this would include non-U.S. financial institutions.
---------------------------------------------------------------------------

    The third rule of construction, in Sec.  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.
    FinCEN recognizes that the sharing of SARs and other relevant 
information indicative of illicit activity can strengthen the ability 
of financial institutions to prevent illicit finance activity from 
entering the U.S. financial system. FinCEN will consider permitting 
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, and consistent with SAR sharing guidance 
finalized in 2010 and applicable to other BSA-defined financial 
institutions.\195\ FinCEN requests comment on this specific issue. 
FinCEN further requests comment on whether there are other entities or 
activities where the sharing of SARs would further the purposes of the 
BSA, and if so, how such sharing would be consistent with the BSA and 
how investment advisers would be able to maintain the confidentiality 
of shared SARs.
---------------------------------------------------------------------------

    \195\ See FinCEN, Sharing Suspicious Activity Reports by 
Securities Broker-Dealers, Mutual Funds, Futures Commission 
Merchants, and Introducing Brokers in Commodities with Certain U.S. 
Affiliates, FIN-2010-G005 (Nov. 23, 2010); FinCEN, Sharing 
Suspicious Activity Reports by Depository Institutions with Certain 
U.S. Affiliates, FIN-2010-G006 (Nov. 23, 2010).
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    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. 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 \196\ or for use in a private legal proceeding, including a 
request under 31 CFR 1.11.\197\ Accordingly, the provision would not 
permit such disclosure by government users in response to these 
requests or uses.
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    \196\ For purposes of this rulemaking, ``non-public 
information'' refers to information that is exempt from disclosure 
under the Freedom of Information Act.
    \197\ 31 CFR 1.11 is the Department of the Treasury's regulation 
governing demands for testimony or the production of records of 
Department employees and former employes in a court or other 
proceeding.
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5. Limitation of Liability
    Proposed Sec.  1032.320(e) would provide protection from liability, 
also known as 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).\198\ This protection 
would extend to an investment adviser and any current or former 
director, officer, employee, or agent of an investment adviser.
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    \198\ 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, section 351(a). Public Law 107-56, Title III, 351, 115 Stat. 
272, 321(2001); 31 U.S.C. 5318(g)(3).
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6. Compliance
    Proposed Sec.  1032.320(f) would note that FinCEN or its delegates 
would examine compliance by investment advisers with the obligation to 
report suspicious transactions and 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 Sec.  1010.810(d), FinCEN has the authority to 
impose civil penalties for violations of the BSA and its regulations.
7. Consultation
    FinCEN will consult on the SAR filing requirements contained in the 
proposed rule with the Attorney General and appropriate representatives 
of State bank supervisors, State credit union supervisors, and the 
Federal functional regulator as required by section 6202 of the AML Act 
of 2020 (codified at 31 U.S.C. 5318(g)(5)). Pursuant to this section, 
in imposing any requirement to report any suspicious transaction under 
this subsection, the Secretary of the Treasury, in consultation with 
the Attorney General, appropriate

[[Page 12134]]

representatives of State bank supervisors, State credit union 
supervisors, and the Federal functional regulators, shall consider 
items that include--
    <bullet> the national priorities established by the Secretary;
    <bullet> the purposes described in section 5311 of the BSA; and
    <bullet> 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.\199\
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    \199\ 31 U.S.C. 5318(g)(5).
---------------------------------------------------------------------------

    These items have been considered by the Treasury as described 
elsewhere in this proposed rule. The AML/CFT National Priorities 
include combatting corruption, fraud, and transnational crime.\200\ For 
example, as discussed in section II.C above, 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 as discussed in section II.C.2, 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. This section, particularly subsection 
F.2, details the typologies that should be reported and how advisers 
may do so in a risk-based manner most beneficial to Federal law 
enforcement and intelligence agencies.
---------------------------------------------------------------------------

    \200\ See FinCEN, Anti-Money Laundering and Countering the 
Financing of Terrorism National Priorities (FinCEN, AML/CFT 
Priorities), (Jun. 30, 2021), https://www.fincen.gov/sites/default/files/shared/AML_CFTPriorities(June30%2C2021).pdf.
---------------------------------------------------------------------------

    Through this rulemaking process, Treasury will consult with the 
relevant State and Federal regulators. This proposed rule has already 
been sent to the Department of Justice and to the SEC as the Federal 
functional regulator for investment advisers for interagency 
consultation, and their input on this issue has been invited. Federal 
banking regulators have also been invited to comment on all aspects of 
this proposed rule. Treasury plans to reach out to the Conference of 
State Banking Supervisors as a representative of State banking and 
credit union supervisors for consultation on this issue and such 
supervisors are invited to comment on this proposed rule through the 
public comment process as well.

G. Special Information-Sharing Procedures To Deter Money Laundering and 
Terrorist Activity

    Proposed Sec. Sec.  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.\201\ Section 314(a) provides that the Secretary of the Treasury 
adopt regulations to encourage the further cooperation and sharing of 
information regarding credible evidence of terrorist acts or money 
laundering activities among financial institutions, their regulatory 
authorities, and law enforcement authorities.\202\ Section 314(b) 
provides financial institutions with the ability to share information 
regarding parties suspected of possible terrorist or money laundering 
activities with another financial institution upon notice to the 
Treasury under a safe harbor that offers protections from 
liability.\203\
---------------------------------------------------------------------------

    \201\ See 31 CFR 1010.520, 1010.540.
    \202\ See 31 U.S.C. 5311 (statutory notes).
    \203\ Id.
---------------------------------------------------------------------------

    FinCEN's regulations at 31 CFR part 1010, subpart E--in particular, 
31 CFR 1010.520 and 1010.540--implement sections 314(a) and 314(b) of 
the USA PATRIOT Act, respectively. Section 1010.520, regarding 
information sharing with government agencies, applies to financial 
institutions generally. Section 1010.540, regarding voluntary 
information sharing between financial institutions, applies to 
financial institutions that are required to have AML/CFT programs--
i.e., financial institutions that have not been exempted from that 
requirement--with certain exclusions. In contrast to the approach 
described above, FinCEN proposes to require investment advisers to 
apply these requirements to any mutual funds that they advise.
    This proposed rule, by designating investment advisers as financial 
institutions under the BSA, would apply 1010.520 and 1010.540 to 
investment advisers. Proposed Sec. Sec.  1032.500, 1032.520, and 
1032.540, moreover, would explicitly subject investment advisers to the 
provisions of Sec. Sec.  1010.520 and 1010.540. Section 1032.500 would 
state generally that investment advisers are subject to the special 
information sharing procedures of subpart E. In turn, proposed 1032.520 
would cross-reference 31 CFR 1010.520, and proposed Sec.  1032.540 
would cross-reference 31 CFR 1010.540, expressly applying these 
provisions to investment advisers. The proposed provisions, therefore, 
would make clear that FinCEN's rules implementing section 314 would 
apply to investment advisers. 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.\204\ An investment adviser would then be 
required to report any such identified information to FinCEN.\205\
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    \204\ 31 CFR 1010.520(b)(3)(i).
    \205\ 31 CFR 1010.520(b)(3)(ii).
---------------------------------------------------------------------------

    FinCEN is proposing to apply these information sharing requirements 
so that investment advisers would be better able to identify and report 
money laundering, terrorist financing, and other illicit finance 
activity, and the U.S. Government would have a more detailed 
understanding of illicit finance activity and risk among investment 
advisers. Under the proposed rule, which adopts by reference 31 CFR. 
1010.540, law enforcement would be able to request from investment 
advisers, where there is reasonable suspicion and credible evidence, 
potential lead information that might otherwise never be 
uncovered.\206\ 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, which would enable 
broader understanding of customer risk and filing of/or file more 
comprehensive SARs, for example.\207\
---------------------------------------------------------------------------

    \206\ FinCEN, FinCEN's 314(a) Fact Sheet (Sept. 5, 2023), 
https://www.fincen.gov/sites/default/files/shared/314afactsheet.pdf. 
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.
    \207\ FinCEN, FinCEN's 314(b) Fact Sheet (Dec. 2020), available 
at https://www.fincen.gov/sites/default/files/shared/314bfactsheet.pdf (noting, in part, that participation in 
information sharing pursuant to section 314(b) is voluntary, and 
FinCEN strongly encourages financial institutions to participate).
---------------------------------------------------------------------------

    FinCEN seeks comment on whether the proposed rule should apply the 
special information sharing procedures

[[Page 12135]]

under 31 CFR 1010.520 and 1010.540 to investment advisers. FinCEN also 
seeks comment on the circumstances under which investment advisers 
would enter into voluntary 314(b) information sharing arrangements.

H. Special Standards of Diligence; Prohibitions; and Special Measures 
for Investment Advisers

    FinCEN's regulations contain several standards, prohibitions, and 
other requirements for financial institutions under certain 
circumstances in 31 CFR part 1010, subpart F (31 CFR 1010.600 through 
1010.670). FinCEN is proposing to apply several of these provisions to 
investment advisers. FinCEN would reflect this in a general cross-
reference, proposed Sec.  1032.600, that would state that investment 
advisers are subject to those ``special standards of diligence; 
prohibitions; and special measures'', and explicitly cross-reference 31 
CFR part 1010, subpart F. FinCEN does not propose to permit investment 
advisers to exempt from any mutual funds that they advise these 
requirements under Subpart F. FinCEN is also proposing several other 
regulatory changes to apply these provisions to investment advisers as 
discussed further below.
1. Definition of ``Correspondent Account'' and ``Covered Financial 
Institution''
    FinCEN is proposing to amend two definitions in 31 CFR 1010.605 as 
these definitions would apply to investment advisers. First, it would 
amend the definition of ``account'' in Sec.  1010.605(c), as applied to 
the meaning of ``correspondent account,'' to include, as applied to 
investment advisers, ``any contractual or other business relationship 
established between a person and an investment adviser to provide 
advisory services.'' FinCEN seeks public comment on this definition--
and more broadly how the concept of a ``correspondent account'' may 
apply to investment advisers, to the extent investment advisers 
establish accounts to handle financial transactions, such as treasury 
investment clearing, for foreign financial institutions.
    Second, FinCEN is also proposing to revise 31 CFR 1010.605(e)(1) 
(as well as add corresponding cross-references as proposed Sec. Sec.  
1032.610 and 1032.620) to include investment advisers in the definition 
of ``covered financial institution.'' This would have several effects. 
First, it would expressly subject investment advisers to FinCEN's rules 
implementing special standards of due diligence for correspondent 
accounts established or maintained for foreign financial institutions 
and private banking accounts established or maintained for non-U.S. 
persons.\208\ As described previously and discussed at greater length 
below, defining investment advisers as ``covered financial 
institutions'' would ordinarily place investment advisers within the 
scope of requirements for the collection and verification of beneficial 
ownership information of legal entity customers as laid out in Sec.  
1010.230. However, as described above, FinCEN expects that the 
requirement to collect and verify beneficial ownership information for 
legal entity customers to be addressed in a future rulemaking. 
Accordingly, the proposed revised Sec.  1010.605(e)(1) would expressly 
provide that an investment adviser would not be considered a ``covered 
financial institution'' for the purposes of Sec.  1010.230.
---------------------------------------------------------------------------

    \208\ See 31 CFR 1010.610 and 1010.620. FinCEN notes that it 
does not propose in this rulemaking to amend the definition of 
``private banking account'' at 31 CFR 1010.605(m).
---------------------------------------------------------------------------

2. Special Standards for Diligence
    Proposed Sec. Sec.  1032.610 and 1032.620 adopt by reference 
Sec. Sec.  1010.610 and 1010.620, which rely on definitions in 1010.605 
in implementing section 312 of the USA PATRIOT Act. Section 312 of the 
USA PATRIOT Act establishes special due diligence requirements for 
private banking and correspondent bank accounts involving foreign 
persons.\209\ Because the due diligence requirements of Sec. Sec.  
1010.610 and 1010.620 apply to ``a covered financial institution'' as 
defined by Sec.  1010.605(e)(1), adding investment advisers to this 
definition, as discussed, would subject investment advisers to the 
requirements of Sec. Sec.  1010.610 and 1010.620. The proposed rule 
would add cross references (proposed Sec. Sec.  1032.610 and 1032.620) 
in the proposed investment adviser regulatory part of the FinCEN 
regulations, part 1032, directing investment advisers to the due 
diligence requirements of Sec. Sec.  1010.610 and 1010.620.
---------------------------------------------------------------------------

    \209\ Public Law 107-56, section 312 (Oct. 26, 2011), codified 
as 31 U.S.C. 5318(i).
---------------------------------------------------------------------------

    Section 312's implementing regulations require that covered 
financial institutions maintain due diligence programs for 
correspondent accounts for foreign financial institutions and for 
private banking accounts that include policies, procedures, and 
controls that are reasonably designed to detect and report any known or 
suspected money laundering or suspicious activity conducted through or 
involving any such correspondent or private banking accounts.\210\ 
These provisions also set certain minimum standards for such due 
diligence programs, as well as procedures for enhanced due diligence 
for correspondent accounts for foreign banks \211\ and private banking 
accounts for senior foreign political figures.\212\
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    \210\ 31 CFR 1010.610 through 1010.620.
    \211\ 31 CFR 1010.610(b).
    \212\ 31 CFR 1010.620(c).
---------------------------------------------------------------------------

    Applying these special standards of due diligence to investment 
advisers would assist RIAs and ERAs in understanding risk and 
identifying illicit activity in certain intermediated advisory 
relationships. Specifically, these standards would address 
relationships with high-net worth non-U.S. customers and foreign 
financial institutions that may be acting on behalf of higher-risk non-
U.S. customers, when those relationships involve correspondent accounts 
for foreign financial institutions or private banking accounts.
    FinCEN's proposed rule would subject investment advisers to special 
due diligence standards consistent with the special due diligence 
standards applied to similarly situated financial institutions under 
the BSA. For instance, mutual funds, which are advised by RIAs, are 
already subject to the section 312 requirements.\213\ FinCEN requests 
comment on whether it is appropriate to apply the special due diligence 
requirements for correspondent and private banking accounts as proposed 
at Sec. Sec.  1032.610 and 1032.620 to investment advisers, and if 
doing so would further the purposes of the BSA and protect the U.S. 
financial system from national security threats.
---------------------------------------------------------------------------

    \213\ 31 CFR 1024.610 and 1024.630.
---------------------------------------------------------------------------

3. Special Measures
    Section 311 of the USA PATRIOT Act requires U.S. financial 
institutions to implement certain ``special measures'' if the Secretary 
finds that reasonable grounds exist to conclude that a foreign 
jurisdiction, institution, class of transaction, or type of account is 
a ``primary money laundering concern.'' \214\ Section 9714(a) of the 
Combatting Russian Money Laundering Act allows for similar special 
measures in the context of Russian illicit finance.\215\ FinCEN is 
proposing that investment advisers be required to comply with special 
measures issued pursuant to sections 311 and 9714(a) in order to 
maintain the options available under these sections to protect the U.S. 
financial system from certain illicit finance threats and to require 
investment advisers to meet obligations

[[Page 12136]]

consistent with obligations imposed on other BSA-defined financial 
institutions under sections 311 and 9714 special measures.
---------------------------------------------------------------------------

    \214\ 31 U.S.C. 5318A.
    \215\ Section 9714 (as amended) can be found in a note to 31 
U.S.C. 5318A.
---------------------------------------------------------------------------

    As noted above, proposed Sec.  1032.600 would state generally that 
investment advisers are subject to FinCEN special measures as set forth 
in subpart F of part 1010 and would cross-reference 31 CFR part 1010, 
subpart F, which includes section 311 special measures. FinCEN is not 
proposing any other regulatory changes specifically to apply sections 
311 and 9714 special measures to investment advisers. Some special 
measures, however, base their scope in part on 31 CFR 1010.605's 
definition of ``covered financial institution.'' \216\ Thus, by 
amending that definition to include investment advisers, as discussed, 
the proposed rule would be expressly placing investment advisers among 
the financial institutions subject to these special measures. FinCEN 
requests comment on whether investment advisers enter into advisory 
relationships that are similar to a ``private banking account'' 
relationship as defined at 31 CFR 1010.605.
---------------------------------------------------------------------------

    \216\ See, e.g., 31 CFR 1010.658(a)(3), 1010.659(a)(5), 
1010.660(a)(3), and 1010.661(a)(3).
---------------------------------------------------------------------------

V. Request for Comment

    FinCEN seeks comment on the rule proposed here and whether the 
proposed rule is appropriate in light of the nature of investment 
adviser activities and money laundering, terrorism financing, and other 
illicit finance risks associated with investment advisers. In 
particular, FinCEN seeks comment on the following aspects of the 
proposed rule. For all responses, commenters are encouraged to provide 
the basis for any conclusions drawn in their comments.

Proposed Definition of Investment Adviser

    FinCEN requests comment on all aspects of the definition of 
``investment adviser'' as proposed in Sec.  1010.100(nnn). In 
particular:
    <bullet> Is the definition of ``investment adviser'' sufficiently 
clear?
    <bullet> Are there classes of investment advisers included in the 
proposed definition of investment adviser that present a very low risk 
for money laundering, terrorist financing, or other illicit finance 
activity such that they should appropriately be excluded from the 
definition? If so, why would it be appropriate to exclude such advisers 
from the definition as opposed to retaining those advisers in the 
definition and requiring them to adopt an AML/CFT program that is 
appropriate to their level of risk?
    <bullet> To what extent are State-registered and foreign investment 
advisers that do not meet the definition of ``investment adviser'' 
proposed here at risk for being used for money laundering, terrorist 
financing, or other illicit finance activity? Should these types of 
advisers be included in the proposed definition?
    <bullet> Are there other types of investment advisers that may not 
meet the definition in the proposed rule that are at risk for abuse by 
money launderers, terrorist financers, or other illicit actors that 
should also be subject to the proposed rule for RIAs and ERAs and the 
corresponding supervision and examination? Are there any entities 
excluded from the definition of ``investment adviser'' under section 
202(a)(11) of the Advisers Act, such as family offices, that are at 
risk for such abuses?
    <bullet> Should ERAs be excluded from the proposed definition of 
investment adviser? How could FinCEN otherwise address the money 
laundering, terrorist financing, and other illicit finance risk 
associated with ERAs? Are there such risks that are specific to ERAs?
    <bullet> With regard to ERAs, are there differences in the risks 
associated with an adviser that qualifies for and elects to use the 
exemption under section 203(l) of the Advisers Act as compared to those 
associated with an adviser that qualifies for and elects to use the 
exemption under section 203(m) of the Advisers Act that would warrant 
different treatment under the BSA and the rule proposed here? If so, 
please offer examples of how each group may be treated under the 
proposed rule noting how their treatment differs in line with their 
differing risks.
    <bullet> Are there certain services or activities provided by 
investment advisers that present a very low risk for money laundering, 
terrorist financing, or other illicit finance activity such that they 
could appropriately be excluded, or cases where applying AML/CFT 
requirements would result in information of limited value to law 
enforcement and regulators? Please provide specific examples if so.
    <bullet> Should the definition of investment adviser apply to non-
U.S. advisers registered or required to register with the SEC (for 
RIAs) or that report to the SEC on Form ADV (for ERAs)? What would be 
the logistical challenges of this approach?
    <bullet> What are the benefits to and challenges of requiring such 
non-U.S. advisers to file reports of suspicious activity with FinCEN on 
activities involving U.S. customers or the U.S. financial system?

A. Proposed Requirement To Require Advisers To File CTRs and Comply 
With the Recordkeeping and Travel Rules

    FinCEN requests comment on the application of the Recordkeeping and 
Travel Rules and CTR filing requirements. In particular:
    <bullet> Are there circumstances where investment advisers should 
be exempt from complying with the requirements of the Recordkeeping and 
Travel Rules?
    <bullet> Do other BSA-defined financial institutions, such as 
qualified custodians, already collect and record this information for 
customers of investment advisers that they facilitate transactions for?
    <bullet> To what extent do investment advisers already regularly 
and consistently collect the information required under the 
Recordkeeping and Travel Rules? If you or your firm would be subject to 
these requirements, to what extent would it represent an additional 
regulatory cost?
    <bullet> To what extent do investment advisers work with qualified 
custodians to maintain separate accounts, subaccounts, or similar 
products and services to manage a customer's funds, including for 
purposes of effecting wire transfers?

B. AML/CFT Program Requirement

    FinCEN requests comment on all aspects of the proposed AML/CFT 
program requirement for investment advisers. In particular:
    <bullet> Which existing requirements under the Advisers Act or the 
regulations adopted thereunder, or other laws or regulations, could 
assist investment advisers in complying with the proposed AML/CFT 
Program requirements? Are any such existing requirements duplicative 
with any proposed requirements?
    <bullet> Which existing measures, such as any existing policies and 
procedures, to implement OFAC sanctions may investment advisers be able 
to rely on to comply with certain requirements in the proposed rule?
    <bullet> Would an exemption from the requirements of the proposed 
rule with respect to customers that are mutual funds be consistent with 
the purposes of the BSA and avoiding duplication of existing AML/CFT 
requirements for mutual funds?
    <bullet> Instead of exempting investment advisers from the 
requirements of the proposed rule with respect to customers that are 
mutual funds, should the proposed rule permit investment advisers and 
their mutual fund

[[Page 12137]]

customer to delegate their AML obligations amongst each other?
    <bullet> Should investment advisers to mutual funds still be 
required to monitor for and file SARs on the mutual fund investors? Why 
or why not?
    <bullet> Should the exemption for mutual funds be dependent on the 
nature of the relationship between the investment adviser and its 
mutual fund customer and the ability of the investment adviser to meet 
AML/CFT obligations?
    <bullet> Other than mutual funds, are there other categories of 
entities that could be, on a risk-basis, reasonably exempted from an 
investment adviser's AML/CFT program? Why or why not?
    <bullet> Should we require an investment adviser to include in its 
AML/CFT program all of the advisory services it provides, including 
whether acting as the primary adviser or a subadviser?
    <bullet> Are there certain subadvisory activities or circumstances 
that should be included or excluded from coverage of this proposed 
rule, such as the specific services provided as a subadviser or the 
particular type of investment adviser serving as the primary adviser?
    <bullet> To what extent would a subadviser's AML/CFT program 
overlap with the primary adviser's AML/CFT program and how could 
possible duplication of effort be mitigated? For example, should the 
proposed rule expressly permit a subadviser to consider the existence 
and operation of the primary adviser's program in satisfying the 
subadviser's own obligations?
    <bullet> Is there an increased risk for a subadviser to be used for 
money laundering, terrorist financing, or other illicit finance 
activity when providing advisory services to a customer that has a 
primary adviser that is not an investment adviser (as defined in the 
proposed rule)?
    <bullet> Are there other similar arrangements where an investment 
adviser may be sub-contracted to provide services to another investment 
adviser that should or should not be in scope of an investment 
adviser's AML/CFT program?
    <bullet> Do investment advisers that are affiliated with a dually 
registered bank or broker-dealer currently apply AML/CFT program 
requirements and other AML/CFT measures applicable to the bank or 
broker-dealer in any of their advisory activities? If so, which 
activities and which requirements are applied?
    <bullet> How do investment advisers that are subsidiaries of banks 
currently apply AML/CFT measures that are applicable to their parent 
banks?
    <bullet> How do investment advisers that are affiliated with a bank 
or broker-dealer apply enterprise-wide AML/CFT requirements? Are there 
certain enterprise-wide AML/CFT requirements that are presently 
tailored to address the risks arising in advisory activities?
    <bullet> What information do fund administrators currently collect 
that would support implementation of the proposed rule?
    <bullet> Is it appropriate to allow an adviser to delegate some 
elements of its AML/CFT program to an entity with which the customer, 
and not the adviser, has the contractual relationship? This would 
include entities providing services to funds advised by the RIA or ERA.
    <bullet> Are there challenges for delegating certain requirements 
of the proposed rule to fund administrators? Are there differences in 
those challenges for fund administrators whose operations are primarily 
conducted inside the United States compared to those whose operations 
are primarily conducted outside of the United States?
    <bullet> Can fund administrators whose operations are primarily 
conducted outside of the United States collect and provide information 
on offshore pooled investment vehicles when that information is 
requested by a U.S. investment adviser? What types of challenges might 
U.S. investment advisers face in receiving such information?
    <bullet> If some or all requirements of the proposed rule are 
delegated to fund administrators whose operations are primarily 
conducted outside of the United States, will the investment adviser be 
able to effectively monitor implementation of those requirements?

C. Proposed Minimum Requirements of the AML/CFT Program

    FinCEN seeks comment on the minimum requirements for an investment 
adviser's AML/CFT program as proposed in Sec.  1032.210(b). In 
particular:
    <bullet> Should closed-end registered funds, wrap fee programs, or 
other types of accounts advised by investment advisers be, on a risk-
basis, reasonably exempted from an investment adviser's AML/CFT 
program?
    <bullet> How can the requirements of the proposed rule be applied 
to advisers participating in a wrap fee program, to include when an 
adviser acting as portfolio manager is either affiliated or not 
affiliated with the sponsoring entity of the program?
    <bullet> The requirements of 31 U.S.C. 5318(h)(5) state that the 
``duty to establish, maintain and enforce'' the 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.'' FinCEN invites comments on 
how this would impact RIAs and ERAs, including the extent to which 
compliance with this requirement would require changes to existing AML/
CFT programs and estimated associated costs with any such changes.
1. Applicability to Private Funds
    <bullet> What information is currently available to advisers to 
private funds regarding the investors in private funds that could help 
advisers comply with the proposed AML/CFT Program requirement?
    <bullet> Are there other factors related to the activities, 
investors, or structure of a private fund that could be higher- or 
lower-risk?
    <bullet> Should a subadviser to a private fund or other 
unregistered pooled investment vehicle with a primary adviser that is 
not an investment adviser (as defined in the proposed rule) be required 
to establish the same policies, procedures, and internal controls as 
when the primary adviser is an investment adviser (as defined in the 
proposed rule)?
    <bullet> If an investor in the private fund or other unregistered 
pooled investment vehicle is itself a pooled investment vehicle, should 
a subadviser to the private fund be required to identify risks and 
incorporate policies, procedures, and internal controls within its AML/
CFT program to mitigate the risks of the investing pooled investment 
vehicle's investors, sponsoring entity, and/or intermediaries when 
there is an increased risk of money laundering, terrorist financing, or 
other illicit activity? How might a subadviser identify when increased 
risks are present?
    <bullet> How should the proposed rule apply to advisers who manage 
private funds that receive investments from in-funds? To what extent 
should advisers be able to rely on the AML/CFT Program of advisers to 
other funds?
    <bullet> How should the proposed rule apply to an adviser to a 
private fund who has funds-of-funds who are investors? To what extent 
should they be able to rely on the AML/CFT Program of advisers who 
advise funds-of-funds?

[[Page 12138]]

2. Risk-Based Procedures for Ongoing Customer Due Diligence
    <bullet> What customer diligence procedures do RIAs already have in 
place to meet the representations in the SIFMA No-Action Letter? Do 
ERAs have similar procedures in place?
    <bullet> What other types of information do investment advisers 
regularly receive from their customers that could be used to understand 
the nature and purpose of a customer relationship?
    <bullet> How would investment advisers exchange information with 
other financial institutions involved in facilitating customer 
transactions, such as qualified custodians, to understand the nature 
and purpose of a customer relationship and conduct ongoing monitoring 
to identify suspicious transactions?
    <bullet> How may investment advisers apply the requirement for 
ongoing monitoring to identify suspicious transactions differently than 
other financial institutions, such as banks and broker-dealers?
3. Identification and Verification of Beneficial Owners of Legal Entity 
Customers
    <bullet> Do you agree with the proposal to wait to apply the 
requirement to collect and verify the beneficial ownership information 
of legal entity accounts at Sec.  1010.230 to investment advisers until 
at or after the CTA-mandated revisions to the CDD Rule, or should 
Treasury apply the existing requirement as soon as a CIP requirement 
for investment advisers is effective?
    <bullet> What types of information regarding private funds, other 
than beneficial ownership information, could an investment adviser 
collect to understand the nature and purpose of a customer relationship 
with a private fund and conduct ongoing monitoring to identify 
suspicious transactions involving the private fund?

D. Proposed Suspicious Activity Reporting Rule

    FinCEN seeks comment on all aspects of the suspicious activity 
reporting rule as proposed in Sec.  1032.320. In particular:
    <bullet> Which existing requirements under the Advisers Act or 
other laws or regulations could assist investment advisers in complying 
with the proposed SAR requirements?
    <bullet> Should there be an exception to the proposed SAR filing 
requirement for certain violations that are appropriately reported to 
the SEC under the Federal securities laws?
    <bullet> Should there be an exception to the proposed SAR filing 
requirement for violations with respect to a mutual fund advised by the 
investment adviser, as proposed? If not, would requiring investment 
advisers to file SARs while exempting mutual funds from an investment 
adviser's AML/CFT program (as proposed) produce any operational or 
other difficulties or challenges?
    <bullet> What guidance would be useful in identifying activity that 
may require the filing of a SAR?
    <bullet> How would an investment adviser apply the proposed SAR 
filing obligation for assets held by a qualified custodian? How would 
an investment adviser obtain, share, and receive information about a 
customer or transactions with a qualified custodian regarding potential 
suspicious activity?
    <bullet> Would the ability to share SARs with corporate affiliates 
that are subject to their own SAR confidentiality regulation assist in 
furthering the purposes of the BSA?
    <bullet> Are there other entities or activities where the sharing 
of SARs would further the purposes of the BSA? How would such sharing 
be consistent with the purposes of the BSA and how would investment 
advisers be able to maintain the confidentiality of shared SARs?

E. Special Information Sharing Procedures

    <bullet> FinCEN seeks comment on whether the proposed rule should 
apply the special information sharing procedures under 31 CFR 1010.520 
and 1010.540 implementing sections 314(a) and 314(b) of the USA PATRIOT 
Act to investment advisers, as proposed at Sec. Sec.  1032.500 and 
1032.540 (cross-referencing 31 CFR part 1010, subpart E, and 31 CFR 
1010.540, respectively).
    <bullet> Under what circumstances would investment advisers enter 
into voluntary 314(b) information sharing arrangements?

F. Special Due Diligence and Section 311 Measures

    <bullet> FinCEN seeks comment on whether it is appropriate to apply 
the special due diligence requirements for correspondent and private 
banking accounts to investment advisers as proposed at 1032.610 and 
1032.620 (cross-referencing 31 CFR 1010.610 and 1010.620, 
respectively), and the special measures under section 311 of the USA 
PATRIOT Act as proposed at 31 CFR 1032.600. Would doing so further the 
purposes of the BSA and protect the U.S. financial system from national 
security threats?
    <bullet> To what extent do investment advisers provide advisory 
services or enter into advisory relationships that are similar to a 
``correspondent account'' relationship as defined at 31 CFR 1010.605? 
What about with respect to a ``correspondent account'' as that term 
would be amended, as proposed?
    <bullet> To what extent do investment advisers enter into advisory 
relationships that are similar to a ``private banking account'' 
relationship as defined at 31 CFR 1010.605?

VI. Severability

    If any of the provisions of this proposed 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.

VII. Regulatory Analysis

    In accordance with Executive Orders 12866, 13563, and 14094 (E.O. 
12866 and its amendments),\217\ this regulatory impact analysis (Impact 
Analysis) is composed of a number of assessments of the anticipated 
impacts of the proposed rule in terms of its expected costs and 
benefits to affected parties. This analysis also includes assessments 
of the impact on small entities pursuant to the Regulatory Flexibility 
Act (RFA) and 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.
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    \217\ See infra.
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    This Impact Analysis finds that the impact associated with the 
proposed rule would primarily affect investment advisers (specifically, 
RIAs and ERAs) and U.S. Federal agencies, and estimates that the total 
present value of costs of the proposed rule over a 10-year time horizon 
ranges from $4.6 billion to $9.3 billion, with a primary estimate of $8 
billion, using a 2 percent discount rate. The annualized costs over a 
10-year time horizon range from $500 million to $1 billion, with a 
primary estimate of $870 million, using a 2 percent discount rate.\218\ 
This proposed 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.
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    \218\ All aggregate figures are approximate and not precise 
estimates unless otherwise specified.
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    Table 1 summarizes the benefits and costs of the proposed 
regulation. The potential benefits are difficult to quantify--and thus 
are unquantified in

[[Page 12139]]

this Impact Analysis--but are reported alongside the monetized costs:
BILLING CODE 4810-02-P
[GRAPHIC] [TIFF OMITTED] TP15FE24.019

BILLING CODE 4810-02-C
    FinCEN has chosen to issue the proposed rule applying AML/CFT 
requirements to RIAs and ERAs instead of two regulatory alternatives: 
(1) applying AML/CFT requirements to RIAs, ERAs, and State-registered 
investment advisers and (2) requiring private funds to collect 
beneficial ownership information on legal entity investors. The first 
alternative would expand the requirements of the BSA to nearly twice as 
many entities (as compared to the proposed rule) at a greater overall 
cost but provide a similar level of benefits (with only limited

[[Page 12140]]

incremental benefits attributable to State-registered investment 
advisers), while the second would reduce the costs of the regulation 
(as compared to the proposed rule) while providing fewer benefits and 
only achieving a small proportion of the objectives of the BSA.
    FinCEN has conducted an initial regulatory flexibility analysis 
(IRFA) pursuant to the RFA and finds that the proposed rule would have 
a significant economic impact on small entities, although FinCEN does 
not assess the number of small entities impacted to be substantial.
    As detailed in the PRA analysis, for the private sector the 
proposed rule is estimated to result in an estimated one-time, upfront 
information collection burden of 7.65 million hours and an average 
annual information collection burden of 5.49 million hours thereafter. 
The estimated one-time, upfront information collection cost is 
approximately $454 million and the estimated average annual recurring 
information collection cost is approximately $316 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 $176 
million.\219\ The UMRA-related analysis for private sector entities has 
been incorporated into this Impact Analysis.
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    \219\ 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,'' 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.
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A. Executive Orders 12866 and Its Amendments

    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 the BSA and applying 
comprehensive AML/CFT measures to these investment advisers are likely 
to reduce this risk.
1. Introduction
    Executive Order 12866 and its amendments direct 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 proposed rule has been designated a ``significant regulatory 
action'' under section 3(f) of Executive Order 12866 and significant 
under section 3(f)(1). Accordingly, the proposed rule has been reviewed 
by the Office of Management and Budget (OMB).
    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 proposed regulatory action and its alternatives.
(a) Statement of the Need for, and Objectives of, the Proposed Rule
    The primary purpose of the proposed 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 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.\220\ While 
investment advisers do not directly 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.
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    \220\ See supra section IV.A.
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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, 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 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 partial information 
concerning the investment adviser's transactions on behalf of a 
particular customer. This limits the ability of law enforcement to 
identify illicit activity that may be occurring through investment 
advisers.
    As discussed in the preamble, the proposed rule would address this 
gap by requiring 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. RIAs and ERAs would be subject to examination for 
compliance with these requirements by the SEC. This would reduce 
instances of investment advisers unwittingly laundering the illicit 
proceeds on behalf of clients and increase the likelihood that 
authorities could detect illicit activity occurring through investment 
advisers and better

[[Page 12141]]

detect complicit investment advisers that knowingly facilitate money 
laundering, terrorist financing, or other illicit finance activity. The 
proposed rule would 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 Proposed Rule
    The proposed regulations would add ``investment adviser'' to the 
definition of ``financial institution'' at 31 CFR 1010.100(t) and add a 
new provision to Sec.  1010.100 defining the term ``investment 
adviser'' to mean RIAs and ERAs.
    With these changes to 31 CFR 1010.100, the proposed rule would then 
subject RIAs and ERAs 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. RIAs and ERAs would be required to maintain an 
AML/CFT program, 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.
    File SARs and CTRs. RIAs and ERAs would be required to file a 
report of any suspicious transaction relevant to a possible violation 
of law or regulation with FinCEN. In addition, RIAs and ERAs would 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.
    Recordkeeping and Travel Rules. RIAs and ERAs would be 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.
    Special Due Diligence Measures for Correspondent and Private 
Banking Accounts. The proposed rule would require RIAs and ERAs 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 proposed 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 
proposed within the proposed 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 proposed rule, they do not impose the specific AML/CFT measures in 
the proposed rule in support of the BSA's statutory purposes. 
Specifically, investment advisers are not required to develop policies, 
procedures, and internal 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 a broker-dealer or are chartered as a banks (and bank 
subsidiaries) or are already subject to AML/CFT requirements. As noted 
above, FinCEN is not proposing to require 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 financing, or other illicit finance 
activity risks posed by the different aspects of the entities' 
businesses and satisfy each of the risk-based AML/CFT program 
requirements to which it will be subject in its capacity as an 
investment adviser, broker-dealer, or bank under the proposed rule. 
Similarly, an investment adviser that is affiliated with, or a 
subsidiary of, another entity required to establish an AML/CFT program 
in another capacity would not be required to implement multiple or 
separate programs because one single program can be extended 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 the entity's business and satisfies each of 
the risk-based AML/CFT program and other BSA requirements to which the 
entity is subject in all of its regulated capacities.
    FinCEN is likewise aware that investment advisers serve as advisers 
to mutual funds, which have their own AML/CFT program requirements. For 
the reasons described above, FinCEN is proposing that an RIA advising a 
mutual fund may deem its AML/CFT program requirements with respect to 
such mutual fund satisfied so long as the mutual fund has developed and 
implemented an AML/CFT program compliant with the AML program 
requirements applicable to mutual funds.
    FinCEN is also aware that the SEC already examines certain 
investment

[[Page 12142]]

advisers for compliance with the Advisers Act and implementing 
regulations. FinCEN anticipates that the SEC's examination of RIA and 
ERA compliance with new requirements will be incorporated into its 
risk-based examination program.
(d) Report Organization
    This Impact Analysis is structured as follows. Section 2 assesses 
the nature and characteristics of the entities and their business that 
will be affected by the proposed rule. Section 3 then identifies the 
expected benefits of the proposed rule, and section 4 then assesses the 
expected costs of the proposed rule to both the private sector and 
government and explains the methodology for doing so. Section 5 then 
assesses potential regulatory alternatives to issuing the proposed 
rule.
    Following the Impact Analysis are the regulatory analyses required 
by the RFA, PRA, UMRA, and other similar laws. These analyses rely on 
certain calculations in the Impact Analysis. Following those are a 
series of questions for public comment regarding the Impact Analysis 
and its methodology which aim to test and refine the assumptions and 
calculations made within the Impact Analysis.
2. Affected Entities
    This section identifies and characterizes the population of 
investment advisers that are likely to be impacted by the proposed 
rule. The proposed rule would cover both RIAs 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 proposed 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 proposed 
rule. First, it describes which investment advisers will be affected by 
the proposed 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 proposed 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 Affected by the Proposed 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.\221\ The 
proposed rule would cover two subsets of investment advisers: RIAs, who 
register or are required to register with the SEC; and ERAs, who are 
exempt from registration but must report certain information to the 
SEC.
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    \221\ 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, 
publishers, statistical ratings agencies, and family offices. See 15 
U.S.C. 80b-2(a)(11)(A)-(G).
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    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.\222\ Form ADV is an SEC-administered self-
disclosure form that collects certain information about each RIA and 
ERA. 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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    \222\ 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.\223\ Besides having AUM above $110 million, additional 
criteria may result in an investment adviser registering with the 
SEC.\224\ 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,\225\ but 
must register instead with the relevant State securities regulator.
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    \223\ 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).
    \224\ 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.
    \225\ 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 million.\226\ ERAs are required to report to 
the SEC on Form ADV.
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    \226\ 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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ii. Size of the Regulated Population
    The number of RIAs and ERAs is well-defined based on the number of 
Form ADV filings. Table 2.1 shows the number of RIAs and ERAs as of 
July 2023 based on each inclusion criterion listed above. One RIA was 
excluded from the regulated population because they reported an 
implausibly high number of total clients.

[[Page 12143]]

[GRAPHIC] [TIFF OMITTED] TP15FE24.020

    In total, there are 15,391 RIAs, with total AUM of $125 trillion 
and roughly 972,000 total employees. There are also 5,846 ERAs with 
total gross assets of $5.2 trillion (ERAs do not report the number of 
employees to the SEC).\229\ With limited exceptions, the proposed rule 
would not apply to RIAs with respect to their mutual funds \230\ (ERAs 
do not advise mutual funds).\231\ Therefore, as a practical matter, 
RIAs that exclusively advise mutual funds would be exempt from most the 
requirements of this rule. Details on cost estimates for these advisers 
are provided in the next sub-section.
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    \227\ Based on a Treasury review of Form ADV information filed 
as of July 31, 2023. See supra n.26. 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.
    \228\ This category also includes already-registered RIAs whose 
AUM is less than $100 million but at least $90 million.
    \229\ ERAs report gross assets for each fund they advise, but 
only if that fund is not reported by another RIA in its own Form 
ADV; therefore, some ERAs report zero gross assets because all of 
the funds they advise are also reported by another RIA.
    \230\ See 31 CFR 1010.100(gg). See section IV.B for additional 
detail on the treatment of mutual funds under the proposed rule.
    \231\ FinCEN does not propose to permit investment advisers to 
exempt mutual funds that they advise from the requirements 31 CFR 
part 1010, subparts E and F (31 CFR 1010.520, 1010.540, and 1010.600 
through 1010.670) that FinCEN proposes to apply to RIAs and ERAs in 
the proposed rule (e.g., certain information sharing, special 
standards, prohibitions, and other requirements).
---------------------------------------------------------------------------

(b) Categorizing the Regulated Population Based on Business Structure
    The economic impact of the proposed 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 proposed rule. Additionally, as described below, survey data 
indicates that some RIAs are already implementing certain requirements 
of the proposed rule.
    RIAs and ERAs are also subject to a variety of regulations and 
reporting requirements, such as those under the Federal securities 
laws, in addition to the proposed rule. In some cases, compliance with 
existing regulations under the Federal securities laws may reduce the 
burden of the proposed 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 proposed 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.\232\ 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.
---------------------------------------------------------------------------

    \232\ See Treasury, 2022 National Money Laundering Risk 
Assessment, p. 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.\233\ 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.
---------------------------------------------------------------------------

    \233\ See SIFMA No Action Letter, supra n. 52; see also Managed 
Funds Association, Sound Practices for Hedge Fund Managers (2009), 
Chapter 6 (Anti-Money Laundering).

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[[Page 12144]]

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 proposed rule.
    Custody Rule. The Custody Rule requires that client funds or 
securities over which an RIA has custody be held at a qualified 
custodian.\234\ 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.
---------------------------------------------------------------------------

    \234\ See 17 CFR 275.206(4)-2.
---------------------------------------------------------------------------

    Compliance Rule. Under the Compliance Rule,\235\ 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 proposed rule. Additionally, the presence of a 
compliance officer may reduce costs associated with designating an AML/
CFT compliance officer, for example by dual-hatting the current chief 
compliance officer.
---------------------------------------------------------------------------

    \235\ 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 example, the percentage of the fund's equity owned by 
broker-dealers, pension plans, and U.S. and non-U.S. persons.\236\ 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 proposed rule.
---------------------------------------------------------------------------

    \236\ See 15 U.S.C. 80b-4(b).
---------------------------------------------------------------------------

    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 proposed rule on RIAs and 
ERAs.
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 (IMCTS Survey), 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 proposed 
rule, including filing SARs, recordkeeping, information sharing, and 
special due diligence measures. Any modifications to existing policies 
or procedures, such as training programs, are assumed to be small and 
would 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 additional measures would need to be implemented under the 
proposed 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 proposed 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.

[[Page 12145]]

    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 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:
    <bullet> 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).\237\
---------------------------------------------------------------------------

    \237\ 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 as a 
bank. The phrase ``dual registrant'' should be interpreted on this 
basis for purposes of this analysis.
---------------------------------------------------------------------------

    <bullet> 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.\238\
---------------------------------------------------------------------------

    \238\ 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.
---------------------------------------------------------------------------

    <bullet> Other advisers. All RIAs or ERAs that are neither dual 
registrants nor affiliates of broker-dealers or banks.
    FinCEN separately categorized RIAs and ERAs into the three groups. 
Although the size of each group is well-defined based on Form ADV data, 
the extent of existing AML/CFT measures within each group is uncertain 
and may vary considerably. The 2016 IMCTS Survey collected information 
from approximately 700 RIAs on their existing implementation of AML/CFT 
measures.\239\ According to the 2016 IMCTS Survey, as of 2016, 
approximately 40 percent of RIAs had already adopted AML/CFT policies 
consistent with the Second Proposed Investment Adviser Rule.\240\ An 
additional 36 percent of RIAs adopted some AML/CFT policies and 
procedures, but those were not in line with those in the Second 
Proposed Investment Adviser Rule. Therefore, approximately 76 percent 
of RIAs had at least some AML/CFT measures in place as of 2016. In 
particular, 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.
---------------------------------------------------------------------------

    \239\ See 2016 IMCTS Survey, supra n. 150.
    \240\ Id.
---------------------------------------------------------------------------

    Based on this information, FinCEN assumed in the baseline for the 
proposed rule, that a minority--but as many as 40 percent--of RIAs had 
in place AML/CFT measures consistent with the requirements of the 
proposed rule. However, that proportion likely varies across the three 
groups defined above. Based on discussions with industry 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 (even if such measures are not required for their advisory 
activities). FinCEN also 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. 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--rather than a limited number of--AML/CFT measures.
    Specifically, FinCEN assessed that a dual registrant is highly 
likely to be applying a significant number of AML/CFT measures, 
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 small and would 
be incorporated into existing routine maintenance, review, and updating 
procedures.
    For RIAs and ERAs with a moderate number of AML/CFT measures in 
place, such as most affiliated advisers, FinCEN assessed that existing 
programs most likely include internal recordkeeping, annual training 
programs, and initial customer due diligence.\241\ 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 RIAs and ERAs would need to implement additional measures 
under the proposed rule.
---------------------------------------------------------------------------

    \241\ See, e.g., SIFMA No Action Letter, supra n. 52.
---------------------------------------------------------------------------

    The remaining RIAs and ERAs, which have a limited number of AML/CFT 
measures in place, would need to implement most of the additional AML/
CFT requirements under the proposed rule. However, FinCEN assessed that 
all RIAs and ERAs are likely to be collecting some customer information 
at the beginning of the client relationship and filing reports \242\ 
that are substantially similar to CTRs.
---------------------------------------------------------------------------

    \242\ 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, n. 50.
---------------------------------------------------------------------------

    Based on this assessment, the RIAs and ERAs in each of the three 
groups were divided based on the proportion that FinCEN 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 used different assumptions to generate lower and upper bounds 
and identify a primary estimate. In this case, ``lower bound'' means 
more 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 proposed rule, while ``upper bound'' 
means more RIAs and ERAs have a limited number of AML/CFT measures in 
place and will have to implement relatively more additional measures 
under the proposed rule. To inform the primary estimate, FinCEN used 
the following assumptions. For RIAs, FinCEN used information from the 
2016 IMCTS Survey as a benchmark for the primary estimate.
    Based on the 2016 IMCTS Survey, FinCEN assumed that 75 percent of 
affiliated RIAs had implemented a moderate number of AML/CFT measures. 
Based on the number of affiliated RIAs, the remaining approximately 34 
percent of other RIAs are implementing a moderate number of AML/CFT 
measures. 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 proposed rule, therefore all RIAs that are not dually registered 
would have to implement the complete set of AML/CFT measures under the 
proposed rule. Based on that assumption, all RIAs and ERAs except 
dually registered entities are assumed to have implemented a limited 
number of AML/CFT measures. For the lower bound estimate, FinCEN 
assumed that 40 percent of all RIAs regardless of business structure 
are implementing a significant number of AML/CFT measures and 36 
percent are

[[Page 12146]]

implementing a moderate number of measures--this includes a mix of 
affiliated and other RIAs.
    FinCEN lacks information on the extent to which ERAs are already 
implementing AML/CFT requirements. Absent a better method to estimate, 
FinCEN assumed the proportion of dual-registered, affiliated, and other 
ERAs meeting AML/CFT requirements was the same as for RIAs across all 
scenarios. FinCEN seeks comment on this assumption, including whether a 
more appropriate method to estimate these proportions is available.
    Classification of RIAs Advising Registered Funds. As discussed 
above, RIAs that exclusively advise mutual funds will be largely exempt 
from the requirements of the proposed 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 (i.e., the mutual funds) 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 2.2 shows the resulting size of the population for each of 
the scenarios described above.
[GRAPHIC] [TIFF OMITTED] TP15FE24.021

(c) Baseline Economic and Financial Characteristics of Regulated 
Population
---------------------------------------------------------------------------

    \243\ Parentheses indicate the percentage of entities within a 
given category by scenario. Totals may not sum precisely due to 
rounding.
---------------------------------------------------------------------------

    This subsection describes the economic and financial profiles of 
RIAs and ERAs subject to the proposed 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 their employee numbers on Form ADV, but 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 2.3 shows the average number of employees for each 
category of investment adviser.

[[Page 12147]]

[GRAPHIC] [TIFF OMITTED] TP15FE24.022

ii. Number of Clients
---------------------------------------------------------------------------

    \244\ Based on a Treasury review of Form ADV information filed 
as of July 31, 2023. See supra n. 26. RIAs report total employees in 
Item 5.A. ERA data come from FinCEN calculations, calculated as the 
median employment among RIAs that report only private fund clients.
---------------------------------------------------------------------------

    On Form ADV, RIAs report the number of clients, enumerated for 
specific types of clients.\245\ As described in section 3 of this 
Impact Analysis, certain costs of the proposed 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 2.4 shows the average 
number of clients of each type, based on the RIA categories defined 
above.
---------------------------------------------------------------------------

    \245\ 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] TP15FE24.023

    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 2.5 reports 
the average number of funds reported per ERA, based on the investment 
adviser categories described above.
[GRAPHIC] [TIFF OMITTED] TP15FE24.024

(d) Other Characteristics of Regulated Entities
---------------------------------------------------------------------------

    \246\ 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.
---------------------------------------------------------------------------

    This section describes the industry classification and business 
size of RIAs and ERAs to be regulated under the proposed 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 (for purposes of the 
NAICS Codes) on Form ADV, and it is 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 NAICS subsector 523 (Securities, 
Commodity Contracts, and Other Financial Investments and Related 
Activities)--with most entities classified in NAICS 5239 (Other 
Financial Investment Activities). 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 Activities) or NAICS 525 (Funds, Trusts, and Other Financial 
Vehicles).
ii. Small Entities
    To assess the prevalence of small businesses affected by the 
proposed 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 assets under 
management ; (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

[[Page 12148]]

investment adviser that is not a small entity.\247\
---------------------------------------------------------------------------

    \247\ 17 CFR 275.0-7 (defining ``small business'' or ``small 
organization'' for purposes of the Advisers Act).
---------------------------------------------------------------------------

    On Form ADV, RIAs report whether they meet the conditions listed 
above. As of July 2023, there were 573 small entities, as reported in 
Table 2.6. ERAs do not report whether they meet the conditions above. 
However, based on a recent SEC rulemaking, and using the SEC's 
rationale here, FinCEN concluded that zero ERAs met the definition of 
small entity.\248\
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    \248\ The SEC's rationale, which FinCEN adopts, is that for an 
investment adviser to constitute an ERA for SEC purposes, the 
adviser would need to have an obligation to register with the SEC. 
An investment adviser with assets under management low enough to 
qualify as a small entity would not have an obligation to register 
with the SEC. See 88 FR 63206, 63383 n. 1895 regarding small entity 
ERAs.
[GRAPHIC] [TIFF OMITTED] TP15FE24.025

    Table 2.7 shows the characteristics of small RIAs compared to all 
other RIAs.
---------------------------------------------------------------------------

    \249\ Based on a Treasury review of Form ADV information filed 
as of July 31, 2023. See supra n. 26. 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. ERAs were presumed not to meet the 
definition of small entity, as discussed above.
    \250\ Id. 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] TP15FE24.026

3. Assessment of Benefits
    The benefits assessed here are more difficult to quantify than the 
costs, but are nonetheless substantial. The primary direct benefits of 
the proposed rule are expected to primarily accrue in the public 
sector, most notably to U.S. law enforcement and the national security 
community, as well as certain Federal functional regulators, as well as 
to the investment adviser industry. Further, the identification of 
illicit activity in the investment adviser industry by applying 
reporting and recordkeeping obligations to those industry participants, 
RIAs and ERAs, that have direct access to customer information would 
enhance detecting, investigating and prosecuting illicit finance 
activity occurring through the industry. The AML/CFT requirements in 
the proposed rule will help address existing information gaps regarding 
suspicious activity reporting discussed in section 1. They will also 
help harmonize AML/CFT requirements between investment advisers and 
similarly situated financial institutions that must comply with these 
requirements.
    In addition, while each provision in the proposed rule may not 
directly provide a benefit, each provision indirectly does so because 
it forms part of a comprehensive framework for identifying and 
reporting money laundering, terrorist financing, or other illicit 
finance activity. For instance, while the requirement for employee 
training and independent testing do not directly lead to increased 
identifying of illicit finance activity, they help ensure that the 
systems and employees who will identify whether an investment adviser 
is being used for such activity are best positioned to do so.
    Specific benefits from the proposed rule include (i) increasing 
access for law enforcement to relevant information for complex 
financial crime investigations, (ii) enhancing interagency 
understanding of priority national security threats and their 
associated financial activity, and (iii) improving financial system 
transparency and integrity, including by aligning with international 
financial standards to strengthen the U.S. financial system from abuse 
by illicit actors. Through these direct benefits, crucial indirect 
benefits would accrue to the public at large by reducing money 
laundering, countering the financing of terrorism and other illicit 
finance activity, and protecting national security.
(a) Strengthening Law Enforcement Investigations of Certain Financial 
Crimes
    Requiring RIAs and ERAs to file SARs and keep certain customer 
records would make 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.\251\ However, for other types of criminal investigations, 
the percentage of criminal investigations supported by BSA reporting 
was even higher. For example, 46 percent of

[[Page 12149]]

transnational organized crime investigations were supported by BSA 
reporting.\252\ 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 Treasury risk 
assessment identified as being most prominently tied to illicit 
proceeds moving through investment advisers.\253\
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    \251\ See FinCEN, Year in Review for FY 2022 (Apr. 21, 2023), 
p.2, https://www.fincen.gov/sites/default/files/shared/FinCEN_Infographic_Public_2023_April_21_FINAL.pdf.
    \252\ Id.
    \253\ See Treasury, Investment Adviser Illicit Finance Risk 
Assessment, https://home.treasury.gov/system/files/136/US-Sectoral-Illicit-Finance-Risk-Assessment-Investment-Advisers.
---------------------------------------------------------------------------

    In particular, information from the reporting of suspicious 
activity and recordkeeping by 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, including through 
private funds advised by at least one RIA, and used to purchase assets 
here.\254\ In another case 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.\255\ These examples demonstrate that investment advisers and 
the funds they advise have been implicated in certain financial crimes, 
and show the scope of potential benefit from covering RIAs and ERAs 
under this proposal.
---------------------------------------------------------------------------

    \254\ See FBI, ``U.S. Seeks to Recover $1 Billion in Largest 
Kleptocracy Case to Date,'' (Jul. 20, 2016), https://www.fbi.gov/news/stories/us-seeks-to-recover-1-billion-in-largest-kleptocracy-case-to-date.
    \255\ 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), https://www.justice.gov/usao-sdny/pr/former-partner-locke-lord-llp-convicted-manhattan-federal-court-conspiracy-commit-money.
---------------------------------------------------------------------------

    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 37,865 
positive responses.\256\ 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.
---------------------------------------------------------------------------

    \256\ Id.
---------------------------------------------------------------------------

(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 FinCEN, 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.\257\ Both U.S. law enforcement and press 
reporting have identified instances where Russian oligarchs and elites 
have accessed U.S. investment opportunities and the financial system 
through private funds or other PIVs, to avoid disclosing their 
identities to other parties.\258\
---------------------------------------------------------------------------

    \257\ See FinCEN, Trends in Bank Secrecy Act Data: Financial 
Activity by Russian Oligarchs in 2022 (Dec. 2022), https://www.fincen.gov/sites/default/files/2022-12/FinancialTrendAnalysisRussianOligarchsFTA_Final.pdf.
    \258\ See Department of the Treasury, Global Advisory on Russian 
Sanctions Evasion Issued Jointly by the Multilateral REPO Task 
Force, p. 3, (Mar. 9, 2023), 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), https://www.fincen.gov/sites/default/files/shared/FinCENAlertRealEstateFINAL508_1-25-23FINALFINAL.pdf.
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    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.\259\
---------------------------------------------------------------------------

    \259\ See supra n. 257.
---------------------------------------------------------------------------

    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. While there are certain transactions of which 
CFIUS must be notified, most transactions reviewed by CFIUS are filed 
voluntarily.\260\ Where transactions are not voluntarily submitted to 
CFIUS for review, CFIUS agencies must invest staff time and resources 
into identifying those transactions and assessing whether to request 
that the parties file with CFIUS.\261\ CFIUS transactions that 
originate through this non-notified process remain among the most 
complicated that CFIUS considers, and often require mitigation measures 
to address national security risks.\262\
---------------------------------------------------------------------------

    \260\ See Treasury, ``Remarks by Assistant Secretary for 
Investment Security Paul Rosen at the Second Annual CFIUS 
Conference,'' (Sept. 14, 2023), https://home.treasury.gov/news/press-releases/jy1732.
    \261\ See id.
    \262\ Committee on Foreign Investment in the United States--
Annual Report to Congress CY 2022 (https://home.treasury.gov/system/files/206/CFIUS%20-%20Annual%20Report%20to%20Congress%20CY%202022_0.pdf), p. 52
---------------------------------------------------------------------------

    Assessing the national security consequences of investments into 
early-stage companies developing emerging technology can be 
particularly challenging.\263\ Requiring ERAs, particularly venture 
capital advisers, to submit SARs may help CFIUS 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 CFIUS was 
already investigating. 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.
---------------------------------------------------------------------------

    \263\ See The Washington Post, ``Scrutiny mounts over tech 
investments from Kremlin-connected expatriates,'' (Dec. 19, 2022), 
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, https://www.wsj.com/articles/government-swat-team-is-reviewing-past-startup-deals-tied-to-chinese-investors-11612094401.
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(c) Protect the U.S. Financial System From Abuse
    Applying AML/CFT obligations to RIAs and ERAs will also strengthen 
the

[[Page 12150]]

ability of the Federal Government and private sector to better protect 
the U.S. financial system from being misused for illicit finance. 
First, the proposed rule would apply a set of AML/CFT obligations to 
RIAs and ERAs, and those investment advisers would be subject to 
enforcement actions for failure to comply with those requirements. 
Those investment advisers would be 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 would 
help identify, prevent, and deter bad actors from using investment 
advisers to further illicit financial activity, as investment advisers 
would be required to obtain information from customers to comply with 
these requirements.
    Moreover, the proposed rule will also strengthen the ability of 
RIAs, ERAs, and other financial institutions to identify and report 
illicit activity. RIAs and ERAs would be 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. Reporting by financial institutions under the BSA--and their 
broader efforts to implement effective AML/CFT programs--are thus 
fundamental to the government's effort to detect and prevent illicit 
financial activity and to protect the integrity of the financial system 
as a whole.
    The proposed rule would also help bring the United States into full 
compliance with several international AML/CFT standards established by 
the Financial Action Task Force (FATF). In the 2016 FATF Mutual 
Evaluation Report (MER) of the United States, the United States was 
rated (and remains rated) ``partially compliant'' on nine of the 40 
FATF Recommendations.\264\ 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.\265\
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    \264\ See FATF (2016), Mutual Evaluation of the United States, 
pp. 255-258, https://www.fatf-gafi.org/content/dam/fatf-gafi/mer/MER-United-States-2016.pdf.coredownload.inline.pdf. In 2020, the 
U.S. was re-rated from ``partially compliant'' to ``largely 
compliant'' on Recommendation 10. See FATF (2020), Anti-money 
laundering and counter-terrorist financing measures--United States, 
3rd Enhanced Follow-up Report & Technical Compliance Re-Rating (2020 
US FUR), https://www.fatf-gafi.org/content/dam/fatf-gafi/fur/Follow-Up-Report-United-States-March-2020.pdf.coredownload.pdf.
    \265\ 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 (FATF Fourth Round Procedures), pp. 22-
23, http://www.fatf-gafi.org/publications/mutualevaluations/documents/4th-round-procedures.html.
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    As a result of its MER, the United States was put in ``enhanced 
follow-up.'' \266\ 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.'' \267\ 
These statements and other actions by the FATF can have material 
consequences on the economy of a jurisdiction.\268\ If the proposed 
rule is finalized, it will assist the U.S. in avoiding these 
consequences and strengthening compliance with the FATF standards.
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    \266\ See 2020 US FUR, p. 1, supra n. 264.
    \267\ See FATF Fourth Round Procedures, p. 24, supra n. 265.
    \268\ See Julia Morse, The Bankers Blacklist: Unofficial Market 
Enforcement and the Global Fight against Illicit Financing (Cornell 
University Press 2021), pp. 131-138 (discussing the consequences of 
FATF listing).
---------------------------------------------------------------------------

    As noted in the Treasury investment adviser risk assessment,\269\ 
investment advisers manage tens of trillions of dollars in assets. 
While some of these assets are subject to AML/CFT requirements, others 
are not. For instance, RIAs manage approximately $20 trillion in 
private fund assets, and as of Q4 2022, this included $284 billion in 
AUM owned by non-U.S. 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.\270\ ERAs held approximately $5 trillion in 
AUM in private funds.
---------------------------------------------------------------------------

    \269\ See Treasury, Investment Adviser Illicit Finance Risk 
Assessment, https://home.treasury.gov/system/files/136/US-Sectoral-Illicit-Finance-Risk-Assessment-Investment-Advisers.
    \270\ See SEC, Private Fund Statistics, First Calendar Quarter 
2022, private-funds-statistics-2022-q1.pdf (sec.gov).
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4. Assessment of Costs
    This section assesses the potential costs to RIAs and ERAs, their 
clients, and government agencies associated with the proposed 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 proposed 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 proposed regulation 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. 
RIAs that are dual registrants or affiliated advisers would not be 
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 entity's legal and regulatory obligations. 
RIAs would also be exempt from having to apply most of the proposed 
requirements with respect to the mutual funds they advise, as 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 proposed rule. Certain RIAs 
and ERAs may also already collect and verify certain information 
provided by customers via contract for a joint customer with another 
financial institution or through a voluntary AML/CFT program.
    This section is organized as follows. First, it describes and 
compiles relevant cost information associated with these activities. 
Based on this information, it 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 proposed regulation.
(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 proposed 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.

[[Page 12151]]

    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 proposed 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 4.1.\271\ Note, the proposed regulation 
requires, at a minimum, that an AML/CFT program must designate an AML/
CFT compliance officer. 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 proposed rule.\272\ 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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    \271\ 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.
    \272\ 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).
    \273\ 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.
    \274\ 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] TP15FE24.027

    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 proposed 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 proposed 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 proposed regulation as technology may be 
used to implement and automate several processes.\275\ 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.\276\ 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 proposed 
regulation. FinCEN seeks comment on this assumption. Table 4.2 reports 
selected characteristics for this benchmark.
---------------------------------------------------------------------------

    \275\ Government Accountability Office, 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), https://www.gao.gov/products/gao-20-574 (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.
    \276\ Id.

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[[Page 12152]]

[GRAPHIC] [TIFF OMITTED] TP15FE24.028

    Table 4.3 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.\278\
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    \277\ Id at Table 111: Selected Characteristics of Large 
Community Bank B, 2018.
    \278\ 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.
[GRAPHIC] [TIFF OMITTED] TP15FE24.029

(b) Compliance Costs to Industry by Regulatory Provision
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    \279\ See 2020 GAO BSA Report at Table 113, supra n. 275.
---------------------------------------------------------------------------

    As described in section 2, the regulated universe for purposes of 
the proposed 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 proposed 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 proposed 
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 2.2). FinCEN believes that these sub-
divisions are the best available method of estimating the cost impacts, 
but FinCEN invites comment on whether some other method of sub-dividing 
the industry for cost-estimate purposes would be preferable.
i. AML/CFT Program Costs
    RIAs and ERAs subject to the proposed rule will need to implement 
and maintain an AML/CFT program that 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 a 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 would 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 proposed 
rule. As firms that have an existing AML/CFT program are expected to be 
already maintaining, updating, storing, and producing upon request the 
written program, FinCEN estimates these firms will incur no additional 
costs beyond reviewing/modifying and obtaining written approval in the 
first year after the promulgation of the proposed regulation.
    Based on public comments on the Second Proposed Investment Adviser 
Rule,\280\ FinCEN estimates it will take approximately 120 hours to 
develop the necessary policies and procedures to establish an AML/CFT 
program for affiliated or other RIAs and ERAs that have a limited 
number of existing AML/CFT measures in place. FinCEN assumes that 
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 would only need to update their existing program. FinCEN 
assumes the vast majority of entities would develop or update a written 
program within the first year after the promulgation of the regulation. 
Once established, FinCEN estimates annually it will take approximately 
1

[[Page 12153]]

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. Table 4.4 reports the average costs of establishing 
and maintaining an AML/CFT program.
---------------------------------------------------------------------------

    \280\ See Public Comments, Docket ID FINCEN-2014-0003, https://www.regulations.gov/docket/FINCEN-2014-0003/comments.
[GRAPHIC] [TIFF OMITTED] TP15FE24.030

    In addition, the AML/CFT program must be approved in writing by an 
RIA's or ERA's board of directors or trustees.\281\ 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.\282\ 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. FinCEN seeks comment 
on the accuracy of this estimation. 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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    \281\ 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.
    \282\ 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 would need to implement an AML/CFT training 
program for employees.\283\ FinCEN estimates approximately two-thirds 
of employees would need to be trained on the AML/CFT program 
requirements, and assumes that such training could occur annually.\284\ 
FinCEN assesses that RIAs and ERAs with a significant or moderate 
number of AML/CFT measures in place are already training staff and 
would not incur additional training costs under the proposed rule--with 
the exception of reviewing and updating the training materials to 
ensure they cover all of the proposed requirements. For RIAs and ERAs 
with a limited number of AML/CFT measures in place, FinCEN estimates it 
would 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 would be 10 hours. FinCEN seeks comment on these 
assumptions. 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 proposed rule.\285\ FinCEN estimates 
the training would take approximately 1 hour for each employee, 
assuming such training occurs annually.\286\ Table 4.5 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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    \283\ 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) would 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.
    \284\ The 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.
    \285\ 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).
    \286\ See id. at p. 52.

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[[Page 12154]]

[GRAPHIC] [TIFF OMITTED] TP15FE24.031

    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.\288\ FinCEN seeks comment on this assumption. This reflects a 
new recurring cost for all RIAs and ERAs affected by the proposed rule 
with the exception of dually registered entities, which are assumed to 
already use independent auditors. Table 4.6 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.
---------------------------------------------------------------------------

    \287\ 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.
    \288\ See 2020 GAO BSA Report at Table 113.
    [GRAPHIC] [TIFF OMITTED] TP15FE24.032
    
ii. Customer Due Diligence Costs
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    \289\ Costs are rounded to the nearest thousand dollars.
---------------------------------------------------------------------------

    The proposed rule would require RIAs and ERAs to implement 
appropriate risk-based procedures for conducting ongoing customer due 
diligence. Specifically, RIAs and ERAs would be required to (1) 
understand the nature and purpose of customer relationships for the 
purpose of

[[Page 12155]]

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 IMCTS Survey, in addition to the 40 percent who 
had implemented a full AML/CFT program consistent with the requirements 
of the Second Proposed Investment Adviser Rule, an additional 36 
percent of RIAs implemented some AML/CFT measures.\290\ 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.\291\ Therefore, FinCEN assumes that 
any 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 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. FinCEN 
seeks comment on these assumptions.
---------------------------------------------------------------------------

    \290\ See 2016 IMCTS Survey, Question 15, supra n. 150
    \291\ See, e.g., Managed Funds Association, Sound Practices for 
Hedge Fund Managers (2009), Chapter 6 (Anti-Money Laundering).
---------------------------------------------------------------------------

    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 for legal entities and PIVs. Table 4.7 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 2023, RIAs had approximately 51.7 million natural 
person customers, 2.8 million legal entity customers, and 100,000 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.\292\
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    \292\ See Investment Adviser Association, Investment Adviser 
Industry Snapshot 2023 (Jul. 2023), p. 26, https://investmentadviser.org/wp-content/uploads/2023/06/Snapshot2023_Final.pdf.
[GRAPHIC] [TIFF OMITTED] TP15FE24.033

    Affiliated and other 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).\294\ 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 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 
proposed regulation.\295\ FinCEN seeks comment on the accuracy of this 
estimate. 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 RIA and ERA.
---------------------------------------------------------------------------

    \293\ See supra n. 26.
    \294\ See 81 FR at 29448.
    \295\ 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

[[Page 12156]]

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.\296\ 
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 RIA or ERA.
---------------------------------------------------------------------------

    \296\ 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 4.8 summarizes the average ongoing CDD costs per entity by 
type and characteristics of each 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.
[GRAPHIC] [TIFF OMITTED] TP15FE24.034

iii. Suspicious Activity Report Filing Costs
---------------------------------------------------------------------------

    \297\ 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.
    \298\ Costs are rounded to the nearest thousand dollars for RIAs 
and to the nearest hundred dollars for ERAs.
---------------------------------------------------------------------------

    As part of their AML/CFT program, RIAs and ERAs will be required to 
conduct ongoing monitoring of customers and file SARs. 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 proposed 
regulation. FinCEN seeks comment on this assumption. To the extent that 
some RIAs and ERAs in this category are already filing SARs, this may 
overestimate the costs of the proposed regulation.
    Based on an analysis of SAR filings by dual registrants between 
2018 and 2022, FinCEN estimates that RIAs will file an average of 
approximately 60 SARs per year.\299\ Since no information was available 
for ERAs, FinCEN applies the same estimate of 60 SARs per year. FinCEN 
seeks comment on this assumption. Based on the analysis, FinCEN 
estimates the following regarding the SARs investment advisers would 
file:
---------------------------------------------------------------------------

    \299\ 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.
---------------------------------------------------------------------------

    <bullet> 51 (85 percent) would be initial SARs and 9 (15 percent) 
would be continuing SARs.
    <bullet> 51 (85 percent) would be discrete SARs and 9 (15 percent) 
would be batch SARs.
    <bullet> 55 (92 percent) would be standard SARs and 5 (8 percent) 
would be extended SARs.
    Without a detailed breakdown, FinCEN assumes the distribution of 
SARs is proportionally distributed across each category as discussed 
below. Each type of filing is expected to have a different reporting 
burden.
    In addition, the estimated costs of ongoing monitoring in (Table 
4.8 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.\300\ Therefore, 
for each case filed as a SAR, approximately 1.4 cases were not filed. 
Table 4.9 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,\301\ 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. 
FinCEN seeks comment on this assumption. The licensing cost for 
transaction monitoring software is not reflected here but is included 
in the software costs described elsewhere in this Impact Analysis.
---------------------------------------------------------------------------

    \300\ See FinCEN, Proposed Renewal: Reports by Financial 
Institutions of Suspicious Transactions, 85 FR 31598 (May 26, 2020).
    \301\ See id.

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[[Page 12157]]

[GRAPHIC] [TIFF OMITTED] TP15FE24.035

    Figure 4.1 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.
---------------------------------------------------------------------------

    \302\ 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).
[GRAPHIC] [TIFF OMITTED] TP15FE24.036

    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.

[[Page 12158]]

iv. Other Compliance Costs
    As discussed above, there are certain costs associated with the 
proposed rule that may be spread across several of the proposed 
requirements. It is challenging to allocate those expenditures to 
specific provisions of the proposed 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.\303\
---------------------------------------------------------------------------

    \303\ See 2020 GAO BSA Report at Table 113.
---------------------------------------------------------------------------

    The proposed rule requires RIAs and ERAs to comply with certain 
recordkeeping obligations (under the Recordkeeping Rule and Travel 
Rule),\304\ 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.\305\ Table 4.10 summarizes the average 
cost associated with these recordkeeping requirements.
---------------------------------------------------------------------------

    \304\ See 31 CFR 1020.410(a), (e); see also 31 CFR 1010.410(f).
    \305\ 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).
[GRAPHIC] [TIFF OMITTED] TP15FE24.037

    In addition, the proposed rule requires RIAs and ERAs to implement 
the information sharing procedures contained in section 314(a) of the 
USA PATRIOT Act.\306\ Upon receiving an information request from 
FinCEN, an RIA or ERA would 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.\307\ 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.\308\ 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 4.11 summarizes the 
information collection costs for 314(a) measures.
---------------------------------------------------------------------------

    \306\ FinCEN, Special Information Sharing Procedures to Deter 
Money Laundering and Terrorist Activity, Final Rule, 67 FR 60579 
(Sept. 26, 2002).
    \307\ FinCEN, Proposed Renewal: Renewal Without Change on 
Information Sharing Between Government Agencies and Financial 
Institutions, 87 FR 41186 (Jul. 11, 2022).
    \308\ Id.
    [GRAPHIC] [TIFF OMITTED] TP15FE24.038
    
    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. FinCEN 
estimates the annual hourly burden of maintaining and updating the due 
diligence program for foreign correspondent accounts and 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.\309\ Information technology costs 
associated with this requirement are included within the overall 
software costs. Table 4.12 summarizes the cost burden associated with 
special due diligence measures.
---------------------------------------------------------------------------

    \309\ 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 12159]]

[GRAPHIC] [TIFF OMITTED] TP15FE24.039

    Under the proposed rule, RIAs and ERAs must also comply with 
special measures procedures and prohibitions contained in section 311 
of the USA PATRIOT Act.\310\ Section 9714 of the Combatting Russian 
Money Laundering Act allows for similar special measures in the context 
of illicit Russian finance. Sections 311 and 9714 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. They also allow 
FinCEN to impose prohibitions or conditions on the opening or 
maintenance of certain correspondent accounts. Currently, such 
prohibitions are in place for three foreign financial institutions and 
two foreign jurisdictions, all imposed under section 311.\311\ These 
special measures 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.\312\ Therefore, the estimated burden is approximately 5 hours. 
FinCEN seeks comment on this assumption. Table 4.13 summarizes the 
average cost for implementation section 311 special measures.
---------------------------------------------------------------------------

    \310\ FinCEN, Final Rule: Special Information Sharing Procedures 
to Deter Money Laundering and Terrorist Activity. 67 FR 60579 (Sept. 
26, 2002).
    \311\ These foreign financial institutions and jurisdictions 
are: (1) Bank of Dandong, (2) Commercial Bank of Syria, including 
Syrian Lebanese Commercial Bank, (3) FBME Bank Ltd., (4) Islamic 
Republic of Iran, and (5) 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,
    \312\ 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 (Jul. 26, 2023).
[GRAPHIC] [TIFF OMITTED] TP15FE24.040

    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.\313\ 
Therefore, FinCEN estimates that the incremental cost for RIAs and ERAs 
to use the CTR is de minimis.\314\ FinCEN seeks comment on this 
assumption.
---------------------------------------------------------------------------

    \313\ 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 (July 13, 2020).
    \314\ In the Second Proposed Investment Adviser Rule, 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.
---------------------------------------------------------------------------

    Based on this information, the average annual cost of other 
compliance measures not characterized elsewhere in this regulatory 
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 proposed regulation.
i. Costs to FinCEN
    Administering the proposed regulation is estimated to entail costs 
to FinCEN as well as other government agencies. In terms of technology 
and IT costs, the proposed 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 proposed 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 proposed rule to 
be

[[Page 12160]]

$7.5 million, as reflected in Table 4.14, with continuing recurring 
annual costs of roughly the same magnitude for ongoing outreach, 
policy, and enforcement activities thereafter.
[GRAPHIC] [TIFF OMITTED] TP15FE24.041

    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.
---------------------------------------------------------------------------

    \315\ 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. Rounded to three significant digits.
    \316\ 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. (HHS, 
Guidelines for Regulatory Impact Analysis, 2016, p. 30).
---------------------------------------------------------------------------

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 proposed rule, and to provide any needed regulatory guidance or 
analysis. Costs associated with implementing the proposed 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 
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.\317\
---------------------------------------------------------------------------

    \317\ See SEC, FY 2023 Agency Financial Report, p. 32, https://www.sec.gov/files/sec-2023-agency-financial-report.pdf#chairmessage.
---------------------------------------------------------------------------

    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 proposed 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.\318\ 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 proposed rule to be approximately $814,000.
---------------------------------------------------------------------------

    \318\ 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.
---------------------------------------------------------------------------

    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.\319\ The SEC maintains authority to examine ERAs as well. While 
the Division of Examinations may conduct examinations for compliance 
with the requirements of the proposed 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.
---------------------------------------------------------------------------

    \319\ 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 proposed rule on a per 
entity basis

[[Page 12161]]

and in aggregate, by type and characteristics of each RIA or ERA. As 
described in ection 2, 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 4.15 summarizes 
the total number of entities by type and characteristics of each RIA 
and ERA.
[GRAPHIC] [TIFF OMITTED] TP15FE24.042

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 proposed rule, by 
category of RIA and ERA. Table 4.16 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.
[GRAPHIC] [TIFF OMITTED] TP15FE24.043

    Table 4.17. summarizes the estimated costs for affiliated RIAs with 
a moderate number of AML/CFT measures in place.
---------------------------------------------------------------------------

    \320\ For Tables 4.16 to 4.37, costs are rounded to the nearest 
thousand dollars or two significant digits.
[GRAPHIC] [TIFF OMITTED] TP15FE24.044

    Table 4.18. summarizes the estimated costs for affiliated RIAs with 
a limited number of AML/CFT measures in place.

[[Page 12162]]

[GRAPHIC] [TIFF OMITTED] TP15FE24.045

    Table 4.19. summarizes the estimated costs for other RIAs with a 
moderate number of AML/CFT measures in place.
[GRAPHIC] [TIFF OMITTED] TP15FE24.046

    Table 4.20. summarizes the estimated costs for other RIAs with a 
limited number of AML/CFT measures in place.
[GRAPHIC] [TIFF OMITTED] TP15FE24.047

    Table 4.21. summarizes the estimated costs for ERAs, affiliated, 
with a moderate number of AML/CFT measures in place.

[[Page 12163]]

[GRAPHIC] [TIFF OMITTED] TP15FE24.048

    Table 4.22. summarizes the estimated costs for ERAs that are 
affiliated with a bank or broker-dealer with a moderate number of AML/
CFT measures in place.
[GRAPHIC] [TIFF OMITTED] TP15FE24.049

    Table 4.23. summarizes the estimated costs for other ERAs with a 
moderate number of AML/CFT measures in place.
[GRAPHIC] [TIFF OMITTED] TP15FE24.050

    Table 4.24. summarizes the estimated costs for other ERAs with a 
limited number of AML/CFT measures in place.
[GRAPHIC] [TIFF OMITTED] TP15FE24.051

ii. Estimated Burden of the Proposed Rule to Industry
    Table 4.25 summarizes the total costs of the proposed rule on an 
undiscounted basis.

[[Page 12164]]

[GRAPHIC] [TIFF OMITTED] TP15FE24.052

    Table 4.26 summarizes the total costs of the proposed rule by 
entity and business structure for dual registrants, affiliated 
advisers, and other advisers on an undiscounted basis.
[GRAPHIC] [TIFF OMITTED] TP15FE24.053

iii. Discounted Estimated Burden of the Proposed 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 
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.\321\ OMB 
recommends using a discount rate of 2 percent.\322\ 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.
---------------------------------------------------------------------------

    \321\ U.S. Office of Management and Budget, Circular A-4, Nov. 
9, 2023.
    \322\ Id.
---------------------------------------------------------------------------

    Table 4.27 summarizes the total costs of the proposed rule using a 
2 percent discount rate. As shown in the table, RIAs account for 
approximately 72 percent of the annualized costs to industry, while 
ERAs account for the remaining 28 percent.

[[Page 12165]]

[GRAPHIC] [TIFF OMITTED] TP15FE24.054

    Table 4.28 summarizes the total costs of the proposed 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.
[GRAPHIC] [TIFF OMITTED] TP15FE24.055

(e) Uncertainty Analysis
    As described in section 2, 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 proposed 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

[[Page 12166]]

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 
proposed rule. The costs presented earlier in this section represent 
FinCEN's primary estimate of the burden of the proposed 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 proposed rule. Table 4.29 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.\323\ 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.
---------------------------------------------------------------------------

    \323\ See 2106 IMCTS Survey, supra n. 150.
    [GRAPHIC] [TIFF OMITTED] TP15FE24.056
    
    Table 4.30 summarizes the total costs of the proposed rule in the 
lower bound scenario using a 2 percent discount rate. As shown in the 
table, although the overall costs of the proposed rule are lower, the 
distribution of costs between RIAs and ERAs is similar to the primary 
estimate.
[GRAPHIC] [TIFF OMITTED] TP15FE24.057

    Table 4.31 summarizes the total costs of the proposed 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

[[Page 12167]]

table, in the lower bound scenario a greater proportion of the costs 
(approximately 95 percent) are attributed to other advisers.
[GRAPHIC] [TIFF OMITTED] TP15FE24.058

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 proposed 
rule. Table 4.32 summarizes the total number of entities by type and 
characteristics of each RIA and ERA.
[GRAPHIC] [TIFF OMITTED] TP15FE24.059

    Table 4.33 summarizes the total costs of the proposed rule in the 
upper bound scenario using a 2 percent discount rate. As shown in the 
table, although the overall costs of the proposed rule are higher, the 
distribution of costs between RIAs and ERAs is similar to the primary 
estimate.

[[Page 12168]]

[GRAPHIC] [TIFF OMITTED] TP15FE24.060

    Table 4.34 summarizes the total costs of the proposed 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 proposed rule are higher, the distribution of costs 
between the different types of RIAs and ERAs is similar to the primary 
estimate.
[GRAPHIC] [TIFF OMITTED] TP15FE24.061

iii. Comparison of Costs in the Lower and Upper Bound Estimates
    As described in this section, FinCEN estimates the cost of the 
proposed rule to regulated entities will be approximately $870 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 proposed 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

[[Page 12169]]

most pessimistic assumptions regarding the degree of existing AML/CFT 
measures, the proposed rule is estimated to cost approximately $1 
billion 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 proposed rule will be approximately 
$490 million on an annualized basis. Table 4.35 provides a comparison 
of the estimated costs of the proposed rule under each of these 
scenarios.
[GRAPHIC] [TIFF OMITTED] TP15FE24.062

iv. Alternative Higher Third Party Vendor Cost Scenario
    While the estimated costs of the proposed 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 of the proposed rule are software licensing fees and 
independent testing. Therefore, FinCEN compared how the estimated costs 
changed if third-party vendor costs increased by 100 percent.\324\ 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 4.36 
reports alternative cost assumptions for third-party vendor costs that 
are double the primary estimate.\325\ 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.
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    \324\ Independent testing under the proposed 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.
    \325\ 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.
[GRAPHIC] [TIFF OMITTED] TP15FE24.063


[[Page 12170]]


    Table 4.37 provides a comparison of the estimated costs of the 
proposed 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 
proposed rule.
[GRAPHIC] [TIFF OMITTED] TP15FE24.064

5. Regulatory Alternatives
    This section evaluates the potential benefits and costs of 
regulatory alternatives in comparison to the proposed 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 proposed 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 
proposed rule. FinCEN estimates there are approximately 17,000 State-
registered investment advisers, based on reports from the North 
American Security Administrators Association (NASAA).\326\ Table 5.1 
summarizes their characteristics.
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    \326\ NASAA Investment Adviser Section: 2023 Annual Report, p.2, 
https://www.nasaa.org/wp-content/uploads/2023/09/2023-IA-Section-Report-FINAL.pdf.
[GRAPHIC] [TIFF OMITTED] TP15FE24.065

    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 5.2. summarizes the total costs of Alternative 1 
for State-registered investment advisers in addition to the other 
entities subject to regulation.
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    \327\ See Id. The average number of employees per investment 
adviser was calculated as a weighted average of the bins reported on 
page 5, using the following employees for each respective bin: 2 [0-
2 employees], 6.5 [3-10 employees], 15 [11-20 employees], 25 [>20 
employees].

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[[Page 12171]]

[GRAPHIC] [TIFF OMITTED] TP15FE24.066

    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 proposed 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 proposed 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. Treasury's risk assessment found few examples of State-
registered investment advisers being used to move illicit proceeds or 
facilitate other illicit activity.\328\ Further, the vast majority of 
their clients are natural persons who are not high net-worth customers 
and are U.S. persons.\329\ Therefore, FinCEN rejected this regulatory 
alternative in favor of the more cost-effective approach in the 
proposed regulation.
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    \328\ See Treasury, Investment Adviser Illicit Finance Risk 
Assessment, https://home.treasury.gov/system/files/136/US-Sectoral-Illicit-Finance-Risk-Assessment-Investment-Advisers.
    \329\ 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 proposed rule. FinCEN estimates there are approximately 
11,000 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 2 and 
3, 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 5.3. summarizes the total costs of Alternative 
2. For Alternative 2, there are no estimated Federal agency costs 
attributed to the CDD requirement.

[[Page 12172]]

[GRAPHIC] [TIFF OMITTED] TP15FE24.067

    FinCEN rejected this regulatory alternative in favor of the 
proposed 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 5.4 reports the costs for each of the regulatory alternatives 
in comparison to the proposed regulation.
[GRAPHIC] [TIFF OMITTED] TP15FE24.068

    Table 5.5 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 12173]]

[GRAPHIC] [TIFF OMITTED] TP15FE24.069

B. Regulatory Flexibility Analysis

    The RFA \330\ requires an agency either to provide an initial 
regulatory flexibility analysis (IRFA) with a proposed rule or certify 
that the proposed rule would not have a significant economic impact on 
a substantial number of small entities. This section, VII.B, contains 
the IRFA prepared pursuant to the RFA. A final regulatory flexibility 
analysis or certification that the proposed rule would not have a 
significant economic impact on a substantial number of small entities 
will be conducted after consideration of comments received during the 
comment period.
---------------------------------------------------------------------------

    \330\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

1. Statement of the Need for, and Objectives of, the Proposed Rule
    As described above in section IV.A.1 and section VII.A.1, FinCEN is 
proposing this rule to address identified illicit finance risks in the 
investment adviser industry. FinCEN is proposing regulations to apply 
AML/CFT program, recordkeeping and reporting requirements to RIAs and 
ERAs.
2. Small Entities Affected by the Proposed Rule
    FinCEN is proposing to define the term small entity in accordance 
with the definition of ``small business'' or ``small organization'' 
under the Advisers Act rule adopted for purposes of the RFA, in lieu of 
using the Small Business Administration's definition.\331\
---------------------------------------------------------------------------

    \331\ See 13 CFR 121.201.
---------------------------------------------------------------------------

    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,\332\ 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,

[[Page 12174]]

including whether they qualify as a ``small entity,'' at least 
annually. Because Form ADV information is individualized to each 
investment adviser, FinCEN can identify the specific entities 
qualifying as ``small entities'' under the SEC standard.
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    \332\ As noted above, FinCEN is proposing to amend 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. This data is not individualized to 
specific firms and as detailed below, likely includes other firms that 
are not covered by the proposed rule requiring FinCEN to make 
additional assumptions. This data represents the average revenues of 
all firms, not just RIAs and ERAs, with less than $50 million in annual 
receipts rather than firms with assets under management 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 many 
of the firms reported in the SUSB, particularly State-registered 
investment advisers, would not be subject to the proposed 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.\333\ Using 
this standard would also be consistent with the standard applied by 
FinCEN in the Second Proposed Investment Adviser Rule and the SEC in 
recent rulemakings for investment advisers.\334\ This is a well-known, 
common-sense understanding of investment adviser size based on assets 
under management (e.g., small advisers are those managing less than $25 
million in customer assets). Further, FinCEN notes that over 70 percent 
of advisers covered by the proposed rule manage at least $110 million 
in customer assets and accordingly would not be understood to be small 
entities.
---------------------------------------------------------------------------

    \333\ See 15 U.S.C. 80b-3a. As described above, SEC registration 
is generally determined by AUM. See supra, n. 24. 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.
    \334\ 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, 63382-3, (Sep. 14, 2023).
---------------------------------------------------------------------------

    In addition, FinCEN's proposed use of the SEC's definition of small 
entity will have no material impact upon the application of these 
proposed rules to the advisory industry. FinCEN requests comment on the 
appropriateness of using the SEC's definition for these purposes.
    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, assets under management of less than $25 
million; (ii) has less than $5 million 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 assets under management 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.\335\
---------------------------------------------------------------------------

    \335\ 17 CFR 275.0-7(a).
---------------------------------------------------------------------------

    Generally speaking, only large advisers, having $110 million or 
more in regulatory assets under management, are required to register 
with the SEC.\336\ The proposed 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. Under section 203A of the Advisers Act, most small 
advisers are prohibited from registering with the Commission and are 
regulated by State regulators.\337\
---------------------------------------------------------------------------

    \336\ See 17 CFR 275.203A-1.
    \337\ Based on Form ADV data as of July 31, 2023. To determine 
the number of RIAs that were ``small entities'', Treasury reviewed 
responses to Items 5.F. and 12 of Form ADV.
---------------------------------------------------------------------------

    As of July 2023, there were 573 RIAs that would be considered 
``small entities'' under the SEC's definition. We estimate that there 
are no ERAs that would meet the definition of ``small entity.'' \338\ 
Therefore, approximately 2.7 percent of all investment advisers 
impacted by the proposed regulation are estimated to be small entities. 
Based on this, FinCEN estimates that the proposed rule will not impact 
a substantial number of small entities.
---------------------------------------------------------------------------

    \338\ In order for an adviser to be an ERA it would first need 
to have an SEC registration obligation, and an adviser with that 
little in assets under management (i.e., assets under management 
that is low enough to allow the adviser to qualify as a small 
entity) would not have an SEC registration obligation. See 88 FR 
63206, 63383 and footnote 1895 regarding small entity ERAs.
---------------------------------------------------------------------------

    Regarding the economic impact on small entities, 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.\339\ 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).
---------------------------------------------------------------------------

    \339\ U.S. Census Bureau, Economic Census, web page, last 
updated on Aug. 31, 2023.
---------------------------------------------------------------------------

    Based on data from the 2017 SUSB: Other Financial Investment 
Activities (for NAICS 5239), the average firm had approximately $7.4 
million in annual revenue adjusted for inflation to 2022 dollars using 
the GDP price deflator.\340\ Furthermore, according to that data, 
approximately 98 percent of firms had less than $50 million in annual 
receipts, with average revenues of approximately $1.6 million measured 
in 2022 dollars. Table B-1 reports the distribution of firms in other 
financial investment activities (NAICS 5239) by firm size.
---------------------------------------------------------------------------

    \340\ Data accessed at https://www.census.gov/data/tables/2017/econ/susb/2017-susb-annual.html.

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[[Page 12175]]

[GRAPHIC] [TIFF OMITTED] TP15FE24.070

    Importantly, as discussed above regarding the limitations with 
Economic Census data, the $1.6 million figure is an imperfect proxy for 
the annual revenues of investment advisers subject to the proposed rule 
that meet the SEC's definition of a small entity.
    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 proposed rule would be 
approximately 2.6 percent of revenues 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 as it is 
unable to certify that the proposed rule would not ``have a significant 
economic impact on a substantial number of small entities.'' Therefore, 
FinCEN is conducting this IRFA.
3. Compliance Costs
    To examine the potential impact of the proposed rule on small 
entities, FinCEN estimates the average compliance costs for a small 
firm and compares those costs to small firms' average annual revenues. 
As described above, 573 RIAs would be considered small entities under 
the proposed definition. All small firms affected by this rule will 
bear upfront costs to revise their standard operating procedures 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 entities, FinCEN relies on the methodology described in the 
Impact Analysis applied to the subset of entities and relevant 
financial characteristics of small RIAs. Table B.2 reports the 
financial characteristics of small entities compared with all other 
RIAs impacted under the proposed rule based on information reported in 
their Form ADV filings.\341\
---------------------------------------------------------------------------

    \341\ This information is reported in Table 2.7 of the Impact 
Analysis.

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[[Page 12176]]

[GRAPHIC] [TIFF OMITTED] TP15FE24.071

    Based on this information, the average cost of the proposed 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 $40,000 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 less than $1,000 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 proposed regulation.
[GRAPHIC] [TIFF OMITTED] TP15FE24.072

    Therefore, the average annualized cost of the proposed rule for a 
small investment adviser over the first 10 years would be approximately 
$41,000. This suggests the annualized cost burden of the proposed rule 
would be approximately 2.6 percent of revenues 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 proposed rule for a small investment adviser would be 
approximately $38,000, suggesting the average cost burden would be 
approximately 2.4 percent of revenues. Table B.4 reports the number of 
small entities, annualized cost, and compliance cost as a percentage of 
revenue for small firms, broken down by industry category.

[[Page 12177]]

[GRAPHIC] [TIFF OMITTED] TP15FE24.073

4. Duplicative, Overlapping, or Conflicting Federal Rules
    As described above in section VII.A.1, there are no Federal rules 
that directly and fully duplicate, overlap, or conflict with the 
proposed 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 
proposed 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 proposed rule, 
they do not impose the specific AML/CFT measures in the proposed rule.
5. Significant Alternatives That Reduce Burden on Small Entities
    FinCEN considered the burden this proposed approach would have on 
covered investment advisers. 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 (who only advise private funds). In this 
scenario, advisers to private funds would be required to conduct risk-
based customer due diligence and to report beneficial ownership 
information.
[GRAPHIC] [TIFF OMITTED] TP15FE24.074

    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 
2.7 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 smaller cost of this alternative, FinCEN 
determined that this alternative would not accomplish the objectives of 
the proposed rule. As noted above, the absence of a SAR filing 
requirement 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, 
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 proposed 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 proposed 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

[[Page 12178]]

considering the attributes of a particular customer (such as legal 
entity v. natural person, or U.S. v. non-U.S. person), is not a useful 
indicator of potential risk.\342\ 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.
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    \342\ See Treasury, Investment Adviser Illicit Finance Risk 
Assessment, https://home.treasury.gov/system/files/136/US-Sectoral-Illicit-Finance-Risk-Assessment-Investment-Advisers.
---------------------------------------------------------------------------

    FinCEN also notes that the AML/CFT requirements in the proposed 
rule are designed to be risk-based and their cost is largely based on 
factors directly correlated with the size of an investment adviser, 
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.\343\ The cost of other requirements in the 
proposed rule, such as employee training, are also likely to vary with 
the size of the business. The requirements of the proposed rule 
therefore have some inherent flexibility whereby small entities serving 
a smaller number of customers are likely to have lower costs.
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    \343\ 2020 GAO BSA Report at p. 3.
---------------------------------------------------------------------------

    FinCEN welcomes comment on this IRFA and any significant 
alternatives that would minimize the impact of the proposed rule on 
small entities and still accomplish the objectives of the proposed 
rule.

C. Paperwork Reduction Act

    The reporting requirements in the proposed rule are being submitted 
to OMB for review in accordance with the Paperwork Reduction Act of 
1995 (PRA).\344\ 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. Written 
comments and recommendations for the proposed information collection 
can be submitted by visiting www.reginfo.gov/public/do/PRAMain. This 
particular document may be found by selecting ``Currently Under 
Review--Open for Public Comments'' or by using the search function. 
Comments are welcome and must be received by April 15, 2024. In 
accordance with requirements of the PRA, 44 U.S.C. 3506(c)(2)(A), and 
its implementing regulations, 5 CFR part 1320, the following 
information concerns the collection of information as it relates to the 
proposed rule and is presented to assist those persons wishing to 
comment on the information collection.
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    \344\ 44 U.S.C. 3506(c)(2)(A).
---------------------------------------------------------------------------

    The PRA analysis included herein is for the sections of the 
proposed 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 proposed 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 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-AB58.
    Frequency: As required; varies depending on the requirement.
    Description of Affected Public: investment advisers, as defined in 
the proposed rule.
    Estimated Number of Respondents: 21,237 investment advisers. Of 
these, there are an estimated 15,391 SEC-registered investment advisers 
and 5,846 exempt reporting advisers. 1,356,780 clients of investment 
advisers in the first year and up to 266,407 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 7,142,302 hours 
for investment advisers and 508,792 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 proposed 
regulation. 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 proposed regulation will be 5,395,622 hours for 
investment advisers and 99,903 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 
$429,383,548 for investment advisers and $25,016,407 for their clients. 
In Year 10, FinCEN estimates the total cost of the proposed regulation 
will be $311,901,932 for investment advisers and $4,812,035 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.

[[Page 12179]]

    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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BILLING CODE 4810-02-C

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 $176 million, 
using the 2022 GDP price deflator.\345\ The proposed rule would result 
in an expenditure in at least one year that meets or exceeds this 
amount.
---------------------------------------------------------------------------

    \345\ 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 proposed rule is estimated to be 
approximately $1.0 billion to the private sector in the first year. The 
annualized cost of the proposed rule after the first year is estimated 
to be approximately $760 million to the private sector. The proposed 
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. Questions for Comment

    FinCEN requests comment on all aspects of the regulatory analysis 
in section VI:
    <bullet> Do you agree with how FinCEN has characterized the extent 
to which different types of investment advisers are already 
implementing a significant, moderate, or a limited number of the AML/
CFT requirements of the proposed rule?
    <bullet> For ERAs, do you agree with FinCEN's assumption that the 
percentage of ERAs currently applying AML/CFT requirements would be the 
same as RIAs across all scenarios described in the Impact Analysis?
    <bullet> Do you agree with FinCEN's assumption that the number of 
employees of an ERA is similar to the number of employees of an RIA 
with the same number of private funds?
    <bullet> Do you agree with FinCEN's decision to not quantify the 
estimated benefits from the proposed rule? If no, what other data or 
methods may inform estimates of potential benefits from the proposed 
rule?
    <bullet> Do you agree that some RIAs would designate their existing 
compliance officer as the AML/CFT compliance officer? What other 
existing positions in an RIA or ERA may be designated as the AML/CFT 
compliance officer?
    <bullet> Do you agree with FinCEN's use of the reported values for 
``Large Community Bank B,'' from the 2020 GAO BSA Report, as the entity 
for which the costs were assessed to be the most similar to the costs 
likely to be incurred by investment advisers covered by the proposed 
regulation?
    <bullet> Do you agree with FinCEN's assumption that dual 
registrants covered by an existing AML/CFT program and entities that 
have a significant or moderate number of AML/CFT measures in place 
would only need to update their existing program to comply with the 
requirements of the proposed rule?
    <bullet> Do you agree with FinCEN's estimates that it would take 
approximately 4 hours for a trustee or director to review and approve a 
written AML/CFT program the first year and approximately 2 hours each 
subsequent year to review the program?
    <bullet> Do you agree with FinCEN's estimate that it would 
initially take an RIA or ERA that does not have an AML/CFT program 50 
hours to develop an AML/CFT training program, and that for entities 
that have an existing AML/CFT training program, it would take 
approximately 10 hours to review and update training materials?
    <bullet> Do you agree with FinCEN's estimate that the average cost 
of independent testing of an adviser's AML/CFT program would be 
approximately $17,000?
    <bullet> Do you agree with FinCEN's assumption that of all the AML/
CFT measures in the proposed rule, RIAs and ERAs are most likely to 
have some CDD measures in place, and that RIAs and ERAs would have to 
modify these existing procedures rather than develop new procedures?
    <bullet> Do you agree with FinCEN's assumption that RIAs and ERAs 
would update customer information on existing accounts over the first 
three years after the promulgation of the proposed rule?
    <bullet> Do you agree with FinCEN's assumption that unless an 
investment adviser is dual registrant or affiliated adviser, they are 
not currently filing SARs?
    <bullet> Do you agree with FinCEN's estimate that RIAs are likely 
to file approximately 60 SARs per year? Do you agree with FinCEN's 
assumption that ERAs would also file 60 SARs a year? If not, what other 
estimate for the number of SARs or an RIA or ERA would be reasonable?
    <bullet> Do you agree with FinCEN's decision to attribute labor 
costs primarily to a compliance officer rather than a financial clerk 
or teller, due to the smaller size of investment advisers relative to 
banks and to avoid potentially underestimating the average hourly labor 
costs associated with these activities?
    <bullet> Do you agree with FinCEN's estimate that since all 
investment advisers are required to report transactions in currency 
over $10,000 on Form 8300, the incremental cost for RIAs and ERAs to 
use the CTR would be de minimis?
    <bullet> Do you agree with FinCEN's decision to define the term 
small entity in accordance with definitions obtained from SEC rules 
implementing the Advisers Act in lieu of using the Small Business 
Administration's definition?
    <bullet> Do you agree with how FinCEN has characterized the 
potential costs and benefits of imposing the AML/CFT requirements of 
the proposed rule to State-registered investment advisers?
    <bullet> Are there other significant alternatives that would 
minimize the impact of the proposed rule on small entities and still 
accomplish the objectives of the proposed rule?

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.

Issuance and Authority

    For the reasons set forth in the preamble, chapter X of title 31 of 
the Code of Federal Regulations is proposed to be amended 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.


[[Page 12190]]


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. 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)), or any person that 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)).
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 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

Subpart A--Definitions
Sec.
1032.100 Definitions.
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; Prohibitions, 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--Definitions


Sec.  1032.100  Definitions.

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

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 (31 U.S.C. 5311, et seq.) 
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 mutual fund (as defined 
in 31 CFR 1010.100(gg)) it advises that has developed and implemented 
an AML/CFT program compliant with the AML/CFT program requirements 
applicable to mutual funds under another provision of this subpart.
    (2) Each investment adviser's anti-money laundering/countering the 
financing of terrorism 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. 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 (SEC).
    (b) Minimum requirements. The anti-money laundering/countering the

[[Page 12191]]

financing of terrorism 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, 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 anti-money laundering/countering the financing of 
terrorism program that complies with the requirements of this section 
on or before [DATE 12 MONTHS AFTER EFFECTIVE DATE OF FINAL RULE].
    (d) Duty. The duty to establish, maintain, and enforce an anti-
money laundering/countering the financing of terrorism program as 
required by this subpart 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 appropriate 
Federal functional regulator.


Sec.  1032.220  [Reserved]

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


Sec.  1032.300  General.

    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.


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 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 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

[[Page 12192]]

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, 
to a non-governmental entity 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 part.

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.


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 activity contained in that subpart which apply to 
investment advisers.


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.

[[Page 12193]]

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, which apply to investment advisers.


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. 2024-02854 Filed 2-13-24; 8:45 am]
BILLING CODE 4810-02-P


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