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Wednesday, September 9, 2015

FinCEN proposes extending Bank Secrecy Act and AML Rules to Investment Advisers

By ABIA Outside Counsel, McIntyre & Lemon, PLLC

For the third time, the Financial Crimes Enforcement Network (FinCEN) is proposing a rule that would require investment advisers to implement anti-money laundering (AML) programs and report suspicious transactions.

The Bank Secrecy Act requires financial institutions to take steps to reduce the risk of money laundering. It also requires financial institutions to report suspicious transactions to FinCEN. Through FinCEN’s regulations, the Bank Secrecy Act applies to many types of financial institutions, including depository banks, insurance companies, and broker-dealers registered with the Securities and Exchange Commission (SEC).

The Bank Secrecy Act, however, has not yet been applied to investment advisers. While FinCEN acknowledges that investment advisers often work with financial institutions that are already subject to BSA requirements, such as banks, the financial institutions may not have sufficient information about an adviser’s clients to assess suspicious activity or money laundering risk. FinCEN views this as a gap that would allow money launderers to evade scrutiny more effectively by operating through investment advisers rather than directly through banks or other financial intermediaries.

FinCEN’s proposed rule would extend the AML program requirements, and the obligation to report suspicious activities, to investment advisers that are required to register with the SEC. The proposed rule would also require the investment advisers to report cash transactions over $10,000, but investment advisers would not be required to implement customer identification programs.

Banks are unlikely to be affected significantly by this rule. Banks are already subject to BSA requirements, including the requirement to develop an AML program and report suspicious activities. FinCEN’s proposed rule would only extend these BSA requirements to a new group of professionals, investment advisers. However, one change that the rule would have on banks is how they file Suspicious Activities Reports (SAR); the proposed rule would allow investment advisers and banks or other financial institutions to file Joint SARs. If a bank and an investment adviser were involved with the same transaction that appeared suspicious, the proposed rule would require that only one joint report be filed, instead of separate reports from both the bank and the investment adviser. This may mean that banks and investment advisers will need to share information about the transaction to complete a Joint SAR.

Investment advisers may provide advice with respect to certain insurance products such as annuities that are offered by insurance companies and broker-dealers in securities (variable annuities). While an investment adviser may work with a bank-affiliated insurance agency that offers variable annuities, the proposed rule would not appear to affect the sale of variable annuities from the perspective of the bank or its affiliated insurance agency.

The comment period on the proposed rule is open until November 2, 2015.