SEC, FinCEN propose new rule to curb illicit finance activity

The Securities and Exchange Commission (SEC), along with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) proposed a new rule designed to prevent illicit finance activity.

Specifically, the proposal would require SEC-registered investment advisers (RIAs) and exempt reporting advisers (ERAs) to establish, document, and maintain written customer identification programs (CIPs). The regulators said that this would strengthen the anti-money laundering and countering the financing of terrorism (AML/CFT) framework for the investment adviser sector.

“The proposed rule is designed to make it more difficult to use false identities to establish customer relationships with investment advisers,” SEC Chair Gary Gensler said. “I support this proposal because it could reduce the risk of terrorists and other criminals accessing U.S. financial markets to launder money, finance terrorism, or move funds for other illicit purposes.”

Under this proposal, RIAs and ERAs would be required to implement procedures to identify and verify the identity of their customers, among other requirements. This would help them form a reasonable belief that RIAs and ERAs know the true identity of their customers. Thus, it would make it more difficult for criminal, corrupt, or illicit actors to establish customer relationships — including by using false identities — with investment advisers for the purposes of laundering money, financing terrorism, or engaging in other illicit finance activity.

“Criminal, corrupt, and illicit actors have exploited the investment adviser sector to access the U.S. financial system and launder funds,” FinCEN Director Andrea Gacki said. “This proposal would help investment advisers better identify and prevent illicit actors from misusing their services, while advancing a harmonized set of CIP obligations.”

If adopted, the rule would require RIAs and ERAs to implement a CIP that includes procedures for verifying the identity of each customer and maintaining records of the information used to verify a customer’s identity. It is generally consistent with the CIP requirements for other financial institutions, such as brokers or dealers in securities and mutual funds.

This proposed rule complements a separate FinCEN proposal in February 2024 to designate RIAs and ERAs as “financial institutions” under the Bank Secrecy Act (BSA). That would subject them to AML/CFT program requirements and suspicious activity report (SAR) filing obligations, among other requirements. That proposal cites a Treasury risk assessment that identified that the investment adviser industry has served as an entry point into the U.S. market for illicit proceeds associated with foreign corruption, fraud, tax evasion, and other criminal activities.

A public comment period will remain open for 60 days after publication of the proposing release in the Federal Register.

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