FinCEN And SEC Mandate Customer ID Program For Investment Advisers

On May 13, 2024, the Securities and Exchange Commission (SEC) and the Financial Crimes Enforcement Network (FinCEN) presented a regulation that preceded the implementation of customer identification programs (CIPs) for registered investment advisors (RIAs). It is another element of a well-coordinated effort to address the apparent gaps in Federal anti-money laundering regulations.

The proposed rule, jointly issued by the two US regulators, advises exempt reporting advisers (ERAs) and registered investment advisers (RIAs) to create, record, and uphold written CIPs. Such programs are important to prevent “money laundering activities including financial crimes, corruption, financing of terrorism and tax evasion by customers of investment advisers”.

FinCEN had presented its own view on the CIP regulatory agenda in the February 2024 Notice of Proposed Rulemaking (NPRM) about restricting RIAs and ERAs to (1) create and adopt anti-money laundering compliance programs within one year from the effective date of a final rule, and (2) detect, record, and report any suspicious activities to FinCEN under its  “AML/CFT Program and SAR Proposed Rule”, says press release.

“This proposed rule is devised to make it more complicated for customers of investment advisers to use fake identities during deals,” stated Chairperson of SEC Gary Gensler. “I see the advantages of this proposal in the view it could decrease the probability of terrorists and other criminals obtaining a gateway into US financial systems for money laundering purposes, financing terrorism, or moving the funds to a third party for illicit purposes.”

What Is The Agenda Of The Newly Drafted Ordinance?

The rule aims to fight money laundering and other criminal activities that may arise including customers of RIA or ERA via reinforcing the legislative countering efforts of the investment industry through the AML/CFT. The US Treasury Department performed a risk assessment showing that a considerable number of investment advisers have served as the entry points for the use of illicit funds through foreign corruption, tax evasion, fraud, and other illegal activities in the US markets and further helping to develop market opportunities for such activities, stated the press release.

The adoption of such Rulemaking would make it more difficult for illicit actors, and criminals to (i) use RIA or ERAs as entrances into the US financial frameworks, (ii) use fake profiles to establish relationships with those RIA and ERAs for money laundering, financing terrorism, illegal financing, and other financial crimes.

“The investment and financial advising sector has been and continues to be used by criminals, corrupt individuals, and money launderers to access the U. S. financial system and to launder funds,” said FinCEN Director Andrea Gacki. “This initiative would help better investment advisors recognize and stop criminals from inappropriately using their services consequently adapting CIP requirements easily.”

The CIP Proposed Rule

The proposed rule of CIP requirements aligns with those of the CIP obligations that are already applicable to banks, dealers, and brokerage firms.

Required Customer Information

As proposed, the investment adviser must obtain, at a minimum, the following information before opening a customer’s account:

• The investment adviser is mandated to collect information before opening a customer’s account;
• Official name and birth date
• Address (maybe the location of the residence or office)
• Identification numbers like Taxpayer Passport Number

Fundamental Conditions

RIAs and ERAs are required to:

• Establish reasonable measures for verifying and screening the customers’ identities.
• In advance, clients must be informed before the account opening that the investment adviser is going to use their details to cross-check their identities.
• Establish responsive measures for the case when the investment adviser is unable to reasonably accept the information that it knows the real customer’s identity.
• Utilize adequate approaches designed to identify if any of the customers appear on the lists of known or suspected terrorists or terrorist groups via any government agency.
• Introduce steps for analysis and maintain all information that the business receives and data processed to support the verification of customer identity.

Significant Exclusions

Under the CIP Proposed Rule, RIAs and ERAs:

• Can remove accounts that the investment adviser obtains via a merger, acquisition, asset purchase, or liability assumption.
• No need to check the identity of certain clients such as state-regulated financial institutions, banks, and multiple government agencies as well as the names of publicly traded companies, and existing clients when the advisor is convinced that the client’s identity is already known.
• In the case of mutual funds that have previously created and executed a CIP, they typically consider the specified standards satisfied.

Must Read: FinCEN Asks for Input on Bank Customer Verification

Final Remarks

As per the press release, the custodian investment adviser should design a set of CIP policies and procedures as per the risk assessment which are based on the types of accounts it maintains. Additionally, the risk assessment will take into account factors that involve any kind of money laundering, financial fraud, and terrorist financing activities available in the adviser’s country, the kind of offerings delivered by the firm, and to what degree it depends on the third-party companies for identity verification procedures.

FinCEN and the SEC stated that they believed the CIP Proposed Rule gives advisers enough flexibility to customize their processes to the risks presented by their clientele and business, so they did not create any additional requirements or an exemption for smaller advisers.

The deadline for submission of public comments will remain open for 60 days from the date of publication of the CIP Proposed Rule in the Federal Register. All investment advisers must implement CIPs within the first six months from the date when the rule will be effective.