Mineola, NY - In response to the increased registration and reporting requirements for investment advisers implemented by the SEC under its mandate from the Dodd Frank Act, Financial Crimes Enforcement Network (FinCEN) recently announced that it is working on a regulatory proposal that would require investment advisers to establish Anti-Money Laundering (“AML”) programs and report suspicious activity.
The forthcoming regulatory proposal would not be the first attempt of FinCEN to include investment advisers within the regulatory framework of the Bank Secrecy Act of 1970 (“BSA”). In May 2003, FinCEN proposed regulations requiring certain investment advisers to implement AML programs. The 2003 proposed rule would have been applicable to 1) registered investment advisers, and 2) unregistered investment advisers of hedge funds and private equity funds with assets under management of $30 million or more. FinCEN withdrew the 2003 proposed rule in 2008.
The 2003 proposed rule required an AML program to contain the following four (4) elements:
- it must be reasonably designed to prevent the use of the investment adviser in money laundering or terrorist activities, and to monitor and achieve compliance with the rules and regulations of the BSA;
- it must be independently tested for compliance by company personnel who are not the persons designated to implement and monitor the program, or by a qualified outside party;
- a person, who is an officer of the investment adviser, must be designated who will be responsible for its implementation and monitoring; and
- it must provide for ongoing training.
FinCEN expressly allowed investment advisers to delegate the implementation and operation of the AML program to its service providers, such as fund administrators, provided that the responsibility for monitoring the effectiveness and compliance of such service provider’s AML program remains with the investment adviser. This is particularly important to emerging hedge fund advisers and private equity fund advisers whose operations may be too small to support the requirements of an AML program, and who customarily depend on their fund administrators and other service providers for back office and middle office support.
This latest regulatory development should be watched closely by New York investment advisers who are expected to register with the SEC this March 30, 2012 and by their service providers who may be expected to support such additional regulatory obligations.