April 15, 2024

VIA ELECTRONIC SUBMISSION

Policy Division
Financial Crimes Enforcement Network
P.O. Box 39
Vienna, VA 22183

Re: Notice of Proposed Rulemaking on Anti-Money Laundering/Countering the Financing of Terrorism Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers and Exempt Reporting Advisers, Docket Number, FINCEN–2024–0006 and RIN 1506–AB58.

The Securities Industry and Financial Markets Association and its Asset Management Group (“AMG”) (together, “SIFMA”)1 appreciate this opportunity to provide comments to the Financial Crimes Enforcement Network (“FinCEN”) on its proposed rule (the “Proposed Rule”)2 to impose certain anti-money laundering (“AML”)/countering the financing of terrorism (“CFT”) requirements on registered advisers (“RIAs”) and exempt reporting advisers (“ERAs”) (together, “Covered IAs”).

SIFMA applauds FinCEN’s efforts to engage with stakeholders to ensure the effectiveness of AML/CFT programs for Covered IAs and supports FinCEN’s overall policy objective of ensuring that the investment adviser industry is not abused by money launderers, foreign corrupt officials and other malign actors. SIFMA believes that a well-calibrated final rule, that accurately reflects the investment adviser industry and the AML/CFT risks it faces, is necessary to allow the investment adviser industry to help prevent illicit financial activity from entering the U.S. financial system, without imposing overly burdensome or duplicative compliance requirements on Covered IAs. SIFMA offers comments with the objective of refining the Proposed Rule, with a focus on ensuring its effective risk-based approach and tailored alignment with the diverse practices and business models deployed within the asset management industry.

Below, SIFMA provides comments on the Proposed Rule and many of the questions FinCEN poses in the proposing release. SIFMA welcomes the opportunity to engage in a meeting with FinCEN to provide additional details pertaining to the industry and context to our comments.3

I. Executive Summary

This section summarizes SIFMA’s principal comments on the Proposed Rule. Section II describes why the underlying risk assumptions in the 2024 Investment Adviser Risk Assessment (the “Risk Assessment”), that investment advisers currently occupy a significant regulatory gap in the AML/CFT space, are misguided and highlights potential consequences for this and future rulemakings related to this misconception.4 Section III provides detailed comments on specific provisions of the Proposed Rule.

As an over-arching comment, SIFMA urges FinCEN to adopt a tailored approach to incorporating “investment advisers” into the definition of “financial institution” under the Bank Secrecy Act (“BSA”). Investment advisers, as discussed below, have widely varied business models and are positioned very differently from banks, broker-dealers and other BSA financial institutions, which variance we believe is important for FinCEN to recognize as it moves forward with any rulemaking. Recognition of the different business models of advisers should lead to a more precise definition of terms such as “customer” for Covered IAs such that the expected customer due diligence, suspicious activity reporting (“SAR”) and section 314(a) requirements for Covered IAs, particularly those that serve as advisers to private funds, will be much clearer than under the Proposed Rule.

• Definition of Investment Adviser; Scope of the Activities Included in the Covered IA’s AML Program
  • Non-U.S. Advisers. SIFMA reiterates its comments, originally offered on FinCEN’s 2015 proposed rule,5 that non-U.S. advisers, as well as the non-U.S. activities of U.S. firms, should be excluded from the final rule because of conflicts-of-laws, other significant compliance challenges and, in many cases, a lack of U.S. nexus of the relevant activities.
  • Subadvisers and Wrap Fee Advisers. SIFMA submits, as in its comment letter on the 2015 Proposal, that subadvisers and wrap program advisers should be excluded from the AML program requirement because they typically lack access to information regarding underlying investors and do not directly manage investor assets. Indeed, because primary advisers are already covered under the Proposed Rule, applying AML/CFT requirements to subadvisers and wrap fee advisers would result in unnecessarily duplicative efforts.
  • Dual Registrants and Affiliated Advisers. SIFMA agrees with the Proposed Rule’s exemption of Covered IAs that are dually registered as broker-dealers or as banks (“Dual Registrants”) and Covered IAs that are affiliated with a broker-dealer or bank (“Affiliated Advisers”) and emphasizes that a single comprehensive AML/CFT program is beneficial and more cost-effective. Further, although SIFMA agrees with FinCEN’s delegation of examination authority for Covered IAs to the Securities and Exchange Commission (“SEC”), SIFMA also urges that, in the case of dual registrants/affiliated advisers, the SEC should leverage the AML/CFT examination(s) conducted by one or more applicable regulators to appropriately allocate compliance and examination resources and avoid duplicative efforts.
• Delegation of Responsibilities
  • AML/CFT Program Delegation. SIFMA requests that FinCEN clarify that, while Covered IAs are responsible for their AML/CFT programs, the full-scope of implementation and operation of the programs, including monitoring for suspicious activity and filing SARs and responding to 314(a) requests (to the extent that such responses are mandated), may be delegated to third-party service providers.
  • Non-U.S. Service Providers. SIFMA submits that delegation of AML compliance to administrators and other service providers located outside of the United States should likewise be permitted.

In terms of service-provider oversight, SIFMA urges FinCEN to be mindful of the SEC’s currently outstanding proposed rule that would prohibit RIAs from outsourcing certain services or functions without first meeting minimum due diligence requirements (the “Outsourcing Proposal”).6 SIFMA urges FinCEN to avoid imposing duplicative or conflicting outsourcing oversight requirements.

• Special Standards of Diligence for Correspondent and Private Banking Accounts. SIFMA believes it would not be appropriate for FinCEN to apply special due diligence requirements for correspondent and private banking accounts to Covered IAs because, unlike custodial banks and broker-dealers, Covered IAs generally do not establish such account relationships or hold investor funds.
• Non-Advisory Activities. SIFMA supports the exclusion of non-advisory activities from the scope of the Proposed Rule and requests further examples and clarification regarding which other activities are deemed non-advisory services. In particular, SIFMA requests that FinCEN clarify that fund investment activity would be considered a non-advisory activity.
• Risk-Based Diligence on Investors and Intermediaries. SIFMA agrees with FinCEN in requiring a risk-based approach to the AML/CFT requirement for Covered IAs. To this point, SIFMA requests that FinCEN make clear in the final rule that Covered IAs are not required to adopt formal risk-rating models or methodologies and are instead permitted to apply risk factors as they deem appropriate to their activities and products. SIFMA also believes that FinCEN should acknowledge in the final rule that risk-based diligence on intermediaries acting for underlying investors (whether in funds-of-funds or nominee or other contexts) is likewise appropriate and consistent with this rulemaking.
• AML Program Approval and Designation of Responsible Person. SIFMA reiterates its comment on the 2015 Proposal that FinCEN should allow maximum flexibility in the governance of Covered IAs’ AML programs to accommodate the wide range of advisory business models.
• Obligations for Reporting Suspicious Activity
  • Reporting of Suspicious Activity. SIFMA requests that FinCEN clarify the application of the proposed “by, at or through” SAR filing obligation language that it proposes to apply to Covered IAs, given that investment advisers do not typically hold or control client assets. SIFMA further requests clarification as to how this language would apply in the context of a non-U.S. pooled investment vehicle that retains a foreign administrator and whether FinCEN believes a U.S. SAR would be mandated, particularly where there may not be a U.S. nexus for a SAR filing.
  • Customer Due Diligence/Transaction Monitoring. SIFMA requests that FinCEN only apply ongoing customer due diligence (“CDD”) to Covered IAs after the CDD rule has been finalized and the scope of CDD requirements for Covered IAs is clarified. SIFMA also asks that FinCEN consider Covered IAs’ lack of visibility into client fund movements in finalizing transaction monitoring requirements for Covered IAs.
  • SAR Sharing/Confidentiality. SIFMA appreciates FinCEN’s incorporation of its 2015 comment letter request into the Proposed Rule to allow investment advisers to share SARs within their corporate organizational structure. SIFMA further requests that FinCEN allow SAR information-sharing with fund administrators/service providers, as well as with directors and officers of the funds managed by Covered IAs, on the basis that it would be important for them to know that a SAR has been filed on one of the fund’s investors.
  • Delegation of SAR Filing Obligations. SIFMA requests that FinCEN clarify that delegation of SAR filing obligations to offshore administrators, agents and service providers will be permitted.
• Recordkeeping and Travel Rules. SIFMA submits that Covered IAs should not be obligated to comply with the Recordkeeping and Travel Rules, as they do not receive funds from, or send funds to third parties; put simply, these rules are inapposite to Covered IAs. If they will be obligated to comply with these requirements under the final rule, FinCEN needs to issue detailed guidance on how Covered IAs should implement these requirements.
• Information-Sharing Procedures. SIFMA supports the application of section 314(b) of the USA PATRIOT Act to Covered IAs, as this could help Covered IAs and other financial institutions gain additional insight into customer transactions and activities to better identify and report potential fraud, money laundering or terrorist activities. SIFMA requests, however, that FinCEN either exempt Covered IAs from section 314(a) requirements or elaborate on how such requirements would apply to Covered IAs, particularly in the funds context.
• Delegation of Examination Authority to the SEC. SIFMA requests that, in delegating examination authority to the SEC, FinCEN require the SEC to make its AML examination manual publicly available, just as the Federal Financial Institutions Examination Council (“FFIEC”) has done with its BSA/AML examination manual.
• Compliance Date. SIFMA requests that the proposed compliance date be extended to 24 months from the date that the rule is finalized. Such an extension would provide Covered IAs with the necessary time to implement new and updated systems, expand compliance staffing, coordinate with other relevant parties such as fund administrators, renegotiate or amend contracts with custodial banks and broker-dealers and, if required, develop automated compliance solutions.

 

1 SIFMA, based in New York and Washington, D.C., is the voice of the nation’s securities industry, bringing together the shared interests of hundreds of broker-dealers, banks and asset managers. AMG represents U.S. asset management firms whose combined assets under management exceed $62 trillion. The clients of AMG member firms include, among others, registered investment companies, endowments, state and local government pension funds, private sector Employee Retirement Income Security Act of 1974 pension funds  and private funds. SIFMA’s Anti-Money Laundering & Financial Crimes Committee comprises a broad range of SIFMA member firms, including global, regional and small securities firms, as well as firms engaged in the institutional, retail, clearing and online segments.

2 FinCEN, “Anti-Money Laundering/Countering the Financing of Terrorism Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers and Exempt Reporting Advisers,” 89 Fed. Reg. 12108 (proposed Feb. 15, 2024).

3 SIFMA notes that the customer identification program (“CIP”) proposed rule for Covered IAs has been submitted to the Office of Management and Budget for review and is forthcoming. SIFMA believes that industry participants should be given the opportunity to consider the CIP rule proposal in conjunction with the Proposed Rule and to provide additional feedback to FinCEN on the instant rulemaking after considering the CIP rule proposal and its effect on the application of AML requirements to advisers. See FinCEN, “Investment Adviser Customer Identification Program Requirements for Registered Investment Advisers and Exempt Reporting Advisers Notice of Proposed Rulemaking,” RIN: 1506-AB66 (Apr. 5, 2024).

4 U.S. Treasury Department, “2024 Investment Adviser Risk Assessment” (Feb. 2024).

5 FinCEN, “Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers,” 80 Fed. Reg. 52680 (Sept. 1, 2015) (the “2015 Proposal”).

6 SEC, “Outsourcing by Investment Advisers,” 87 Fed. Reg. 68816 (proposed Nov. 16, 2022).