FinCEN and the SEC Propose Rule to Require Certain Investment Advisers to Establish Customer Identification Programs
The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) and the U.S. Securities and Exchange Commission (SEC) recently proposed a new joint rule (the Proposed Rule) which would require both investment advisers (RIAs) registered with the SEC and investment advisers who report to the SEC as exempt reporting advisers (ERAs) to enact reasonable verification procedures to ensure that each such investment adviser could “form a reasonable belief that it knows the identity of each customer” (such procedures known as customer identification programs or CIPs).
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Notably, the Proposed Rule does clarify that while a private fund would be a “customer” of an investment adviser based on the currently proposed definition, the passive investors in such private fund would not be considered customers for purposes of the CIP requirements. If the Proposed Rule is adopted as a final rule, both RIA’s and ERA’s CIPs would have to meet certain minimum thresholds, including that:
- The CIP would: (1) need to be written and incorporated into the investment adviser’s overall anti-money laundering and counter-terrorism financing program, (2) be appropriate based on the size and business of the investment adviser, and (3) include risk-based procedures for verifying the identity of each customer such that the investment adviser can “form a reasonable belief that it knows the identity of each customer.”
- The CIP would need to require the collection of: (1) customer names, (2) individual customer’s dates of birth and entity customer’s dates of formation, (3) customer addresses and (4) customer identification numbers or alternative government-issued identification documentation.
- As part of the CIP, the investment adviser would need to verify the above information, including comparing customer names to lists of known or suspected terrorists, document how such information was verified in their records and notify customers about their verification procedures.
- The CIP would need to occur within a reasonable amount of time before or after a customer account is opened.
Under the Proposed Rule, FinCEN and the SEC have asked for comments on the scope of the proposed definitions of “account” and “customer,” with an “account” being “any contractual or other business relationship between a person and an investment adviser under which the investment adviser provides investment advisory services” (excluding any account acquired through an acquisition, merger, purchase of assets or assumption of liabilities), and a “customer” being any person (including a natural person or legal entity) who opens a new account with the investment adviser (subject to certain carve-outs). The Proposed Rule would also require the investment adviser to take additional steps to verify the identity of a customer that is not an individual by seeking information about the individuals with authority or control over the account and may need to look through the account.
The Proposed Rule comes on the heels of the issuance of FinCEN’s proposed rule to treat RIAs and ERAs as “financial institutions” under the Bank Secrecy Act, and together, these proposed rules serve to illustrate the increased focus by FinCEN and the SEC subjecting RIAs and ERAs to the same anti-money laundering and counter-terrorism financing programs as those required for other financial institutions such as banks and broker-dealers. As a result of this ever-increasing focus, RIAs and ERAs should carefully pay attention to the development of these proposed rules.
The comment period for the Proposed Rule will remain open until July 22, 2024. If you have any questions about the Proposed Rule, please contact authors Keith Kaplan, and Nicole Haiem, who are members of the Fund Formation Practice Group at Klehr Harrison.