On August 28, FinCEN (Financial Crimes Enforcement Network) released a final ruling which is extending anti-money laundering (AML) and countering the financing of terrorism (CFT) requirements to investment advisors.
This rule will apply to many registered investment advisors (RIAs), registered with the Securities and Exchange Commission (SEC), and exempt reporting advisors (ERAs). This shift aims to enhance the integrity of the financial system by extending the scope of what is considered a financial institution under the Bank Secrecy Act (BSA) regulations. The final ruling requires companies to develop and maintain AML/CFT compliance through a compliance program, including filing Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs) and implementing due diligence measures for correspondent and private banking accounts. The final rule is scheduled to go into effect January 1, 2026.
FinCEN has finalized its definition of an “investment advisor” after proposing to amend its previous definition earlier this year. The new definition excludes specific RIAs registered with the SEC that are mid-sized advisors, pension advisors, RIAs that do not report any AUM (assets under management) on SEC Form ADV, and multi-state advisors. FinCEN notes that these RIAs pose a lower risk than bigger ones with over $110 million AUM. FinCEN has also indicated that state-registered advisors are not required to comply with this rule due to being considered low-risk for money laundering. Although these state-registered advisors are not required to comply at this time, FinCEN cautioned that they will continue to monitor activity moving forward.
Before this rule, there were no U.S. federal or state regulations requiring IAs or RIAs to maintain AML/CFT programs. FinCEN noted that having obligations in place for banks, broker-dealers, and other financial institutions can help in detecting financial crime. As financial crimes evolve, regulatory bodies are recognizing the need for more robust regulations to combat these issues. By including investment advisers within the scope, FinCEN is reinforcing its commitment to creating a more secure financial environment.
With the new ruling, there are minimum requirements that need to be set into place. RIAs and ERAs (exempt reporting advisors) are mandated to implement risk-based written AML/CFT programs which include the development of internal policies, procedures, and controls: ongoing employee training programs, a designated compliance officer, and independent audit programs to test the effectiveness. Additionally, advisors will be obligated to conduct customer due diligence (CDD) to better understand their clients and the nature of their transactions. This move not only places focus on investment performance but also the potential risks associated with client activities. The new AML/CFT program must be approved by the IA’s board of directors or trustees. If there is no board, the program will need to be approved by the general partner, sole proprietor, or other persons like the board of directors.
RIAs and ERAs can serve a critical role in the fight against financial crime and its impacts. If you or your organization has need assistance in developing an AML/CFT program, please reach out to James Rumph [email protected] or Brian Webster [email protected] for more information on what we can do to help.
About Schneider Downs Financial Services
The Schneider Downs Financial Services industry group provides financial institutions of all sizes with the expertise to effectively address their needs in risk management, IT security and internal audit. Through cybersecurity, IT risk advisory, internal audit, IT compliance frameworks, risk advisory, risk management and more, our experienced professionals provide extensive and comprehensive solutions to our financial services industry clients.
To learn more, visit our Financial Industry Group page.
