In a significant move to protect the U.S. financial system from exploitation by criminals and foreign adversaries, the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) has issued a Notice of Proposed Rulemaking (NPRM) today. The proposed rule aims to enhance transparency in the U.S. financial system and aid law enforcement in identifying illicit proceeds entering the economy through investment advisers.

The NPRM is part of the Treasury's ongoing efforts to combat illicit finance risks associated with anonymous companies and all-cash real estate transactions. It seeks to ensure that investment advisers adhere to Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) requirements outlined in the Bank Secrecy Act (BSA).

Under the proposed rule, certain investment advisers, including those registered with the Securities and Exchange Commission (SEC), as well as exempt reporting advisers, would be obligated to implement risk-based AML/CFT programs. They would also be required to report suspicious activities to FinCEN and maintain adequate recordkeeping.

To address the existing gaps in the regulatory landscape, the proposed rule classifies investment advisers as "financial institutions" under the BSA. This means that they would be subject to the same AML/CFT obligations as other financial institutions. Additionally, the rule calls for the implementation of information-sharing provisions among FinCEN, law enforcement agencies, and select financial institutions.

Director of FinCEN, Andrea Gacki, emphasized the critical role investment advisers play as gatekeepers to the U.S. economy. She highlighted that the current inconsistent application of AML/CFT requirements allows criminals to exploit regulatory loopholes and compromise American businesses. By leveling the regulatory playing field, the proposed rule aims to safeguard the U.S. economic and national security.

Furthermore, FinCEN is proposing to delegate examination authority for this rule to the SEC, given their expertise in regulating investment advisers and examining other financial institutions regarding AML/CFT responsibilities.

The proposed rule complements the recently published risk assessment of the investment adviser sector by the Treasury. The assessment identifies the threats and vulnerabilities of illicit finance within the industry, noting how the uneven application of AML/CFT requirements allows both legitimate and illicit investors to seek advisers who do not inquire into the source of their wealth.

This proposed rule builds upon the recommendations outlined in the 2021 U.S. Strategy on Countering Corruption and reexamines a 2015 NPRM that proposed extending AML/CFT requirements to certain investment advisers. While recognizing the importance of the investment adviser sector to legitimate investors and the U.S. economy, the proposed rule seeks to address material risks, strengthen financial transparency, and minimize potential business burdens.

The NPRM represents a significant step towards safeguarding the U.S. financial system against illicit activities, providing law enforcement with the tools to identify and prevent the entry of illicit proceeds into the economy. The Treasury's focus on enhancing transparency and accountability within the investment adviser industry demonstrates its commitment to protect American businesses and maintain the integrity of the U.S. financial system.