One could see how FinCEN’s delay on the effective date of its investment adviser AML rule is actually a nod to the SEC to take a role in its further development. FinCEN announced on July 21st that it intends to issue exemptive relief delaying the rule’s compliance date from January 1, 2026 to January 1, 2028. It appears that FinCEN now recognizes it needs the input from the SEC to revise the AML rule so that it applies accurately to the various business models and risk levels of all SEC registered investment advisers. Right now, the rule falls short of that and could create confusion for investment advisers on how to effectively apply its AML measures, such as how the rule applies to private fund clients versus other types of clients.
Additionally, FinCEN indicated it would review the joint proposed rule establishing Customer Identification Program (CIP) rule requirements for investment advisers. Not only could we see an enhanced FinCEN AML rule, but a second joint rule with the SEC specifically requiring investment adviser CIPs. This may look similar to the requirements already in place for banks, broker-dealers and investment companies.
Another alternative is that FinCEN scraps its standalone AML rule entirely and jointly, with the SEC, issues a beefed-up AML Rule including CIP requirements. This would most certainly allow the SEC to take the lead in a new rule proposal and would take advantage of its expertise with the nuances of investment adviser business structures and money management offerings.
The investment adviser industry is likely the largest financial segment without AML requirements at this time. It includes private funds that have experienced substantial growth over the past decade. While some firms voluntarily conduct AML reviews, most do not. Since the 9/11 terrorist attacks, the need for a rule on AML policies and processes for investment advisers has been discussed by regulators and the industry, but without direct action taken.
Expanding global criminal enterprises continually seek to exploit US financial sectors. Investment advisers, without requirements for adequate AML policies and surveillance systems, may be more routinely targeted by criminal networks seeking to launder illicit gains. These illegal transactions now go beyond the use of standard US currencies with the growing acceptance of cryptocurrencies that can more easily circumvent regulations. While there is industry resistance to additional layers of regulations requiring further investments in compliance, having an AML rule for investment advisers is long overdue. Working out the remaining details of the new rule or an expanded version should be the last steps before it comes to fruition.
FrontLine Compliance foresees a new proposal by the end of 2026, if not before. So, if your firm has already begun its enhanced compliance measures for the new FinCEN rule, your time has been well spent.
