The Financial Crimes Enforcement Network (FinCEN) has recently issued a pivotal final rule that mandates registered investment advisers (RIAs) and exempt reporting advisers (ERAs) to establish comprehensive anti-money laundering (AML) and countering the financing of terrorism (CFT) frameworks under the Bank Secrecy Act (BSA).
According to Napier AI, for the first time, these advisers, now termed as “Covered IAs,” will be recognized as financial institutions, a significant shift in regulatory classification.
This change will impact around 15,000 SEC-registered investment advisers and 5,800 exempt reporting advisers. The objective is to mitigate the risk of illicit finance activities within the investment adviser sector by filling critical regulatory gaps. Despite uncertainties due to recent changes in the U.S. administration, the essential requirement for robust AML controls remains undiminished. A 2024 risk assessment by the Treasury Department highlighted significant vulnerabilities due to the prior absence of AML/CFT obligations, underscoring the need for proactive compliance measures.
Covered IAs are required to implement several critical compliance measures:
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AML/CFT Program: Advisers must design and maintain AML/CFT programs that are adapted to their specific business models and risk exposures.
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Customer Due Diligence (CDD): Firms need to establish procedures to accurately assess client risks and verify beneficial ownership information.
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Suspicious Activity Reporting (SARs): Transactions of $5,000 or more that suggest potential money laundering or related illegal activities must be reported to FinCEN.
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Recordkeeping and Travel Rule Compliance: Transaction records must be meticulously maintained, and the Travel Rule mandates the collection and transmission of specific information for transactions exceeding $3,000.
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SEC Oversight: The Securities and Exchange Commission (SEC) will oversee and enforce compliance with these regulations.
The expansion of AML/CFT requirements represents a substantial shift for investment advisers. Historically, RIAs operated without the stringent AML frameworks required of banks and broker-dealers. This regulatory evolution means investment advisers will now need to implement sophisticated compliance structures, comparable to those in the banking sector, which may particularly challenge smaller RIAs and ERAs with previously minimal regulatory engagement.
To effectively meet these new regulations, RIAs should consider a strategic implementation plan that includes:
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Phase 1: Assessment & Planning: Conduct an AML risk assessment and develop a budget and resource plan.
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Phase 2: Program Development: Draft detailed policies and procedures and appoint an AML compliance officer.
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Phase 3: Technology Implementation: Install advanced transaction monitoring and sanctions screening systems.
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Phase 4: Training & Testing: Execute comprehensive AML training and conduct initial program testing.
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Phase 5: Full Compliance: By January 1, 2026, all systems and processes should be fully operational, with ongoing monitoring and regular program reviews to adapt to regulatory changes.
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