SEC and FinCen propose new customer identification rules for investment advisers
Earlier this month the US Securities and Exchange Commission (SEC) and the Treasury’s Financial Crimes Enforcement Network (FinCEN) proposed a new rule requiring SEC-registered investment advisers (RIAs) and exempt reporting advisers (ERAs) to establish comprehensive customer identification programs (CIPs). This initiative aims to bolster the anti-money laundering and countering the financing of terrorism (AML/CFT) framework within the investment adviser sector.
The proposed rule mandates that RIAs and ERAs implement and maintain procedures to verify customer identities effectively. This would entail establishing a documented CIP, ensuring that advisers form a reasonable belief about the true identity of their clients. Such measures are expected to limit criminal activities, such as money laundering and terrorism financing, by preventing the use of false identities to exploit adviser services.
This proposal complements FinCEN’s February 2024 initiative to classify RIAs and ERAs as “financial institutions” under the Bank Secrecy Act (BSA). This classification subjects them to stringent AML/CFT requirements and the obligation to file suspicious activity reports (SARs). The Treasury’s risk assessment highlighted the vulnerability of the investment adviser industry to illicit activities, citing cases of foreign corruption, fraud, and tax evasion. The combined efforts of these proposals are directed at mitigating such risks and fortifying the integrity of the US financial system.
SEC Chair Gary Gensler expressed strong support for the proposal, emphasising its potential to curtail terrorist and criminal access to U.S. markets. Similarly, FinCEN Director Andrea Gacki underscored the importance of the rule in identifying illicit actors and preventing them from exploiting the investment adviser sector.
If implemented, the rule will require RIAs and ERAs to develop CIPs with procedures for customer identity verification, akin to those required of brokers, dealers, and mutual funds. This alignment aims to create a consistent and robust framework across the US financial services industry.
The rule is available on the SEC’s website and will be open for public comment for 60 days.
For further details, read the fact sheet here.
