Today, the Commission and the Department of the Treasury issued a joint proposal to implement provisions of the Bank Secrecy Act (“BSA”) for certain investment advisers.[1]  Specifically, Section 326 of the USA PATRIOT Act of 2001, which amended the BSA, requires the Secretary of the Treasury (the “Secretary”) to issue regulations that require financial institutions to implement specified procedures for identifying customers that seek to open an account.[2]  These procedures are referred to as Customer Identification Programs (“CIPs”).

The Secretary can impose CIP requirements only on a “financial institution,” which is a defined term in the BSA.[3]  Twenty-four types of entities are specifically listed in the definition of “financial institution,” but not investment advisers.[4]  However, the BSA gives the Secretary discretion to add other types of entities to that statutory definition.[5]

Thus, on February 15, 2024, the Secretary, acting through the Financial Crimes Enforcement Network (“FinCEN”), proposed to include certain investment advisers as “financial institutions” under the BSA.[6]  The proposal would apply to investment advisers that: (1) are registered or required to register with the Commission under the Investment Advisers Act of 1940 (“Advisers Act”);[7] or (2) report to the Commission as exempt reporting advisers (“ERAs”) under that Act.[8]

An important question is the scope of the FinCEN Proposed Rule, which requests comment on whether “specific services provided by investment advisers, such as advisory services that do not involve management of client assets or subadvisory services, should be included or excluded from coverage of this proposed rule.”[9]  Presumably, this is because there are legitimate questions as to the relevance of such services to money laundering, terrorist financing, and other illicit financial activity.

However, the overly broad definitions within this proposal would appear to sweep in such services.  The proposal defines “account” as “any contractual or other business relationship between a person and an investment adviser under which the investment adviser provides investment advisory services.”[10] “Customer” is defined as “[a] person that opens a new account,” subject to certain limited exceptions such as regulated financial institutions and persons that have an existing account with the investment adviser.[11]  While “investment advisory services” is not defined, the broad definition of “investment adviser” in the Advisers Act includes any person that, “either directly or through publications or writings,” is in the business of advising others “as to the value of securities” or who “issues or promulgates analyses or reports concerning securities.”[12]  

Registered investment advisers or ERAs may provide a wide range of investment advisory services, including services that do not generally present any opportunity for money laundering or terrorist financing activities.  For example, while the proposal would deem the CIP requirements satisfied for an adviser that advises a mutual fund, such adviser may also provide investment advice to collective investment trusts, or create model portfolios for wrap fee programs – all of which involve “investment advisory services” to “accounts” of “customers” under the proposal.  Other types of investment advisory services may not at all involve or relate to the transfer of funds or securities.  It is difficult to envision a money laundering concern that should be addressed with these activities, and it is unreasonable to require advisers to implement a CIP and verify customer identities in these circumstances.   

Because of the interrelatedness of this proposal and the FinCEN Proposed Rule, the proposing release states that “[w]e anticipate that any change to the scope of the [FinCEN Proposed Rule], as finalized, would also be reflected in this rule, to ensure that the scope of both rules remain consistent.”[13]  This explicit interrelatedness is the precise reason that the scoping question should be addressed through a two-step process.  First, determine the scope of investment advisory services that should be covered under the BSA, which is the subject of the FinCEN Proposed Rule.  Second, determine how a CIP should be applied with respect to that set of investment advisers, which is the subject of this proposed rule.

Otherwise, it becomes difficult to provide a thoughtful economic analysis for this rulemaking.[14]  It also dilutes the quality of public comments submitted in response to the proposal.  Commenters seeking to analyze this proposal have no way of knowing the baseline against which the requirements of the proposal should be assessed.  That baseline will be set by FinCEN on a standalone basis in connection with a separate rulemaking initiative.  Depending on that outcome, time and money may be spent unnecessarily articulating why certain investment advisory services should be excluded, thereby diluting attention from more relevant and practical concerns about the proposal. 

By waiting for FinCEN to finalize its proposal prior to proposing these implementing regulations, the scope of this proposal would have been known, and the Commission and the public would have been better able to analyze its costs and benefits.

For smaller investment advisers, the additional burdens will add to a mountain of new regulations that have been imposed in recent years.  While the goals of preventing money laundering and terror financing are laudable, there are legitimate questions as to whether imposing additional burdens on investment advisers will meaningfully contribute to those efforts. 

For these reasons, I am unable to support this proposal.  I thank the staff in the Divisions of Investment Management and Economic and Risk Analysis, and the Office of the General Counsel, as well as the staff at the Department of the Treasury for their efforts.