Advisers Face AML Pressure From SEC Despite Lack Of Regulations

Investment advisers that are registered with the U.S. Securities and Exchange Commission (SEC) have been dealing with a gray area when it comes to anti-money laundering (AML) efforts, and the recent announcement of the SEC’s enforcement priorities for 2020 have turned up the pressure but provided little guidance. This has caused investment advisers to deal with a shadow regulatory environment where AML compliance is expected, even though it is not required.

Back in September 2015, the Financial Crimes Enforcement Network (FinCEN) proposed a rule that would require SEC-registered investment advisers and those required to be registered, to adopt AML practices and procedures. These would include filing suspicious activity report and currency transaction reports, plus keeping records, to bring investment advisers more into line with existing AML regulations governing the U.S. banking system and other financial institutions.

On January 7, 2020, the SEC’s Office of Compliance Inspections and Examinations announced increased examination coverage of registered investment advisers and AML as part of its 2020 examinations priorities. However, investment advisers are not statutorily defined financial institutions and FinCEN prioritizing them above other institutions that are well-defined but exempt from AML requirements hints strongly at the regulator’s AML priorities.

FinCEN’s rulemaking has also been constrained by the White House Executive Order 13771, which requires the repeal of two prior regulations for every new regulation proposed. If FinCEN does not have the excess regulations to implement AML obligations for investment advisers, it may have to rely on a national security exception to create the new regulation.