SEC, FinCEN propose customer ID program for investment advisers

The proposed rule, jointly released by the two regulators Monday, would require RIAs and exempt reporting advisers (ERAs) to establish, document, and maintain written CIPs, which would help to “prevent illicit finance activity involving the customers of investment advisers by strengthening the anti-money laundering and countering the financing of terrorism … framework for the investment adviser sector,” the SEC said in a press release.

The CIPs would require RIAs and ERAs to establish risk-based procedures for verifying the identity of each customer before or after the customer’s account is open, enabling each type of firm to “form a reasonable belief that it knows the true identity of each customer,” according to an SEC fact sheet.

As part of the process, advisers would have to obtain each customer’s name, date of birth or date of formation (in the case of a limited liability company), address, and an identification number. Advisers would also be required to adopt procedures for maintaining records, comparing customer names to those on federal terrorism watch lists, and notifying customers why they are requesting information to verify their identities.

In February, FinCEN issued a notice of proposed rulemaking that would categorize RIAs and ERAs as financial institutions that are subject to the Bank Secrecy Act (BSA). The BSA requires financial institutions to have an AML program and to file suspicious activity reports with FinCEN.

“The proposed rule would align investment adviser CIP obligations with those of other entities,” said SEC Chair Gary Gensler in a statement. “Such harmonization would help reduce the risk of terrorists and other criminals accessing U.S. financial markets by using investment advisers to launder money, finance terrorism, or move funds for other illicit purposes.”

“Criminal, corrupt, and illicit actors have exploited the investment adviser sector to access the U.S. financial system and launder funds,” said FinCEN Director Andrea Gacki in a press release. “This proposal would help investment advisers better identify and prevent illicit actors from misusing their services while advancing a harmonized set of CIP obligations.”

SEC Commissioner Mark Uyeda, who voted against the rule, said in a statement the agencies should wait for FinCEN to finalize its February proposal so that “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.” He also wondered whether the rule’s impact on smaller advisers had been explored.

The Investment Advisers Association (IAA), a trade group representing RIAs, said it supported the proposal but that it might not fulfill its policy goals “because it lacks sufficient tailoring to the unique business models and risk profiles of SEC advisers.”

“We urge the SEC and the Treasury Department to develop a tailored approach that effectively addresses specific risks while avoiding unnecessary regulatory burdens, especially burdens on smaller SEC advisers,” IAA General Counsel Gail Bernstein said in an emailed statement.

Private funds advised by RIAs, such as hedge, private equity, and venture capital, held approximately $20 trillion in assets under management at the end of 2022, the Treasury said in an investment adviser risk assessment published in February.