The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Earlier this year, the Financial Crimes Enforcement Network ("FinCEN") issued a proposed rule that would bring SEC-registered investment advisers and Exempt Reporting Advisers ("Covered Advisers") within the scope of key U.S. anti-money laundering ("AML") rules (see our prior alert for more information). However, that proposal did not require Covered Advisers to adopt and maintain a Customer Identification Program ("CIP"), since any such rule must be adopted alongside the SEC.
On May 13, 2024, the SEC and FinCEN issued a joint proposed rule (the "Proposed Rule") to require covered investment advisers to implement CIPs. The SEC/FinCEN have issued the Proposed Rule to prevent customers from using false identities to establish advisory relationships with Covered Advisers in order to launder money through the U.S. financial markets.
Summary of Proposed Rule
Under the Proposed Rule, Covered Advisers would need to establish, document, and maintain a written CIP as part of their AML program. The CIP must implement "reasonable procedures" for verifying the identity of any person seeking to open an account with the financial institution, maintaining records associated with such verification, and consulting lists of known terrorists and terrorist organizations.
A Covered Adviser's CIP must include the following:
1. Identity verification procedures.
Covered Advisers would need to implement identification procedures to form a reasonable belief that the Adviser knows the true identity of each customer. Specifically, Covered Advisers would need to:
- Give customers adequate notice of their identity verification procedures.
- Obtain the client's name, date of birth (or date of formation for an entity), address, and identification number.
- Follow risk-based procedures to verify the accuracy of information obtained through specific documentary or non-documentary means.
- Obtain additional verification for customers who are not individuals and whose identity cannot be verified through the previously listed means.
Covered Advisers must also implement procedures for responding to instances in which the Covered Adviser cannot form a reasonable belief that it knows the true identity of a customer. These procedures should address:
- When a Covered Adviser should not open an account.
- The extent to which a Covered Adviser may provide services to a customer while attempting to verify the customer's identity.
- When a Covered Adviser should close an account after failing to verify the customer's identity.
- When a Covered Adviser should file a Suspicious Activity Report with FinCEN.
2. Recordkeeping Practices.
Covered Advisers would need to make and maintain records of identifying information obtained under their CIP. Records must include:
- The identifying information gathered about each customer.
- A description of any document the Covered Adviser relied on to verify the customer's identity.
- A description of methods and results of measures taken to verify the customer's identity, including non-documentary methods and any additional verification methods required.
- A description of methods used to resolve each substantive discrepancy discovered when verifying identifying information.
Records must be maintained:
- For records containing identifying information about the customer: while the account remains open and for five years after the date the account is closed.
- For records containing information regarding the verification of a customer's identity: for five years after the record is made.
3. Comparison with Government Lists.
Covered Advisers would need to determine whether a customer appears on any list of known or suspected terrorists or terrorist organizations provided by the federal government (generally through FinCEN).
Exceptions
In certain circumstances, Covered Advisers may be permitted to rely on another financial institution's customer identification practices if:
- The Covered Adviser actively monitors the operation of the financial institution's CIP and assesses its effectiveness;
- A customer of the Covered Adviser has a business relationship with the financial institution to provide services, dealings, accounts, or other transactions (e.g., the customer's broker-dealer or custodian);
- The Covered Adviser's reliance on the financial institution's CIP is reasonable under the circumstances;
- The financial institution is federally regulated and subject to federal AML rules; and
- The financial institution enters into a contract with the Covered Adviser under which it annually certifies that it has implemented an AML program and will perform the requirements of the Covered Adviser customer identification program.
Implementation and SEC Examination Authority
The Proposed Rule is open for comment until July 22, 2024. If adopted, Covered Advisers will be required to comply with the final rule within 6 months from its effective date.
Under the Proposed Rule, the SEC will have examination authority over Covered Advisers' CIP compliance. The SEC has been aggressive in proposing and adopting new rules and Covered Advisers should prepare for compliance well in advance of the compliance deadline.
The Broker-Dealer & Investment Adviser team at Michael Best has attorneys that can help investment advisers and exempt reporting advisers navigate their regulatory obligations. Please contact a member of our team for more information.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.