Saturday, January 28, 2012

FinCEN to Work with SEC in Developing Regulations Requiring Investment Advisers to Set Up AML Programs and Report Suspicious Activities

The Financial Crimes Enforcement Network is working on a regulatory proposal that would require investment advisers to establish anti-money laundering programs and report suspicious activity. In remarks at a recent American Bankers/American Bar Association seminar, FinCEN Director James Fries, Jr. said that FinCEN looks forward to working with the SEC as well as the States in developing the proposed regulations. FinCEN is a bureau within the Treasury Department charged with administering and enforcing compliance with the Bank Secrecy Act and associated regulations.

Although investment advisers are not expressly included within the definition of financial institution under the Bank Secrecy Act, the Act authorizes the Treasury Secretary to include additional types of entities within the definition of financial institution if it is determined that they engage in an activity similar to, related to, or a substitute for an activity of an enumerated entity. FinCEN regulations currently apply to broker-dealers and mutual funds.

On May 5, 2003, FinCEN published a notice of proposed rulemaking in the Federal Register proposing that investment advisers, because of the types of activities they engage in and the services they provide, should be defined as financial institutions for the purpose of requiring them to establish anti-money laundering programs. Many investment advisers provide investment advice to clients who have granted the adviser the power to manage the assets in their accounts, frequently on a discretionary basis, reasoned FinCEN, and thus engage in activities that are similar to, related to, or a substitute for financial services that are provided by other Bank Secrecy Act financial institutions.

Further, advisers managing clients’ assets work so closely with other financial institution, such as by directing broker-dealers to purchase or sell client securities or by directing banks to transfer client funds, that the advisers’ activities are related to those of the other financial institutions. Advisory services can also be a substitute for products offered by investment companies or insurance companies, for example, when clients seek to have advisers manage their assets through other forms of pooled investment vehicles.

Given the amount of time that had elapsed since the initial publication without further regulatory action, on November 4, 2008, FinCEN withdrew the proposed regulations and said that it would not proceed with regulations for investment advisers without publishing new proposals and allowing for industry comments. Since then, there have been significant changes in the regulatory framework for investment advisers with the passage of the Dodd-Frank Act and SEC rules implementing Dodd-Frank. Based on passage of Dodd-Frank and other changes, FinCEN revisited the topic of investment advisers.

According to the Investment Advisers Association, the number of investment advisers registered with the SEC totaled 11,539 in 2011, and the total assets under management reported by all investment advisers increased 13.7% to $43.8 trillion in 2011, from $38.6 trillion in 2010. According to the SEC, there are more than 275,000 state-registered investment adviser representatives and more than 15,000 state-registered investment advisers. Approximately 5% of SEC-registered investment advisers are also registered as broker-dealers, and 22% have a related person that is a broker-dealer. Additionally, approximately 88% of investment adviser representatives are also registered representatives of broker-dealers.