Preparing for Change: Key Insights on the New Investment Adviser Rule

The regulatory framework governing investment advisers fundamentally changed following the issuance of the "Anti-Money Laundering/Countering the Financing of Terrorism Program and Suspicious Activity Report Filing Requirements" final rule by the Financial Crimes Enforcement Network (FinCEN). This rule imposes comprehensive Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) requirements on investment advisers registered with the Securities and Exchange Commission (SEC) by making them comply with the same Bank Secrecy Act (BSA) obligations as banks. As the effective date of January 1, 2026 fast approaches, firms must prepare to meet these new compliance obligations, including, in some cases, building out entirely new compliance programs from the ground up.

Summary of the Investment Adviser Rule

The new rule is a significant enhancement to the regulatory framework for investment advisers, as they previously had far less rigorous AML and CFT obligations than other financial institutions, such as banks. For the first time, the rule mandates that Registered Investment Advisers (RIAs) and Exempt Reporting Advisers (ERAs) establish comprehensive AML/CFT programs. Limited exemptions were granted for certain entities, such as mutual funds and smaller state-level investment advisers.

These programs should be risk based and tailored to the size and complexity of the institution and must include the ability to file Suspicious Activity Reports (SARs) with FinCEN. An important aspect of the rule is that it finally aligns U.S. regulations with international standards set by the Financial Action Task Force (FATF).

Key Compliance Obligations

Investment advisers covered by the rule must undertake significant new compliance obligations outlined in detail below:

• AML/CFT Program Requirements
  • Risk-based Approach: AML/CFT programs must be tailored to specific risk profiles, assessing vulnerabilities to money laundering and terrorist financing that each institution has based on their client set. Advisers should incorporate these risks into their overall risk assessment processes.
  • Independent Testing: These programs must be independently assessed to ensure effectiveness by personnel within the institution not involved in the Know Your Client (KYC)/AML function or by a qualified third party that is independent from the adviser’s operations.
  • Training: Advisers must implement continuous education for employees on their BSA, AML, and CFTC obligations, updating programs continuously to reflect regulatory changes and emerging threats (e.g., a robust regulatory horizon scanning process).
  • Designated Compliance Officer: A dedicated compliance officer must be appointed to oversee the AML/CFT program, ensuring procedures are followed and updated on an ongoing basis.
  • Continuous Monitoring: Ongoing monitoring of transactions that may involve export control evasion must be included (e.g., Russia sanctions in light of the invasion of Ukraine).
  • Special Due Diligence: Enhanced due diligence is required for correspondent and private banking accounts that aligns with FATF standards.
• Suspicious Activity Reports (SARs)
  • Monitoring and Reporting: Advisers must monitor transactions for suspicious activity and file SARs promptly upon the discovery of any suspicious activity.
  • Recordkeeping: Detailed records to support compliance and regulatory examinations must be maintained for five years. Investment advisers are required to maintain copies of all filed SARs and the underlying related documentation, which must be made available to FinCEN and relevant authorities upon request.
• Customer Identification Programs (CIP)
  • Beneficial Ownership Information: Advisers must collect and verify information about individuals who own or control legal entity companies including the designated beneficial owners of these entities.
  • Verification Processes: To ensure the accuracy of the information an adviser is getting from a client, firms must implement robust verification processes. These verification processes are expected to utilize technology solutions to ensure accuracy, including checking data against third-party public sources, such as beneficial ownership registries.
• Regulatory Examinations
  • Enhanced SEC Examinations: The rule mandates that the SEC examination staff will be the primary examiner to ensure compliance with the rule by registered advisers. Registered and ERAs should be prepared for risk-based examinations by maintaining comprehensive records of compliance activities.
  • Focus on High-risk Activities: Resources must be prioritized to focus compliance efforts on the highest-risk activities. When designing their programs, advisers should consider exemptions for lower-risk populations, if they are applicable.

Take Action: Ensure Compliance with the New Rule

The new investment adviser rule represents a significant shift in the regulatory landscape. As the deadline approaches, investment advisers must not only understand the intricacies of the new rule but also take proactive steps to ensure compliance. By taking immediate action and leveraging external expertise, firms can navigate these changes effectively, ensuring compliance and maintaining their competitive edge in the market.

Engaging with subject matter experts and third-party service providers, such as Services for Regulatory and Compliance Solutions, can provide invaluable support. These experts can offer guidance on implementing effective AML/CFT programs, conducting independent testing, and ensuring ongoing compliance with regulatory requirements.