FinCEN Adopts Final AML Program Rule for Investment Advisers

The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) adopted a final rule (the Final Rule) on August 28 that will treat certain investment advisers and exempt reporting advisers as financial institutions for purposes of the Bank Secrecy Act (the BSA). FinCEN first proposed subjecting investment advisers to anti-money laundering related requirements under the BSA in 2003, and the Final Rule is the culmination of more than two decades of rulemaking activity on this subject.

Key highlights of the Final Rule include the following:

• The Final Rule becomes effective on January 1, 2026, and investment advisers subject to the rule will be required to implement an anti-money laundering and countering the financing of terrorism (AML/CFT) compliance program that meets the requirements of the Final Rule by that date.
• The Final Rule is largely consistent with the proposed rule released by FinCEN in February of this year, summarized here, with some important changes, summarized below.
• The Final Rule slightly narrows the scope of investment advisers covered by the rule to exclude certain midsize and multistate advisers and advisers without assets under management (AUM). However, the Final Rule will apply not just to investment advisers registered with the Securities and Exchange Commission (SEC) but also to venture capital advisers and other exempt reporting advisers, both those based in the US and those based outside of the US.
• The Final Rule narrows the scope of the rule with respect to foreign-located investment advisers to exclude advisory activities without any US nexus. However, this exception will be of limited practical use since non-US SEC-registered investment advisers and exempt reporting advisers will still need to comply with the Final Rule with respect to non-US funds if such funds have any US investors.

Types of Investment Advisers Covered

The Final Rule defines an “investment adviser” as any person,¹ wherever located, who is (i) registered or required to register with the SEC as an investment adviser under Section 203 of the Investment Advisers Act of 1940, as amended (the Advisers Act);² (ii) a venture capital fund adviser who is exempt from registering as an investment adviser under Section 203(l) of the Advisers Act; or (iii) a private fund adviser who is exempt from registering as an investment adviser under Section 203(m) of the Advisers Act.

The Final Rule excludes from the definition of “investment adviser” (i) investment advisers who are registered with the SEC solely because they are midsize advisers, multistate advisers, or pension consultants; and (ii) registered investment advisers who do not report any AUM on Form ADV. Excluding the latter category of advisers means that advisory firms that provide research or models but do not report AUM because they do not have advisory clients are not subject to the Final Rule.

Scope of AML/CFT Program

An investment adviser with a principal office and place of business in the United States must comply with the requirements of the Final Rule with respect to all of its advisory activities (with limited exceptions, described below). An investment adviser will not be required to apply its AML/CFT program to its nonadvisory activities. In the adopting release, FinCEN explained that, by way of example, certain activities undertaken by an adviser’s personnel in connection with a portfolio investment held by an advised private fund, such as making managerial/operational decisions about the activities of a portfolio company as a member of the company’s board of directors, would not be considered “advisory activities.” FinCEN also explained that the rule does not require an investment adviser to conduct special diligence on portfolio companies to implement the suspicious activity reporting requirement but cautioned that, if an investment adviser has information about a portfolio company — such as information obtained as part of its process of directing investment in the company’s securities or through its AML/CFT program — and that, as a result, the adviser “knows, suspects, or has reason to suspect” that there is suspicious activity occurring at a portfolio company, then it is required to file a suspicious activity report (SAR).

Other FinCEN Rulemaking

In May, as summarized here, FinCEN and the SEC jointly proposed subjecting investment advisers to a customer identification program (CIP) requirement, and the Final Rule does not impose a CIP requirement on investment advisers.³

Impact on Foreign-Located Advisers and Foreign-Located Private Funds

FinCEN initially proposed that the rule would “apply on the same basis” to foreign-located investment advisers as to domestic advisers. However, the Final Rule applies to a foreign-located investment adviser⁴ only with respect to its advisory activities that (i) take place within the United States, including through involvement of US personnel of the investment adviser; or (ii) provide advisory services to a US person or a foreign-located private fund⁵ with an investor⁶ that is a US person, as defined in Rule 902(k) of the SEC’s Regulation S under the Securities Act of 1933, as amended.

For purposes of assessing whether a foreign-located private fund has any US persons as investors, a foreign-located investment adviser must treat holders of the fund’s commercial paper as investors and will need to “look through” the direct investors in a fund that relies on Section 3(c)(1) of the Investment Company Act to determine whether any person who would be included in determining the number of beneficial owners of the outstanding securities of the private fund for purposes of Section 3(c)(1) is a US person. The Final Rule also clarifies that a foreign-located investment adviser will need to look through any entity formed for the purpose of investing in a fund that relies on Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act to determine whether any US persons hold an interest in that entity. A foreign-located investment adviser will need to apply the requirements of the Final Rule with respect to any foreign-located private fund in which any US person holds an interest either directly or indirectly based on these look-through rules. A US-located private fund advised by a foreign-located investment adviser will be considered an advisory client that is a US person, which means a foreign-located investment adviser will need to address in its AML/CFT program advisory services provided to a US-located private fund. FinCEN clarified in the adopting release to the Final Rule that the rule’s requirements should not apply to a foreign-located investment adviser when (i) it provides services exclusively to a foreign-located person (other than a foreign-located private fund with a US person who is an investor), and (ii) the personnel providing such advisory services are all outside of the United States.

A foreign-located investment adviser will be required to make available to FinCEN or the SEC, upon request, records and reports required under the Final Rule and any other records that it has retained regarding the scope of its activities covered by the Final Rule. FinCEN has advised that a foreign-located investment adviser “should generate records to reflect how it properly scoped the advisory activities” subject to the Final Rule.

The fact that the Final Rule applies with respect to foreign-located private funds with US investors is a significant departure from how the SEC applies the Advisers Act to non-US investment advisers. It has been the long-standing position of the SEC that most of the substantive rules of the Advisers Act do not apply with respect to the non-US clients of a non-US investment adviser (whether registered with the SEC or not), including foreign-located private funds with or without US investors. It should also be noted that if the non-US investment adviser had no US investors in any of its private funds and had no US place of business, it could rely on the foreign-private-adviser exception under the Advisers Act and would not be subject to the Final Rule. Therefore, going forward, there will be only very limited circumstances in which a non-US SEC-registered investment adviser or non-US exempt reporting adviser could rely on this exception, and substantially all non-US SEC-registered investment advisers and exempt reporting advisers will be subject to the Final Rule (unless they can rely on a different exception).

Impact on Private Funds and Other Funds

An investment adviser will need to subject private funds and other funds that it advises to its AML/CFT program (except as described above with respect to foreign-located investment advisers and subject to the exceptions described below for mutual funds, bank-maintained funds, and subadvisory services). FinCEN has advised that it expects an investment adviser that is the primary adviser to a private fund or other unregistered pooled investment vehicle to make a risk-based assessment of the money laundering, terrorist financing, and illicit finance activity risks presented by the investors in such an investment vehicle, which may include obtaining information about the structure and ownership of the fund and relevant information about investors.

This expectation could require an investment adviser to obtain identifying information on investors in a private fund it advises, which may include source of funds, depending on its risk assessment. FinCEN intends to address the requirement to collect beneficial ownership information for legal entity customers in a subsequent rulemaking.

Exclusions for Mutual Funds, Bank-Maintained Funds, and Subadvisory Services

The Final Rule provides that an investment adviser may consider the requirements of the Final Rule satisfied with respect to a “mutual fund,”⁷ a bank-maintained collective investment fund that is subject to the requirements of the Office of the Comptroller of the Currency (OCC) at 12 C.F.R. § 9.18 (or other applicable law that incorporates the requirements of 12 C.F.R. § 9.18), or any other “investment adviser” (as defined for purposes of the Final Rule), as long as the mutual fund, collective investment fund, or other investment adviser is advised by the investment adviser and subject to an AML/CFT program requirement under FinCEN’s rules implementing the Bank Secrecy Act.

A bank-maintained common trust fund for which a state bank or trust company is trustee must comply with the OCC’s rules at 12 C.F.R. § 9.18 applicable to collective investment funds in order for the fund to qualify as exempt from taxation under Section 584 of the Internal Revenue Code. A collective investment fund for tax-qualified employee benefit plans, certain governmental plans, and other qualifying participating plans and investors is not directly subject to the OCC’s rules at 12 C.F.R. § 9.18 if its bank trustee is not a national bank or federal savings association, but applicable state law in some cases may incorporate the requirements of 12 C.F.R. § 9.18.

The proposed rule would have included all of an investment adviser’s subadvisory activities within its scope. The Final Rule permits an investment adviser to exclude from its AML/CFT program advisory services provided to another investment adviser subject to the Final Rule. FinCEN explained that this exclusion will permit an investment adviser (acting as subadviser) to exclude from its AML/CFT program another covered investment adviser (the primary adviser) to which it provides subadvisory services where the subadviser has a direct contractual relationship with the primary adviser and not with the underlying customer of that primary adviser. The investment adviser may also be able to exclude wrap-fee programs, separately managed accounts, or other advisory relationships, so long as the customer is another investment adviser and the adviser does not have a direct contractual relationship with the underlying customer of the other investment adviser.

Advisory services otherwise provided to a financial institution subject to regulation under the BSA remain within scope of the Final Rule. In the case of a dually registered broker-dealer and investment adviser, an adviser may exclude the dual registrant from its AML/CFT program only to the extent that the dual registrant is acting as an investment adviser and not with respect to its broker-dealer activities.

Duty to Maintain AML/CFT Program in the United States

The BSA provides that the duty to establish, maintain, and enforce a financial institution’s AML/CFT program shall remain the responsibility of, and be performed by, persons in the United States who are accessible to, and subject to oversight and supervision by, the Secretary of the Treasury and the appropriate federal functional regulator. FinCEN initially proposed explicitly reflecting this requirement in its AML/CFT rule for investment advisers; however, the Final Rule does not include this requirement. FinCEN has indicated that it may address it in a subsequent rulemaking applicable to investment advisers.

Suspicious Activity Reports

FinCEN adopted the proposed SAR requirements without significant changes and clarified that an adviser’s obligation to file a SAR does not extend to activity that is outside the scope of the AML/CFT program.

Information Sharing

The Final Rule includes the proposed information-sharing provisions under Section 314(a) of the USA PATRIOT Act. However, in the adopting release, FinCEN clarified that it does not expect an investment adviser to have “accounts” for investors in private funds, unless the investor separately has an advisory relationship with the adviser, and generally expects an advisor to respond to a Section 314(a) request for the fund but not underlying investors in the fund.

Compliance Date

FinCEN delayed the compliance date to January 1, 2026.

An investment adviser affected by the Final Rule will need to develop and implement an AML/CFT compliance program no later than the January 1, 2026, compliance date, including addressing the manner in which the AML/CFT program will apply to private funds managed by the adviser, which may include updates to the partnership agreement and subscription materials.

 

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^[1] Under the general definitions section of FinCEN’s BSA regulations, the term “person” includes individuals, trusts and “all entities cognizable as legal personalities.”
^[2] The types of investment advisers covered by the Final Rule include general partners (and similar entities) who are SEC-registered investment advisers in reliance on SEC staff no-action guidance, general partners (and similar entities) who are exempt reporting advisers in reliance on SEC staff Frequently Asked Questions, and affiliated managers who are SEC-registered investment advisers because they are “relying advisers” in reliance on the Form ADV instructions.
^[3] In addition, earlier this summer, FinCEN issued a proposed rule, summarized here, to revise and update its regulations under the BSA requiring various types of financial institutions to maintain AML programs to reflect certain requirements of the Anti-Money Laundering Act of 2020. That proposed rule does not address investment advisers, and the Final Rule does not reflect changes that FinCEN has proposed for other financial institutions.
^[4] The Final Rule defines a “foreign-located investment adviser” as an “investment adviser whose principal office and place of business is outside the United States.” In the adopting release, FinCEN explained that it considers the principal office and place of business “to be the executive office of the investment adviser from which the officers, partners, or managers of the investment adviser direct, control, and coordinate the activities of the investment adviser.” This is consistent with the definition under the Advisers Act.
^[5] The Final Rule defines a “foreign-located private fund” as any foreign-located issuer that would be an investment company as defined in Section 3 of the Investment Company Act of 1940, as amended (the Investment Company Act), but for reliance on Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act.
^[6] The definition of “investor” has the same meaning as provided in the SEC’s rules relating to foreign private advisers in Advisers Act Rule 202(a)(30)-1(c)(2) under which a foreign adviser can determine whether the private funds it advises have more than 14 “investors in the United States.”
^[7] For this purpose, a “mutual fund” is defined as an open-end investment company that is registered or required to be registered with the SEC under Section 8 of the Investment Company Act.

 

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