Securities and Exchange Commission-registered investment advisors, hedge fund advisors and private equity advisors would be required to comply with federal anti-money laundering requirements under proposed rules released Tuesday by The Financial Crimes Enforcement Network (FinCEN).

The greater the risk of money laundering at an advisory firm, the stiffer the requirements for company programs would be.

Advisors would be obligated to have written AML programs. The programs would have to be tested by outsiders or advisor personnel not involved with the operation or oversight of the program.

Compliance would be mandated six months after the rules are finalized.

Mutual funds, broker-dealers in securities, banks and insurance companies are already required to follow AML rules.

Unlike other financial institutions, advisory firms would not initially be required to have a customer identification program.

However, FinCEN said it expects to have a customer ID program for advisors with the SEC later.  

As the primary overseers for advisors, SEC examiners would be responsible to looking for advisor violations much as FinCEN delegates the responsibility for bank oversight to the primary bank regulators: the Office of the Comptroller of the Currency, the Federal Reserve and the Federal Deposit Insurance Corporation.

Under the new rule, FinCEN would no longer require advisors to notify it when someone gives them $10,000 cashier’s checks, bank drafts and money orders.

With the new regime, advisors would stop filing Form 8300 and instead submit currency transaction reports when the $10,000 threshold is reached or surpassed in cash alone.

Advisors would have to file confidential suspicious activity reports for transactions of $5,000 or more no later than 30 days after they become aware of the transactions if they think the money could be used to finance terrorism or other illegal activity from abroad.

Advisors would be protected from lawsuits by the parties named in SARs or anyone else for filing the reports.

FinCEN said red flags that should lead advisors to consider filing SARs include when a customer refuses to reveal any information about business activities or to disclose the identity of a client the advisor is acting as an agent for, or when a client exhibits a total lack of concern regarding performance returns or risk.

In the new rule, advisor size would matter. FinCEN would impose more rigorous requirements on large firms than small ones to keep down the compliance costs at the undersized advisors which could least afford them.

In justifying the new regulations, FinCEN Director Jennifer Shasky Calvery said “Investment advisers are on the front lines of a multi-trillion dollar sector of our financial system. If a client is trying to move or stash dirty money, we need investment advisers to be vigilant in protecting the integrity of their sector.”

The proposal added the rule is needed because terrorists and other money launders may see advisors as a low-risk way to enter the U.S. financial system since they are exempt from AML disclosure guidelines and requirements that they bar suspicious money transfers.

The agency said it may consider imposing AML requirements on non-SEC registered investment advisors in the future.

This is the third try in 12 years by FinCEN to require advisors to comply with AML rules. Previous proposals in 2003 and 2007 were withdrawn.

The Investment Adviser Association said it is taking a particularly hard look to see if the proposed benefits outweigh compliance costs for small firms.

To see the full 86-page proposal, click here:

The formal deadline for comments is in about 60 days. However, regulatory agencies routinely accept submissions after the official end date.