Registered investment advisors of all sizes may soon need to beef up their customer ID process to comply with a new anti-money-laundering (AML) rule jointly proposed by the Securities and Exchange Commission and the Treasury Department earlier this week.
The proposed customer identification program (CIP) rule would require investment advisors to verify the identity of their customers to make it tougher for criminals to take on false indentities, officials said.
“The proposed rule is designed to make it more difficult to use false identities to establish customer relationships with investment advisors,” said SEC Chair Gary Gensler. “I support this proposal because it could reduce the risk of terrorists and other criminals accessing U.S. financial markets to launder money, finance terrorism, or move funds for other illicit purposes.”
Andrea Gacki, director of the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), said bad actors “have exploited the investment advisor sector to access the U.S. financial system and launder funds. This proposal would help investment advisors better identify and prevent illicit actors from misusing their services, while advancing a harmonized set of CIP obligations.”
A Treasury Department risk assessment found that the RIA industry has been an entry point into the U.S. market for illicit proceeds associated with foreign corruption, fraud, tax evasion, and other criminal activities, the regulator said.
If adopted, the rule would require investment advisors and exempt reporting advisors (ERAs) to "establish, document, and maintain written CIPs appropriate for their respective sizes and businesses," according to an SEC fact sheet.
"The proposed rule seeks to require RIAs and ERAs to implement reasonable procedures to identify and verify the identities of their customers," the SEC said. "The proposal is generally consistent with the CIP requirements for other financial institutions, such as brokers or dealers and mutual funds."
Treasury said the rule is designed to complement a FinCEN proposal issued earlier this year to designate RIAs as "financial institutions" under the Bank Secrecy Act and subject them to anti-money-laundering program requirements, as well as obligations to file suspicious activity reports.
For the first time, that proposed rule would require all SEC advisors to have AML procedures as established by the Bank Secrecy Act (BSA), report all transactions over $10,000 and file suspicious activity reports.
The Investment Advisor Association said the rule overlooks the practical considerations of the size and capacity of RIAs, particularly smaller firms, and should tailored to be risk-based rather than blanketing all firms.
"We urge the SEC and the Treasury Department to develop a tailored approach that effectively addresses specific risks while avoiding unnecessary regulatory burdens, especially burdens on smaller SEC advisers," Gail Bernstein, the IAA's general counsel, said in a statement.
The IAA has also been lobbying the Treasury Department to create a risk-based approach that doesn’t sweep advisory firms up into the same regulatory structure they apply to investment banks and broker-dealers who routinely deal with offshore clients, Bernstein said.