Lawmakers Applaud, Industry Opposes Possible Compliance Rules for Investment Advisers

Senate Democrats are urging the Treasury Department to quickly finalize a proposed rule that could make investment advisers subject to more sanctions-related compliance requirements, adding that the agency should also require advisers to follow rigorous due diligence requirements that currently apply to large banks. But financial industry organizations said Treasury should revise the proposal because investment advisers are already covered by existing anti-money laundering laws and aren’t the right target for new compliance guardrails.

The public comments, released by Treasury’s Financial Crimes Enforcement Network last month, came after the agency in February said it’s considering imposing anti-money laundering and counter-terrorism financing requirements on investment advisers under the Bank Secrecy Act (see 2402130054). The proposed rules are meant to close a loophole that Treasury said allows sanctioned companies and people, including in China and Russia, to invest in American companies, hide their assets in the U.S. and access sensitive American technology.

Several leading Democrats applauded the proposal, including Senate Banking Committee Chair Sherrod Brown of Ohio and Senate Finance Committee Chair Ron Wyden of Oregon. In comments to Treasury, they said the rule will help the U.S. government “crack down on money laundering and sanctions evasion,” especially involving sanctioned Russian oligarchs that use American investment advisers. They also said Chinese companies use advisers to invest in American private funds involved in artificial intelligence, quantum computing and other sensitive technologies, and those Chinese companies can “request special access to details about portfolio company business and operations” under the “guise of monitoring investment performance.”

“The government will continue to lack basic oversight about these flows of information and funds unless the Proposal is finalized,” said the lawmakers, which also included Sens. Mark Warner of Virginia, Jack Reed of Rhode Island, Elizabeth Warren of Massachusetts, Richard Durbin of Illinois and Sheldon Whitehouse of Rhode Island. “We therefore urge FinCEN to finalize the Proposal as quickly as practicable.”

The senators also said FinCEN should go further in regulating investment advisers by also requiring them to comply with the agency’s Customer Identification Program rule and the beneficial ownership requirements of FinCEN’s Customer Due Diligence rule “as soon as practicable.” The agency said it’s planning to apply those rules to investment advisers sometime in the future, but the seven lawmakers urged FinCEN to do so “quickly,” suggesting early next year.

“FinCEN is required to revise the final rule entitled ‘Customer Due Diligence Requirements for Financial Institutions’ by January 1, 2025,” they said, “and that rulemaking is a logical vehicle to address this issue for advisers.”

Several organizations also applauded FinCEN’s proposed rule, including the Americans for Financial Reform Education Fund, which said anti-money laundering (AML) and other compliance standards for investment advisers are ​​”long overdue.” A lack of “widespread” reporting requirements for advisers has caused national security agencies to “struggle to assess how much the Kremlin and its affiliates are invested in American startups, especially those involved with sensitive technology,” the group said. It added that foreign investors in venture capital funds are able to access sensitive technology from startups through their role as “board observers,” which aren’t “subject to the same scrutiny by the Committee on Foreign Investment in the United States (CFIUS) that covers direct investment in a startup.”

Transparency International U.S. made similar points, saying the rule is a “significant initial step toward strong and effective rules.” Like the lawmakers, the group called on FinCEN to also require investment advisers to collect and verify “basic” customer information, including about their client’s beneficial owners.

“Should FinCEN ultimately fail to incorporate this key requirement,” Transparency International U.S. said, “it would leave intact serious risks to the U.S. financial system.”

But several financial industry groups said FinCEN’s proposed rule goes too far, including the American Investment Council, which said investment advisers take their existing compliance obligations “seriously” and would face too many new rules from the agency’s proposal. Investment advisers “are not well situated to be the point of the spear for AML compliance, and the costs the Proposed Rule will impose on Covered [advisers] seem disproportionate to the potential incremental benefit,” the council said.

The AIC suggested several changes to the rule, including new potential suspicious activity reporting requirements for investment advisers. It said FinCEN should “clarify” how those obligations would apply to private funds and to specify that the SAR rules wouldn’t apply to a fund or fund administrator that is organized or based outside of the U.S.

The Managed Funds Association, which said it represents the “global alternative asset management industry,” said FinCEN’s proposed rule “requires meaningful clarification” and seems to represent a misunderstanding of the relationship between investment advisers and their clients. The association said some advisers that manage “pooled investment vehicles” have an “advisory relationship" with the funds they manage: the "manager’s client is the fund, not an investor in the fund,” the association said. The proposed rule “assumes and seems predicated on a direct relationship between Covered [advisers] and investors, the absence of which leads to questions about how AML/CFT responsibilities of Covered [advisers] should be discharged.”

The group said it “respectfully disagrees” with FinCEN’s premise that investment advisers are the “entry point” into American markets for corrupt and sanctioned entities, and that they allow foreign businesses to access sensitive American technology in ways that don’t align with U.S. national security.

“Many of the cases FinCEN relies on in describing these threats involve complicit actors or concealment of ownership -- neither of which would be addressed by the proposed requirements,” the association said. It added that many of FinCEN’s concerns are already addressed through existing sanctions compliance rules, saying that advisers and the private funds they manage already file blocked property reports with the Office of Foreign Assets Control. “In other words,” MFA said, “sanctions work.”

The Securities Industry and Financial Markets Association also said the idea that investment advisers represent a “significant regulatory gap in the AML/CFT space” is “misguided.” The association said issues surrounding investment advisers that help sanctioned Russian oligarchs hide money are “addressed through existing sanctions compliance obligations,” and “U.S. investment advisers are already fully obligated to meet U.S. sanctions requirements and, if sanctions are imposed on an individual or entity, these investment advisers have and will block and report assets as required under existing U.S. sanctions regulations.”

FinCEN's “examples do not provide adequate support for” the agency's rulemaking, the association said.