Introduction

The Financial Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Department of the Treasury (the “Treasury”), issued a final rule (the “Final Rule”), adding investment advisers to the definition of “financial institution” under the regulations that implement the Bank Secrecy Act (the “BSA”).  The Final Rule defines “investment advisers” as SEC-registered investment advisers and exempt reporting advisers that have filed Form ADV with the SEC (collectively, “Subject Advisers”), subject to certain exclusions. Since the adoption of the Final Rule, FinCEN has postponed the effective date of the Final Rule from January 1, 2026, until January 1, 2028. During the delayed effective date, FinCEN intends to revisit the Final Rule through a future rulemaking process. All statements in this article about the Final Rule are based on its current version as of the publication date.

Under the Final Rule, Subject Advisers are required to:

  • implement a risk-based and reasonably designed anti-money laundering/countering the financing of terrorism (“AML/CFT”) program;
  • file Suspicious Activity Reports, and certain other reports, with FinCEN;
  • comply with recordkeeping and travel rules (the “Recordkeeping Rule” and “Travel Rule”, respectively); and
  • fulfill certain other obligations, such as special information sharing procedures, applicable to financial institutions subject to the BSA and FinCEN’s implementing regulations.

In relation to the first bullet point above, Subject Advisers should consider voluntarily adopting risk-based anti-money laundering procedures (described in more detail below) prior to the Final Rule’s effective date that are specifically tailored to their advisory relationships, as some investors may require that Subject Advisers have procedures that are reasonably designed to comply with anti-money laundering standards.

AML/CFT Programs

Under the Final Rule, a Subject Adviser must apply an AML/CFT program to all advisory services provided to all customers (including private funds and other managed accounts), subject to certain exclusions. 

A Subject Adviser’s AML/CFT program must meet certain minimum standards prescribed by FinCEN.  Generally, a Subject Adviser’s AML/CFT program should be (i) reasonably designed to assure and monitor compliance with the requirements of the BSA and regulations issued thereunder and (ii) risk-based, ensuring that more attention and resources are directed towards higher-risk customers and activities, consistent with the Subject Adviser’s risk profile, rather than lower-risk customers and activities.  

A Subject Adviser is permitted to contractually delegate the implementation and operation of some or all aspects of its AML/CFT program to fund administrators and other third-party service providers.  However, a Subject Adviser that delegates the implementation and operation of any aspects of its AML/CFT program will remain fully responsible and legally liable for the program’s compliance with AML/CFT requirements and FinCEN’s implementing regulations.  Further, the Subject Adviser will be required to demonstrate to FinCEN and/or the SEC the program’s compliance with the requirements.

Suspicious Activity Reports

Under the Final Rule, Subject Advisers must file Suspicious Activity Reports (“SARs”) with FinCEN within 30 calendar days after initially detecting any facts that may constitute a basis for filing a SAR, such as those listed below.  Filing SARs may be delayed for up to, but no more than, an additional 30 days to identify a suspect if no suspect is identified on the date of such initial detection.  In situations involving violations that require immediate attention, such as suspected terrorist financing or ongoing money laundering schemes, a Subject Adviser must also immediately notify an appropriate law enforcement authority by telephone.

A Subject Adviser must file a SAR with FinCEN when a transaction:

  • is conducted or attempted by, at, or through the Subject Adviser;
  • it involves or aggregates funds or other assets of at least $5,000; and
  • the Subject Adviser knows, suspects, or has reason to suspect that the transaction (or a pattern of transactions of which the transaction is a part):
    • involves funds derived from illegal activity or is intended or conducted in order to hide or disguise funds or assets derived from illegal activity (including, without limitation, the ownership, nature, source, location, or control of such funds or assets) as part of a plan to violate or evade any Federal law or regulation or to avoid any transaction reporting requirement under Federal law or regulation;is designed, whether through structuring or other means, to evade any requirement or other regulations under the BSA;
    • has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage, and the Subject Adviser knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction; or involves use of the Subject Adviser to facilitate criminal activity.

Currency Transaction Reports and Recordkeeping and Travel Rules

To the extent a Subject Adviser transacts in cash currency, such Subject Adviser may need to file a currency transaction report (“CTR”).  Under the Final Rule, Subject Advisers are required to report transactions in currency over $10,000 by filing a CTR with FinCEN.

Under the Final Rule, Subject Advisers are also required to create and retain records for certain transmittals of funds that equal or exceed $3,000 and ensure that certain information pertaining to the transmittal of funds “travels” with the transmittal to the next financial institution in the payment chain.  These requirements are referred to as the Recordkeeping and Travel Rules, which are codified at 31 CFR 1010.410(e) and 31 CFR 1010.410(f), respectively.   

Information Sharing, Special Due Diligence, and Special Measures

FinCEN, any law enforcement agency or another component of the Treasury may submit an information request to any Subject Adviser if the requesting party certifies in writing that the specified individual, entity or organization that the Subject Adviser maintains or has maintained an account for, or has engaged in transactions with, is engaged in, or is reasonably suspected based on credible evidence of engaging in, terrorist activity or money laundering.  Upon receipt of an information request, a Subject Adviser needs to designate one person to be the point of contact regarding the request and search their records for certain information pertaining to the request.  If a Subject Adviser identifies an account or transaction related to an individual, entity, or organization named in the information request, it must report certain related information.

Conclusion

Subject Advisers with existing AML/CFT programs should review their AML/CFT programs to ensure they are reasonably designed to comply with the requirements of the BSA and regulations thereunder and appropriately address the risks related to their customers and activities.  Subject Advisers without an AML/CFT program in place should review the advisory services they provide and the customers that advisory services are provided to, and use this information to create a reasonably designed and risk-based AML/CFT program.

Under the Final Rule, Subject Advisers should also closely monitor all transactions involving funds or assets of at least $5,000 to determine if a SAR must be filed, as well as always file a CTR for all transactions in currency over $10,000. Lastly, under the Final Rule, Subject Advisers should designate one person to respond to information requests and search for the requested information.

For information on the current version of the Final Rule, see the Final Rule here.

For more information on the recent postponement, see the recent Exemptive Relief Order here.

Contacts:

Burke McDavid  I  214.745.5490  I  bmcdavid@winstead.com

Andrew Rosell  I  817.420.8261  I  arosell@winstead.com