On August 25, 2015, the Financial Crimes Enforcement Network (FinCEN) issued a Notice of Proposed Rulemaking (NPRM) that would define investment advisers registered (or required to be registered) with the Securities and Exchange Act (Registered Investment Advisers), including those that manage private funds commonly known as "hedge funds," "venture capital funds" and "private equity funds," as "financial institutions" under the Bank Secrecy Act (BSA). In the NPRM, FinCEN states that "investment advisers have an important role to play in safeguarding the financial system against fraud, money laundering, terrorist financing, and other financial crime." The NPRM proposes requiring investment advisers to establish anti-money laundering programs and abide by most of the BSA's recordkeeping and reporting requirements, including the requirements to file Currency Transaction Reports (CTRs) and Suspicious Activity Reports (SARS). In the NPRM, FinCEN has delegated first-line authority to examine for compliance to the Securities and Exchange Commission (SEC) as it has with registered broker-dealers.
The NPRM solicits responses to more than 30 specific questions spanning multiple topics and is open for comment for 60 days. The NPRM proposes requiring Registered Investment Adviser compliance with any final rule within 6 months of its effective date.
While many investment advisers have already voluntarily implemented an anti-money laundering (AML) program on their own initiative, to satisfy the requirements of counterparties, or to allow broker-dealers to rely upon them for part of the broker-dealer's AML program (subject to compliance with the requirements of a SEC No-Action Letter), this NPRM is significant for several reasons, including: (1) the long pending uncertainties and inconsistencies in the application of the BSA's AML program requirements to investment advisers; (2) the proposed scope of the affirmative obligations imposed; and (3) the number of significant issues left unresolved.
This is not the first time that FinCEN has tried to impose compliance program requirements on investment advisers. On May 5, 2003, FinCEN published a notice of proposed rulemaking (the "2003 Proposed Rulemaking") that would have required Registered Investment Advisers and a large percentage of unregistered investment advisers to private funds to establish AML programs. No action was taken for five years, until the 2003 Proposed Rulemaking was withdrawn in 2008.
In recent years, however, senior officials at FinCEN and the Department of the Treasury have been devoting efforts to expand and enforce the BSA's reach to detect and prevent money laundering, specifically focused on non-bank institutions. It is therefore not surprising that FinCEN is renewing its efforts to bring investment advisers into the BSA fold. When the 2003 Proposed Rulemaking was published, the financial crimes enforcement world was still adjusting to the changes to the BSA regulatory and potential enforcement landscape brought by the USA PATRIOT Act, which went into effect in 2001. Over a decade later, and in the wake of the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), FinCEN is more comfortable with the BSA's requirements, and with the tools for enforcement it has developed.
The NPRM addresses three major topics: (1) the definition for "investment adviser" for purposes of the proposed rule; (2) the scope of the AML program requirements to be imposed; and (3) the specific reporting and record keeping requirements to be imposed. The following is a summary of the key points contained in the NPRM.
FinCEN seeks comments on essentially all aspects of the NPRM. The NPRM contains approximately 30 specific requests for comments covering numerous topics. The requests for comment range from seven questions devoted specifically to the definition of "investment adviser," to the proposed minimum requirements for an effective AML program, to the proposed suspicious activity reporting rule, to FinCEN's calculations for economic impact on imposing the requirements on this industry.
Although the NPRM proposes only to include Registered Investment Advisers within the definition of "financial institution," it expressly leaves the door open for future rulemakings to include other types of investment advisers, "such as state-regulated investment advisers or investment advisers that are exempt from SEC registration." Specific questions posed include: (i) whether there are classes of Registered Investment Advisers that should not be included in the definition; (ii) to what extent mid-sized, small, State-registered, and foreign private investment advisers that are not within the definition pose risks that would justify including them; and (iii) whether there are other types of investment advisers that do not meet the definition, such as "exempt reporting advisers" that are advisers to private "hedge funds", "venture capital funds" and "private equity funds," that should be included.
These questions are particularly significant because they raise multi-faceted issues as to how the amendments to the Advisers Act that were made by the Dodd-Frank Act and implemented by SEC regulations should be reconciled with the AML risks addressed in the proposed rulemaking.
In addition to the specific requests for comment, the NPRM raises many other unanswered questions and areas subject to interpretation, including the lack of an explicit requirement that any third-party service provider that is relied upon for an AML compliance function itself be subject to the AML program rule, and what additional consequences there may be, if any, for failing to register with the SEC in the first instance.
As noted in the introduction, the NPRM provides a 60-day period during which FinCEN will accept public comments. All interested parties, including and especially potentially covered investment advisers, should be prepared to review, evaluate, and submit comments on the proposed new rules, either through counsel, a trade group, or on their own behalf – in addition to preparing to implement or evaluate any existing compliance programs.
For further information on this alert or the NPRM, please contact Jonathan Lopez (202-339-9456), Edward Eisert (212-506-3635) or Courtney Linn (916-329-4946) who would be happy to discuss this further with you.
 NPRM at 8.
 NPRM at 16.
 NPRM at 38.
 Financial Crimes Enforcement Network; Anti-Money Laundering Programs for Investment Advisers, 68 Fed. Reg. 23646, at 23648 (proposed May 5, 2003).
 Withdrawal of the Notice of Proposed Rulemaking, 73 FR 65569 (Nov. 4, 2008).
 Jennifer Shasky Calvery, Director, FinCEN, Remarks at Securities Industry and Financial Markets Association Anti-Money Laundering and Financial Crimes Conference, (Feb. 27, 2013), available at https://www.fincen.gov/sites/default/files/shared/20130227.pdf; David Cohen, Under Secretary, Dept. of Treasury, Remarks at the ABA Money Laundering Enforcement Conference (Nov. 10, 2014), available at http://www.treasury.gov/press-center/press-releases/Pages/jl2692.aspx.
 As demonstrated by the recent enforcement actions, issuance of guidance, or requests for comments with respect to numerous types of non-bank financial institutions, such as insurance companies and non-bank residential mortgage lenders, money services businesses engaged in the virtual or digital currency space, and casinos to name a few.
 Pub. L. No. 107-56, Title III, 352, 115 Stat. 272, at 322 (2001); 31 U.S.C. § 5318(h).
 12 U.S.C. 5301
 NPRM at 12.
 NPRM at 13-14.
 Id. at 14-15.
 NPRM at 15.
 Section 1031.210(a)(1).
 NPRM at 25.
 NPRM at 36.
 NPRM at 27-32.
 NPRM at 32-33
 NPRM at 34.
 Section 1031.210(b)(1).
 Section 1031.210(b)(2).
 Section 1031.210(b)(3).
 Section 1031.210(b)(4).
 NPRM at 40; proposed section 1031.320(a).
 NPRM at 42.
 NPRM at 39-40.
 NPRM at 17-18
 NPRM at 20-21.
 NPRM at 49.
 NPRM at 12.
 The Impact of the Dodd-Frank Act on Advisers to Private Funds, Orrick Client Alert, June 6, 2011.