November 2 2015


Herb Perone

IAA Urges FinCEN to Reconsider Scope of AML Proposal, Says Advisers Raise Few AML Concerns

Washington, DC (November 2, 2015) – The IAA is asking the Financial Crimes Enforcement Network (FinCEN) to carve back its proposal to extend anti-money laundering (AML) regulations to all SEC-registered investment advisers – and is seeking exemptions for a range of advisers and advisory services that the IAA says do not raise money laundering risks.

“FinCEN’s expansive proposal is based on a fundamental misunderstanding of the nature and scope of the services advisers provide,” said IAA General Counsel Bob Grohowski. “As a result, many of the proposal’s provisions would impose compliance burdens on advisers that are unnecessary, duplicative and costly – while contributing little to FinCEN’s AML regime.”

In a November 2 comment letter, the IAA said it recognizes the importance of detecting and preventing money laundering, but objects to the proposal’s expansive scope, which would apply AML requirements to all SEC-registered investment advisers regardless of the nature of their clients or the advisory services they provide.

“We urge FinCEN to reconsider,” the IAA letter says. Given the varying types of advisers and the diversity of their advisory activities and client bases, FinCEN should “seek to extend the [Bank Secrecy Act (BSA)] only where doing so would fill a potential gap in our nation’s anti-money laundering regime.”

The IAA letter also expresses strong concerns about the costs advisers would incur to comply with the proposed rule, even if FinCEN were to adopt all of the modifications the IAA is recommending. The IAA letter asserts that FinCEN has greatly underestimated implementation costs. For example, the IAA points out that FinCEN’s estimates of just three hours per year to implement an AML program, just three hours per year for suspicious activity report (SAR) recordkeeping and reporting, and just one hour per year for currency transaction reporting “substantially understate the necessary cost of implementing the proposal for advisers.” The IAA asks FinCEN to reconsider its cost-benefit analysis and, in particular, “to more fulsomely consider costs on smaller advisers.”

The IAA also takes particular issue with FinCEN’s basic premise — that “as long as investment advisers are not subject to AML program and suspicious activity reporting requirements, money launderers may see them as a low-risk way to enter the U.S. financial system.” In its letter, the IAA submits – respectfully – that that is “simply not true.”

“Advisers do not provide any way – much less a ‘low risk way’ – for a client to bypass banks, broker-dealers, or any other financial institutions covered by the BSA and enter the U.S. financial system,” the IAA letter says. It explains that the process for opening and funding a client account with an adviser necessarily involves SEC-registered broker-dealers or regulated banking institutions that are already subject to extensive AML regulatory obligations, and that advisers do not maintain actual physical custody of the cash and securities in an adviser client’s account. Those facts, in combination with the nature of an adviser’s relationship with its clients, make investment advisers generally unattractive to people who seek to quickly and frequently move funds in and out of the financial system without raising suspicion.

The letter recognizes that “under certain circumstances it may be possible for an adviser that has a direct relationship with an individual client to recognize behavior that may be suspicious,” but argues that “certain advisers provide services to clients and/or engage in advisory services that do not, in the IAA’s view, raise money laundering risks that need to be addressed by FinCEN’s proposed rules.”

Specifically, the IAA recommends that FinCEN carve out:

  • Advisory services that do not involve management of client assets
  • Advisory services to AML-regulated entities, including mutual funds and broker-dealer wrap accounts
  • Advisory services to other advisers
  • Advisory services to low-risk clients such as pensions, publicly traded corporations and government entities such as state and municipal agencies

The IAA’s letter also offered a number of recommendations that would allow investment advisers to more practically implement an AML program, including:

  • Allowing “a member of senior management” to approve an investment adviser’s AML program, since boards, trustees, owners and principals may not be the most familiar with the operational aspects of the adviser’s AML program or compliance program generally.
  • Permitting any sufficiently senior employee of the advisory firm – including its chief compliance officer – to serve as the AML compliance officer. Currently the proposal requires that the AML compliance officer be an “officer” of the advisory firm. The IAA notes that many investment advisers, by virtue of their organizational structures, may not have formally designated corporate “officers.”
  • Providing greater flexibility with respect to “independent” testing of AML programs. Currently the proposal requires periodic independent testing of their AML by qualified outside parties or by advisory employees who have no involvement in the implementation or oversight of the AML program. The IAA notes that more than 57 percent of SEC-registered investment advisers have 10 or fewer non-clerical employees, and that these types of advisers are highly unlikely to have employees who are knowledgeable about the AML program but who are not already involved in its implementation or oversight. Having to retain qualified outside parties would place a substantial cost burden on smaller advisers that are least able to afford it.
  • Authorizing the sharing of suspicious activity reports (SARs) within an investment adviser’s organizational structure. To the extent advisers become subject to suspicious activity reporting requirements, they should be granted the same or similar flexibility as banks, broker-dealers, mutual funds and other financial institutions to share SARs, as well as AML-related personnel and training, within their organizations.

The full text of the IAA comment letter is available at

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The Investment Adviser Association (IAA) is the leading trade association representing the interests of SEC-registered investment adviser firms. The IAA’s more than 550 member firms collectively manage assets in excess of $16 trillion for a wide variety of institutional and individual investors. In addition to serving as the voice of the advisory profession on Capitol Hill and before the SEC, DOL, CFTC and other U.S. and international regulators, the IAA provides extensive compliance and educational services to its membership. For more information, visit or follow us on LinkedIn and Twitter.

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