RIAs could be required to report suspected money laundering

Proposal from FinCEN would have investment advisers monitor and report questionable activity under the Bank Secrecy Act

Jun 23, 2015 @ 1:38 pm

By Mason Braswell

After more than a decade of deliberation, registered investment advisers are one step closer to having to monitor and report suspicious activity related to money laundering, according to a rule proposal from the Treasury Department's Financial Crimes Enforcement Network.

FinCEN filed a draft rule with the Office of Management and Budget on April 24 that is expected to be made public in July for comment. It requires RIAs to have anti-money-laundering programs and file suspicious activity reports under the Bank Secrecy Act similar to requirements already in place at broker-dealers.

“It's actually going to put more [responsibility] for surveillance on advisers for the activity in their client accounts,” said Tom Nally, head of TD Ameritrade Institutional. “It's just another added thing that advisers have to do.”

The Bank Secrecy Act did not apply to advisers under the original anti-money-laundering rules because RIAs were not defined as financial institutions. But FinCEN, the Treasury's anti-money-laundering arm, has been working with the Securities and Exchange Commission and other regulators since at least 2003 to broaden the definitions.


FinCEN first proposed including RIAs as financial institutions in 2003, but withdrew the proposal in 2008. Advisers already worked mostly through broker-dealers and custodians who were required to monitor for suspicious activity, the agency said.

A FinCEN spokesman, Steve Hudak, said he could not elaborate on the proposed rule since it had not yet been made public.

The agency, however, has been open in the last few years about its intentions to re-propose some form of the rule to broaden the definition of financial institutions.

Despite the added responsibility, advisers could be in a better position to spot suspicious activity than a broker-dealer or custodian in certain instances, Mr. Nally said.

While the full text of the proposed rule has not yet been made public, Karen L. Barr, president and chief executive of the Investment Adviser Association, a trade group representing RIAs, said most firms should be able to adapt.

About 80% of firms already have an anti-money-laundering program in place, according to a 2013 survey of 462 advisers by IAA.

“For those who do not already have the program in place, and that's true for many smaller firms, it will certainly be a burden to get up and running,” Ms. Barr said.


The other difference is that now advisers may have to file suspicious activity reports, which are confidential notices sent to FinCEN when the adviser suspects something may be awry. Those who do not could face strict enforcement action, she said.

“Obviously, that's a serious matter,” Ms. Barr said. “The SEC and other regulators have announced enforcement actions against banks and broker-dealers and others in recent years, and they're taking it very seriously.”

The original proposal in 2003 included possible red flags that would be detected by broker-dealers, Ms. Barr said. This time, she expects the reporting requirements to be better suited for RIAs.

While broker-dealers and custodians monitor for suspicious transactions, clients who seem reluctant to provide information about the source of their funds or their business, for example, is something advisers would be in a unique position to detect during account openings, Ms. Barr explained.

The IAA will likely review the rule and provide specific comments once it becomes public, she said.


Are you and your firm prepared to handle added responsibilities related to money laundering?

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