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Treasury’s AML Plan for Advisors Needs Big Changes: IAA

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The Investment Adviser Association is urging the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to “carve back” its recently released proposal to extend anti-money laundering regulations to all SEC-registered investment advisors.

IAA also wants a range of exemptions for advisors 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 advisors provide,” said IAA General Counsel Bob Grohowski.  “As a result, many of the proposal’s provisions would impose compliance burdens on advisors that are unnecessary, duplicative and costly – while contributing little to FinCEN’s AML regime.”

In a Nov. 2 comment letter, IAA said it objects to the proposal’s expansive scope, which would apply AML requirements to all SEC-registered investment advisors 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 advisors 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 advisors would incur to comply with the proposed rule, even if FinCEN were to adopt all of the modifications the IAA is recommending.

Specifically, the IAA recommends 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 advisors; and

  • Advisory services to low-risk clients such as pensions, publicly traded corporations and government entities such as state and municipal agencies.

The IAA also suggested the following changes that would allow advisors to more practically implement an AML program:

  • Allow “a member of senior management” to approve an investment advisor’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.

  • Permit 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. Many investment advisors, by virtue of their organizational structures, may not have formally designated corporate “officers.”

  • Provide 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. More than 57% of SEC-registered investment advisors have 10 or fewer non-clerical employees, and these types of advisors 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 advisors that are least able to afford it.

  • Authorize the sharing of suspicious activity reports (SARs) within an investment advisor’s organizational structure.To the extent advisors 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.

— Check out Hedge Funds’ Critical Role in Anti-Money Laundering on ThinkAdvisor.


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