A proposed Securities and Exchange Commission rule would require SEC registered investment advisors (RIAs) to implement “reasonable procedures” to verify their customers’ identities.
The SEC and the Department of the Treasury are proposing the rule, which implements a section of a 2001 law designed to prevent money laundering and obstruct terrorism. The rule would also apply to exempt reporting advisors (ERAs).
“The proposed rule would make it more difficult for criminal, corrupt, or illicit actors to establish customer relationships — including by using false identities — with investment advisers for the purposes of laundering money, financing terrorism, or engaging in other illicit finance activity,” the SEC said in a press release.
Whether investment advisors must comply will depend on the approval of another rule proposed by Treasury’s Financial Crimes Enforcement Network. That proposal defines RIAs and ERAs as “financial institutions” under the Bank Secrecy Act.
The investment adviser industry has served as an entry point into the U.S. market for illicit proceeds associated with foreign corruption, fraud, tax evasion, and other criminal activities, according to a Treasury risk assessment report. The goal of the proposals is to prevent illegal financial activity.
“Criminal, corrupt, and illicit actors have exploited the investment adviser sector to access the U.S. financial system and launder funds,” said FinCEN Director Andrea Gacki. “This proposal would help investment advisers better identify and prevent illicit actors from misusing their services, while advancing a harmonized set of CIP obligations.”
If the rules are adopted, RIAs would need to adopt customer identification programs that includes procedures for verifying the identity of each customer and maintaining records to verify a customer’s identity.
Gail Bernstein, general counsel of the Investment Adviser Association, said the IAA supports efforts to combat money laundering, but is concerned that the sweeping proposal will capture virtually all SEC advisers and won’t accomplish its goals because it isn’t sufficiently tailored to advisers’ unique business models and risk profiles.
