[Federal Register: May 5, 2003 (Volume 68, Number 86)]
[Proposed Rules]
[Page 23646-23653]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05my03-38]
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DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506-AA28
Financial Crimes Enforcement Network; Anti-Money Laundering
Programs for Investment Advisers
AGENCY: Financial Crimes Enforcement Network (FinCEN), Department of
the Treasury.
ACTION: Proposed rule.
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SUMMARY: FinCEN is proposing to amend its Bank Secrecy Act rules to
require certain investment advisers that manage client assets to
establish anti-money laundering programs, to establish minimum
requirements for such programs, and to delegate its authority to
examine certain investment advisers for compliance with such program
requirements to the Securities and Exchange Commission.
DATES: Written comments may be submitted to FinCEN on or before July 7,
2003.
ADDRESSES: Because paper mail in the Washington area may be subject to
delay, commenters are encouraged to e-mail comments. Comments may be
sent to Internet address regcomments@fincen.treas.gov with the caption
``Attention: Section 352 Investment Adviser Rule Comments'' in the body
of the text. Comments may be mailed to FinCEN, Section 352 Investment
Adviser Rule Comments, P.O. Box 39, Vienna, VA 22183. Comments should
be sent by one method only. Comments may be inspected at FinCEN between
10 a.m. and 4 p.m. in the FinCEN Reading Room in Washington, DC.
Persons wishing to inspect the comments submitted must request an
appointment by telephoning (202) 354-6400 (not a toll-free number).
FOR FURTHER INFORMATION CONTACT: Office of Chief Counsel (FinCEN),
(703) 905-3590; Office of the General Counsel (Treasury), (202) 622-
1927; or Office of the Assistant General Counsel for Banking & Finance
(Treasury), (202) 622-0480 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
I. Background
On October 26, 2001, the President signed into law the Uniting and
Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001 (Public Law
107-56) (the Act). Title III of the Act makes a number of amendments to
the anti-money laundering provisions of the Bank Secrecy Act (BSA),
which are codified in subchapter II of chapter 53 of title 31, United
States Code. These amendments are intended to promote the prevention,
detection, and prosecution of international money laundering and the
financing of terrorism.
Section 352(a) of the Act, which became effective on April 24,
2002, amended section 5318(h) of the BSA. As amended, section
5318(h)(1) requires every financial institution to establish an anti-
money laundering program that includes, at a minimum, (i) the
development of internal policies, procedures, and controls; (ii) the
designation of a compliance officer; (iii) an ongoing employee training
program; and (iv) an independent audit function to test programs.
Section 5318(h)(2) authorizes the Secretary of the Treasury
(Secretary), after consulting with the appropriate Federal functional
regulator, which in the case of investment advisers is the Securities
and Exchange Commission (SEC), to prescribe minimum standards for anti-
money laundering programs. The Secretary has delegated the authority to
administer the BSA to the Director of FinCEN. To date, FinCEN has
issued interim final rules prescribing minimum anti-money laundering
program requirements for numerous types of financial institutions,\1\
has proposed rules for other financial institutions,\2\ and is studying
how to design such standards for numerous other types of financial
institutions.
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\1\ Anti-Money Laundering Programs for Financial Institutions,
67 FR 21110 (April 29, 2002); Anti-Money Laundering Programs for
Mutual Funds, 67 FR 21117 (April 29, 2002); Anti-Money Laundering
Programs for Money Services Businesses, 67 FR 21114 (April 29,
2002); Anti-Money Laundering Programs for Operators of a Credit Card
System, 67 FR 21121 (April 29, 2002).
\2\ Anti-Money Laundering Programs for Unregistered Investment
Companies, 67 FR 60617 (Sept. 26, 2002); Anti-Money Laundering
Programs for Insurance Companies, 67 FR 60625 (Sept. 26, 2002);
Anti-Money Laundering Programs for Dealers in Precious Metals,
Stones, or Jewels, 68 FR 8480 (Feb. 21, 2003).
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FinCEN is today proposing a similar rule for commodity trading
advisors, which is published elsewhere in this issue of the Federal
Register.\3\
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\3\ Commodity trading advisors, which are subject to regulation
by the Commodity Futures Trading Commission (CFTC), were added to
the statutory BSA list of ``financial institutions'' in section 321
of the Act.
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II. Investment Advisers Determined To Be Financial Institutions
The BSA does not expressly enumerate investment advisers among the
entities defined as financial institutions under sections 5312(a)(2)
and (c)(1).\4\ Nevertheless, the BSA
[[Page 23647]]
definition is extremely broad, listing numerous types of businesses,
and section 5312(a)(2)(Y) authorizes the Secretary to include
additional types of businesses within the BSA definition if he
determines that they engage in any activity similar to, related to, or
a substitute for any of the listed businesses. Because of the types of
activities certain investment advisers engage in and the services they
provide, FinCEN is proposing to exercise its authority to define these
investment advisers as financial institutions solely for purposes of
section 5318(h) and to require them to establish anti-money laundering
programs.
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\4\ The BSA definition includes institutions that are already
subject to federal regulation such as banks, savings associations,
credit unions, securities broker-dealers, and futures commission
merchants. Money services businesses (such as money transmitters and
currency exchanges) are also defined as financial institutions under
the BSA, and, like the former categories, under FinCEN's
implementing regulations. The BSA definition also includes dealers
in precious metals, stones, or jewels; pawnbrokers; loan or finance
companies; private bankers; insurance companies; travel agencies;
telegraph companies; sellers of vehicles, including automobiles,
airplanes, and boats; persons engaged in real estate closings and
settlements; investment bankers; investment companies; and commodity
pool operators and commodity trading advisors that are registered or
required to register under the Commodity Exchange Act (7 U.S.C. 1 et
seq.).
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An investment adviser is defined in the Investment Advisers Act of
1940 (Advisers Act) (15 U.S.C. 80b et seq.) as ``any person who, for
compensation, engages in the business of advising others * * * as to
the value of securities or as to the advisability of investing in,
purchasing, or selling securities, or * * * issues * * * analyses or
reports concerning securities,'' subject to certain exceptions.\5\ Many
investment advisers provide investment advice to clients who have
granted the adviser the power to manage the assets in their accounts,
frequently on a discretionary basis. As a result, these investment
advisers engage in activities that are ``similar to, related to, or a
substitute for'' financial services that are provided by other BSA
financial institutions.
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\5\ Advisers Act, Section 202(a)(11) (15 U.S.C. 80b-2(a)(11)).
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Advisers managing clients' assets work so closely with other BSA
financial institutions--such as by directing broker-dealers to purchase
or sell client securities or by directing banks to transfer client
funds--that the advisers' activities are related to those of the other
financial institutions. Advisers' services can be a substitute for
products offered by investment companies or insurance companies, for
example, when clients seek to have advisers manage their assets through
other forms of pooled investment vehicles or through separate accounts.
Some investment advisers offer asset management services that are
similar to, and that may even compete directly with, asset management
services provided by certain banks through their trust departments.
FinCEN also notes that the close interrelationship between investment
advisers and other financial institutions (such as securities broker-
dealers, mutual funds, commodity trading advisors, and commodity pool
operators) is further demonstrated by the fact that they are often
jointly registered with, affiliated with, or sponsored by each other.
III. Money Laundering and Investment Advisers
Money laundering occurs when money from illegal activity is moved
through the financial system to make it appear that the funds came from
legitimate sources. Money laundering usually involves three stages,
known as placement, layering, and integration. In the placement stage,
cash or cash equivalents are placed into the financial system.
Investment advisers rarely have occasion to receive currency from or
disburse it to clients. Nevertheless, in some instances, FinCEN has
received reports of suspicious activities indicating that clients may
attempt to use investment advisers in the placement stage. These
reports include attempts by clients to structure transactions with an
investment adviser to avoid reports of currency transactions, \6\ as
well as attempts to fund accounts with fraudulent checks.
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\6\ ``Structuring'' is described infra at note 25 and
accompanying text.
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``Layering'' describes the distancing of illegal proceeds from
their criminal source through the creation of complex layers of
financial transactions. A money launderer could use its client account
with an investment adviser as one of many accounts in a layering
scheme, frequently transferring funds to the adviser for management and
then withdrawing the funds or transferring them to accounts at other
institutions. Layering could also involve establishing an advisory
account in the name of a fictitious corporation or an entity designed
to conceal the true owner. For example, FinCEN in one instance received
reports of suspicious activity involving an investment advisory client
who established an account under an alias for the family of a Colombian
narcotics trafficker. Investment advisory firms could also be used for
integrating illicit income into legitimate assets. ``Integration''
occurs when illegal funds previously placed into the financial system
are made to appear to have been derived from a legitimate source. For
example, proceeds from investments made on a client's behalf by an
investment adviser would appear legitimate to any financial institution
receiving such proceeds.
The crime of money laundering also encompasses the movement of
funds to support terrorism or terrorist organizations.\7\ These funds
may be from illegitimate or legitimate sources. Even where the funds
derive from legitimate sources, money launderers might attempt to use
investment advisers to aid movement of the funds through the money
laundering patterns described above, in order to disguise the identity
of the originator of the funds.
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\7\ 18 U.S.C. 1956, 2339A, and 2339B.
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Investment advisers in the United States today control over $21
trillion in assets.\8\ Although advisers rarely hold financial assets
themselves and even more rarely accept cash, they are often in a
critical position of knowledge as to the movement of large amounts of
financial assets through financial markets.\9\ If some of these assets
include the proceeds of illegal activities, or are intended to further
such activities, an anti-money laundering program should help discover
them. In some cases, an investment adviser may be the only person with
a complete understanding of the source of invested assets, the nature
of the clients, or the objectives for which the assets are invested.
Other market participants may, for example, hold and trade assets in an
account controlled by the adviser, but these parties often rely solely
on an investment adviser's instructions and lack knowledge of the
adviser's clients. In other cases, an adviser may be the only
participant aware of the overall investment program of a client who may
use multiple broker-dealers to trade securities in transactions that
individually may not raise money laundering concerns.\10\ As a result,
FinCEN believes that investment advisers have an important role to play
in preventing the use of their services for money laundering and the
financing of terrorism.\11\
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\8\ Information filed by investment advisers registered with the
SEC shows that these advisers had assets under management of over
$21 trillion as of February 2003.
\9\ Rule amendments proposed by the SEC would generally prohibit
an adviser from holding clients' funds or securities directly;
instead, the adviser would have to maintain these assets in accounts
with a broker-dealer, bank, or other qualified custodian. Custody of
Funds or Securities of Clients by Investment Advisers, Investment
Advisers Release No. 2044 (July 17, 2002) (67 FR 48579 (July 25,
2002)).
\10\ 18 U.S.C. 1956 and 1957 make it a crime for any person,
including an individual or company, to engage knowingly in a
financial transaction with the proceeds from any of a long list of
crimes or ``specified unlawful activity.'' Although the standard of
knowledge required is ``actual knowledge,'' actual knowledge
includes ``willful blindness.'' Thus, a person could be deemed to
have knowledge that proceeds were derived from illegal activity if
he or she ignored ``red flags'' that indicated illegality.
\11\ Moreover, FinCEN is concerned that the failure of advisers
to implement effective anti-money laundering programs may result in
money launderers seeking their services to access financial markets
while avoiding detection by banks, broker-dealers, mutual funds, and
other financial institutions that have adopted programs.
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[[Page 23648]]
IV. Section-by-Section Analysis
A. Definition of Investment Adviser for Purposes of the Proposed Rule
The SEC regulates investment advisers under the Advisers Act. The
proposed rule relies on terms and definitions used by the Advisers Act
and in the SEC's regulations to define the scope of the rule.\12\
Section 103.150(a) of the proposed rule defines two groups of advisers
located within the United States required to have anti-money laundering
programs.
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\12\ This approach would permit advisers to determine easily
whether they are subject to the proposed rule, and would permit both
Treasury and the SEC to identify which advisers have obligations
under the proposed rule.
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The first group consists of advisers that (i) have a principal
office and place of business in the U.S. (U.S. advisers), (ii) are
registered with the SEC, and (iii) report to the SEC that they have
assets under management.\13\ This group includes advisers registered
with the SEC that have either discretionary or non-discretionary
authority to manage client assets.\14\ It excludes, however, advisers
that are not registered with the SEC because they are smaller, state-
registered firms that have less than $30 million of assets under
management, as well as advisers that are registered with the SEC but do
not manage client assets.\15\ Because these excluded firms, unlike many
``financial institutions'' such as banks or broker-dealers, do not
accept funds or hold financial assets directly, and have relatively few
(or no) assets under management, these firms are unlikely to play a
significant role in money laundering.
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\13\ SEC-registered advisers report their assets under
management in Part 1A of Form ADV (17 CFR 279.1), which is the
investment adviser registration form. The item currently requiring
this information is Item 5.F of Part 1A.
\14\ When a client places its assets with an advisory firm for
management, the client authorizes the advisory firm to buy or sell
securities for the client's account, and the account itself is
maintained with a broker-dealer, bank, or other custodian. However,
many advisory firms, such as financial planners or pension
consultants, do not manage clients' assets. While these investment
advisers may recommend securities or asset allocations, their
clients make their own arrangements to purchase and sell securities;
in some cases, the adviser may not be told whether the client has
acted on the firm's advice.
\15\ Section 203A of the Advisers Act generally prohibits
advisers with assets under management of less than $25 million from
registering with the SEC. Primary responsibility for regulating
these firms rests with state securities authorities. Under SEC
rules, however, firms with between $25 and $30 million in assets
under management may choose whether to register with the SEC or with
the states, and certain other investment advisers--such as certain
pension consultants--register with the SEC even though they may not
manage $25 million in assets. 17 CFR 275.203A-1; 17 CFR 275.203A-2.
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The second group consists of U.S. advisers that are not registered
with the SEC, but have $30 million or more of assets under management
and are relying on the registration exemption provided by section
203(b)(3) of the Advisers Act (15 U.S.C. 80b-3(b)(3)) (unregistered
advisers). Under section 203(b)(3), advisers that have fewer than 15
clients and do not hold themselves out generally to the public as
investment advisers are exempted from SEC registration.\16\ Many of the
advisers that use this registration exemption may control substantial
client assets, either because they have a few individual clients with
very large accounts or because they advise certain types of pooled
investment vehicles, such as limited partnerships.\17\
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\16\ Section 203(b)(3) exempts from registration any investment
adviser who during the course of the preceding 12 months has had
fewer than 15 clients and who neither holds himself out generally to
the public as an investment adviser nor acts as an investment
adviser to any registered investment company or business development
company that has elected to be regulated as such.
\17\ An SEC rule permits the adviser to count the partnership or
other pooled investment vehicle as a single client, rather than
count each limited partner or other investor as a client. 17 CFR
275.203(b)(3)-1. As a result, the adviser may have only one or two
pooled investment vehicle clients, yet manage tens or hundreds of
millions of dollars. While some of these pooled investment vehicles
may be subject to FinCEN's proposed rule requiring unregistered
investment companies to implement anti-money laundering programs,
these advisers may have other clients not subject to that rule. See
Anti-Money Laundering Programs for Unregistered Investment
Companies, 67 FR 60617 (Sept. 26, 2002) (UIC NPRM).
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With respect to this second group of investment advisers, the
proposed rule would exclude those entities that would qualify as
unregistered advisers but that are otherwise required to have an anti-
money laundering program under the BSA because they are dually
registered as a financial institution in another capacity and are
examined by a Federal functional regulator for compliance with the
requirement in that other capacity.\18\ This explicit exclusion will
avoid potential duplicative anti-money laundering regulation of these
financial institutions by the SEC and other Federal functional
regulators and promote the efficient allocation of scarce government
resources.
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\18\ For example, as noted above, FinCEN is proposing today a
similar rule for commodity trading advisors. FinCEN is also
considering requiring that commodity pool operators (which are also
BSA financial institutions subject to regulation by the CFTC)
establish and implement the anti-money laundering programs required
pursuant to the UIC NPRM, supra note 17, for commodity pools that
they operate.
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In some instances, investment advisers that would be subject to the
proposed rule advise pooled investment vehicles that are themselves
required to maintain anti-money laundering programs under BSA rules,
such as mutual funds, or that are sponsored or administered by
financial institutions subject to such requirements.\19\ To prevent
overlap and redundancy, the proposed rule would permit investment
advisers covered by the rule to exclude from their anti-money
laundering programs any investment vehicle they advise that is subject
to an anti-money laundering program requirement under BSA rules.
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\19\ For example, an investment adviser may be adviser to a
mutual fund, or adviser to a bank's common or collective trust fund.
BSA rules obligate mutual funds and banks to maintain anti-money
laundering programs to protect against attempted money laundering by
their customers. Anti-Money Laundering Programs for Mutual Funds, 67
FR 21117 (April 29, 2002); Anti-Money Laundering Programs for
Financial Institutions, 67 FR 21110 (April 29, 2002). An adviser may
also act as adviser to other investment pools, such as an insurance
company's separate accounts or certain unregistered investment
companies, that will be similarly subject to anti-money laundering
program rules under pending FinCEN proposals. See, e.g., Anti-Money
Laundering Programs for Insurance Companies, 67 FR 60625 (Sept. 26,
2002); UIC NPRM, supra note 17.
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B. The Anti-Money Laundering Programs
1. Individualized Program
Section 103.150(b) of the proposed rule would require each
investment adviser subject to the proposed rule to develop and
implement its own anti-money laundering program reasonably designed to
prevent the firm from being used to launder money or finance terrorist
activities and to achieve and monitor compliance with the other
applicable requirements of the BSA and FinCEN's implementing
regulations. Every program must incorporate four minimum requirements,
discussed below, but each adviser will tailor its program to address
the risks presented by the nature of its services and clients. In
addition, each adviser may implement its program in a manner reasonably
practicable in light of the firm's size and resources. For example,
according to recent information filed by the approximately 7,750
investment advisers registered with the SEC, only ten percent of them
reported that their firms had more than 50 employees, whereas nearly
half reported having one to five employees. While FinCEN expects that
large firms will adopt detailed procedures addressing the
responsibilities of the individuals and departments involved in
carrying out each aspect of the program, smaller firms may adopt
procedures consistent
[[Page 23649]]
with their simpler, centralized organizational structure.\20\
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\20\ The legislative history of the Act reflects that Congress
intended that each financial institution should have the flexibility
to tailor its program to fit its business, taking into account
factors such as size, location, activities, and risks or
vulnerabilities to money laundering, so long as the program meets
the four minimum statutory requirements. This flexibility is
designed to ensure that all firms subject to the Act, from the
largest to the smallest, have in place policies and procedures
appropriate to monitor for money laundering. See USA PATRIOT Act of
2001: Consideration of H.R. 3162 Before the Senate, 147 Cong. Rec.
S10990-02 (October 25, 2001) (statement of Sen. Sarbanes); Financial
Anti-Terrorism Act of 2001: Consideration Under Suspension of Rules
of H.R. 3004 Before the House of Representatives, 147 Cong. Rec.
H6938-39 (October 17, 2001) (statement of Rep. Kelly) (provisions of
the Financial Anti-Terrorism Act of 2001 were incorporated as Title
III in the Act).
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To assure that the requirement to have an anti-money laundering
program receives the highest level of attention, the proposed rule
would require that each investment adviser's program be approved in
writing by the board of directors or trustees or, if it doesn't have
one, by its sole proprietor, general partner, or other persons who have
similar functions.\21\ The four required elements of the anti-money
laundering program are discussed below.
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\21\ The board's approval could be given at its first regularly
scheduled meeting after the program is adopted.
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2. The Four Required Elements of Each Anti-Money Laundering Program
(1) Establish and Implement Policies, Procedures, and Internal
Controls Reasonably Designed to Prevent the Investment Adviser From
Being Used to Launder Money or Finance Terrorist Activities, Including
but not Limited to Achieving Compliance with Applicable Provisions of
the BSA and FinCEN's Implementing Regulations.
Each investment adviser subject to the proposed rule would be
required to develop a written program reasonably designed to prevent
the firm from being used to launder money or finance terrorist
activities and to achieve compliance with applicable requirements of
the BSA and FinCEN's implementing regulations. As described below, this
would require each investment adviser to review the types of services
it provides and the nature of its clients to identify its
vulnerabilities to money laundering and terrorist financing activity.
The adviser would then develop and implement procedures and controls
that would reasonably address each vulnerability and assure compliance
with these requirements, and periodically assess the effectiveness of
its procedures and controls.
An adviser's vulnerabilities to money laundering and terrorist
financing activity are minimal with respect to clients for whom the
adviser does not manage assets. Many advisers that manage portfolios
for some clients have other clients to whom the firm provides very
different services, such as pension consulting, securities newsletters
or research reports, or financial planning. Accordingly, in designing
its anti-money laundering procedures, an adviser could exclude clients
for whom the firm does not manage assets.
Advisers face higher vulnerability to money laundering when clients
place their assets under management with the firm. An adviser's
procedures for these clients would seek to identify unusual
transactions whereby clients place funds under the firm's management
through checks drawn on (or wire transfers made from) accounts of third
parties with no family or business relationship to the client, or
through numerous checks or transfers from one or more issuers or
institutions. In addition, an adviser's procedures would identify
unusual transactions upon the subsequent withdrawal of assets from
management with the firm, such as payments in numerous separate
monetary instruments, transfers to unrelated or numerous accounts,\22\
or to accounts in countries in which drugs are known to be produced or
other countries at high-risk for money laundering or terrorist
financing.\23\
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\22\ Securities account custodians typically handle the actual
deposit and withdrawal of funds in a client's account. In most
cases, these custodians are broker-dealers, banks, or other entities
that are ``financial institutions'' under FinCEN's BSA rules.
Commonly, the client selects and contracts for account services with
the custodian and instructs the custodian to permit the adviser to
trade securities in the account. In such cases, the custodian's
personnel may have exclusive access to the information needed to
assess whether the source or destination of funds transfers in and
out of the account are unusual. If the adviser selects and retains
the account custodian, however, the adviser should coordinate review
of these transactions with the custodian, as is discussed in
connection with service providers, below.
\23\ See, e.g., http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.state.gov for International Narcotics
Control Reports evaluating the effectiveness of countries' controls
against narcotics trafficking and for lists of state sponsors of
terrorism, and http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.fincen.gov for FinCEN Advisories
identifying countries whose anti-money laundering regimes do not
meet international standards.
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An adviser's vulnerability rises further with respect to clients
who make frequent additions to or withdrawals from their advisory
accounts with the firm. An adviser would need to establish procedures
to identify which clients engage in such activity, and assess the
reasonableness of the additions or withdrawals in light of the clients'
investment objectives and the firm's existing knowledge of the clients'
personal finances or business operations.
An investment adviser faces the highest degree of vulnerability
when clients place or attempt to place assets under management in the
form of cash, or require investment options or brokerage, banking, or
other custodial arrangements that allow the client to remain anonymous
to other intermediaries. The adviser would need to establish procedures
to assess whether there are legitimate circumstances underlying the
client's request before proceeding with the relationship.
An adviser's program should also take into account the extent to
which the adviser provides investment advice to, and creates or
administers, pooled investment vehicles, as well as whether the adviser
provides advice to pooled investment vehicles that are created and
administered by the adviser or by a third party. As discussed above,
investment advisers to pooled investment vehicles that are subject to
anti-money laundering program requirements under BSA rules may exclude
the vehicles from their anti-money laundering programs. However, an
investment adviser must include other pooled vehicles it advises in its
anti-money laundering program, using different approaches depending on
whether the adviser is also the entity creating or administering the
pooled vehicle.
Advisers providing investment advice to pooled investment vehicles
that are not subject to BSA anti-money laundering requirements, and
that are created and administered by a third party, would have little
or no information about the investors in the pooled vehicle or their
transactions. In this situation, the adviser would need to establish
procedures to assess whether the entity that created and administers
the vehicle, or the nature of the vehicle itself, reduces the risk of
money laundering. For example, an employee retirement savings plan
sponsored by a public corporation that accepts assets only in the form
of payroll deductions or rollovers from other similar plans presents no
realistic opportunity for money laundering activity, whereas an
offshore vehicle not itself subject to any anti-money laundering
program requirement would present a more significant risk. The
adviser's program would need to analyze the money laundering risks
posed by a particular investment vehicle by using a risk-based
evaluation of relevant factors including: the type of entity; its
location; the statutory and regulatory regime of that location (e.g.,
if the entity is organized
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or registered in a foreign jurisdiction, does the jurisdiction comply
with the European Union anti-money laundering directives, and has the
jurisdiction been identified by the Financial Action Task Force as non-
cooperative); and the adviser's historical experience with the entity
or the references of other financial institutions. As the entity's
potential vulnerability to money laundering increases, the adviser's
procedures would need to reasonably address these increased risks, such
as by obtaining and reviewing information about the identity and
transactions of the investors in the vehicle.
In contrast, if the adviser also creates or administers a pooled
investment vehicle not subject to BSA anti-money laundering program
requirements, then the adviser's program would need to address the
investors in the vehicle under the same type of criteria as the adviser
uses for non-pooled vehicle clients, as discussed above. If, however,
any of the investors are themselves pooled investment vehicles (e.g.,
hedge funds or pension funds), the adviser would need to address the
money laundering risks posed by the pooled entity investing in the
adviser's vehicle (and any other intermediary that may be involved),
under the same type of criteria an adviser would use for pooled
entities it advises directly, as described above.\24\
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\24\ See 67 FR 60617, 60621 (Sept. 26, 2002) (Treasury's UIC
NPRM, supra note 17, provides for similar treatment for ``funds of
hedge funds''), and 67 FR 21117, 21119-21120 (April 29, 2002)
(Treasury's interim final rule requiring mutual funds to establish
anti-money laundering programs provides for similar treatment for
omnibus accounts).
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Anti-money laundering programs at larger firms would allocate the
responsibility for carrying out these procedures among affected
departments, managers, and employees, whereas implementation
responsibilities at smaller firms would typically be more centralized.
In either case, if the adviser needs to look to affiliated or
unaffiliated service providers to evaluate some transactions or perform
parts of its anti-money laundering program, it would be permissible to
delegate the implementation and operation of appropriate elements of
its program by contract. The investment adviser, however, would remain
fully responsible for the effectiveness of its anti-money laundering
program, as well as for ensuring that federal examiners are able to
obtain information and records relating to the program and to inspect
the third party for purposes of the program. Accordingly, the adviser
would still be required to identify the particular procedures
appropriate to address its vulnerability to money laundering and
terrorist financing, and then undertake reasonable steps to assess
whether the service provider would carry out such procedures
effectively. For example, it would not be sufficient to simply obtain a
certification from a service provider that the service provider ``has a
satisfactory anti-money laundering program.''
Some investment advisers, such as advisers that are dually-
registered as broker-dealers, may already have anti-money laundering
programs in place. FinCEN does not require that such investment
advisers establish multiple anti-money laundering programs. The same
program may apply to an entity that functions as more than one type of
financial institution, so long as the program is appropriately designed
to address the different risks posed by the different aspects of the
entity's business and satisfies each of the anti-money laundering
program requirements to which it is subject in each of its capacities.
The adviser's anti-money laundering program should also be
reasonably designed to ensure compliance with BSA requirements. The BSA
currently requires investment advisers to report on Form 8300 the
receipt of cash totaling more than $10,000 in one transaction or two or
more related transactions.\25\ In order to develop a compliant anti-
money laundering program, the program should be reasonably designed to
detect and report not only transactions required to be reported on Form
8300, but also to detect activity designed to evade such requirements.
Such activity, commonly known as ``structuring,'' may involve making
deposits into a trading or investment account of $10,000 or more with
multiple money orders, travelers' checks, or cashier's checks or other
bank checks, each with a face amount of less than $10,000. Such methods
of payment may be indicative of money laundering, particularly when the
payment instruments were obtained from different sources or the
payments were made at different times on the same day or on consecutive
days or close in time.
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\25\ See Financial Crimes Enforcement Network; Amendments to the
Bank Secrecy Act Regulations--Requirement that Nonfinancial Trades
or Businesses Report Certain Currency Transactions, 66 FR 67679
(Dec. 31, 2001). The reporting requirement also covers cashier's
checks, bank drafts, traveler's checks, or money orders having a
face amount of not more than $10,000 received in certain retail
sales or in any transaction in which the recipient knows that such
instrument is being used in an attempt to avoid the reporting of the
transaction.
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FinCEN is currently considering whether investment advisers should
be subject to additional BSA requirements, including filing suspicious
activity reports pursuant to section 5318(g) of the BSA and complying
with accountholder identification and verification procedures pursuant
to section 326 of the Act. If advisers become subject to additional
requirements, they will need to update their compliance programs to
include appropriate procedures, training, and testing functions. In
addition, FinCEN encourages investment advisers to implement promptly
procedures for voluntarily filing suspicious activity reports with
FinCEN and for reporting suspected terrorist activities to FinCEN using
its Financial Institutions Hotline (1-866-566-3974).
(2) Provide for Independent Testing of Compliance to be Conducted
by Company Personnel or by a Qualified Outside Party.
An investment adviser would be required to provide for testing of
its program periodically, to assure that the program is functioning as
designed. Personnel conducting the testing--whether a third party, an
affiliate of the firm, or an employee of the firm--should have a
working knowledge of applicable BSA requirements, but should not be the
person designated to implement and monitor the program under
requirement (3) below. The frequency of such a review would depend upon
factors such as the size and complexity of the adviser's business and
the extent to which its business model may be subject to a higher risk
of money laundering than other business models. A written assessment or
report should be a part of the review, and any recommendations
resulting from such review should be promptly addressed.
(3) Designate a Person or Persons Responsible for Implementing and
Monitoring the Operations and Internal Controls of the Program.
The investment adviser would be required to charge an individual
(or group of individuals) with the responsibility for overseeing the
anti-money laundering program. The person or group of persons should be
competent and knowledgeable regarding applicable requirements and money
laundering risks, and empowered with full responsibility and authority
to develop and enforce appropriate policies and procedures. The person
or group should also have adequate time and resources to carry out
these oversight duties, taking into account the nature and complexity
of the firm's program and their other responsibilities. In addition, a
person responsible for
[[Page 23651]]
overall supervision of the program should be an officer of the
investment adviser.
(4) Provide Ongoing Training for Appropriate Persons.
Employee training is an integral part of an anti-money laundering
program in any firm that has multiple employees involved in managing
client assets. Employees of the adviser must be trained in BSA
requirements relevant to their functions and in recognizing possible
signs of money laundering that could arise in the course of their
duties, so that they can carry out their responsibilities effectively.
Such training could be conducted by outside or in-house seminars, and
could include computer-based training. The level, frequency, and focus
of the training would be determined by the responsibilities of the
employees and the extent to which their functions bring them in contact
with BSA requirements or possible money laundering activity.
Consequently, the training program should provide both a general
awareness of overall BSA requirements and money laundering issues, as
well as more job-specific guidance regarding particular employees'
roles and functions in the anti-money laundering program.\26\ For those
employees whose duties bring them in contact with BSA requirements or
possible money laundering activity, the requisite training should occur
when the employee assumes those duties. Moreover, these employees
should receive periodic updates and refreshers regarding the anti-money
laundering program.
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\26\ Appropriate topics for an anti-money laundering program
include, but are not limited to: BSA requirements, a description of
money laundering, how money laundering is carried out, what types of
activities and transactions should raise concerns, what steps should
be followed when suspicions arise, and the Office of Foreign Assets
Control and other government lists of suspected terrorists and
terrorist organizations.
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C. Administration
The proposed rule includes a provision under which FinCEN would
generally delegate examination authority to the SEC, to enable the SEC
to examine investment advisers' compliance with the anti-money
laundering program requirement. In addition, because certain investment
advisers subject to the rule are not necessarily registered with the
SEC or otherwise identifiable to FinCEN, the proposed rule contains a
notice provision requiring the firms subject to the rule that are not
SEC-registered to file a brief notice with FinCEN providing identifying
information about the firm. Without a methodology for identifying these
unregistered entities, there would be no way for FinCEN to assure that
they are in compliance with the rule.\27\
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\27\ The Secretary of the Treasury is authorized to promulgate
this notice requirement under the BSA. For a discussion of this
authority, see UIC NPRM, supra note 17.
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V. Request for Comment
FinCEN requests comment on all elements of the proposed rule.
FinCEN specifically requests comment on the proposed definition of
``investment adviser,'' whether it is appropriate to determine that
investment advisers are financial institutions under the BSA and to
require these investment advisers to implement anti-money laundering
programs, and whether other categories of investment advisers should be
covered by or excluded from the rule. FinCEN also requests comment
regarding the proposed provisions designed to avoid imposing
overlapping or duplicative regulation of investment advisers and other
financial institutions that are (or are proposed to be) subject to
anti-money laundering program requirements.
VI. Regulatory Flexibility Act
It is hereby certified that this proposed rule will not have a
significant economic impact on a substantial number of small entities.
The proposed rule will not impose significant burdens on those
investment advisers covered by the rule because they are already
subject to Form 8300 reporting and may build on their existing risk
management procedures and prudential business practices to ensure
compliance with this rule. In addition, investment advisers subject to
the proposed rule will not be compelled to obtain more sophisticated
legal or accounting advice than that already required to run their
businesses.
Finally, FinCEN believes that the flexibility incorporated into the
proposed rule will permit each investment adviser to tailor its anti-
money laundering program to fit its own size and needs. In this regard,
FinCEN believes that expenditures associated with establishing and
implementing an anti-money laundering program will be commensurate with
the size of an investment adviser. If an investment adviser is small,
the burden to comply with the proposed rule should be de minimis.
VII. Executive Order 12866
It has been determined that this is not a significant regulatory
action for purposes of Executive Order 12866. Accordingly, a regulatory
impact analysis is not required.
VIII. Paperwork Reduction Act
The collections of information contained in this proposed rule are
being submitted to the Office of Management and Budget for review in
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3507(d)). Comments on the collections of information should be sent
(preferably by fax (202-395-6974)) to Desk Officer for the Department
of the Treasury, Office of Information and Regulatory Affairs, Office
of Management and Budget, Paperwork Reduction Project (1506),
Washington, DC 20503 (or by the Internet to jlackeyj@omb.eop.gov), with
a copy to FinCEN by mail or the Internet at the addresses previously
specified. Comments on the collections of information should be
received by July 7, 2003.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information subject to the Paperwork
Reduction Act unless it displays a valid control number assigned by the
Office of Management and Budget.
The collections of information in this proposed rule are in 31 CFR
103.150(b) and (d). The information will be used by federal agencies to
verify compliance by investment advisers with the provisions of 31 CFR
103.150. The collections of information are mandatory.
Description of Recordkeepers and Reporters: Investment advisers as
defined in 31 CFR 103.150(a).
Estimated Number of Recordkeepers: 10,000.
Estimated Average Annual Burden Per Recordkeeper: The estimated
average burden associated with the recordkeeping requirement in this
proposed rule is 1 hour per recordkeeper.
Estimated Total Annual Recordkeeping Burden: 10,000 hours.
Estimated Number of Respondents (Notice Requirement): 3,000.
Estimated Average Annual Burden Per Respondent: The estimated
average burden associated with the notice requirement in this proposed
rule is 15 minutes per respondent.
Estimated Total Annual Reporting Burden: 750 hours.
FinCEN specifically invites comments on the following subjects: (a)
Whether the collections of information are necessary for the proper
performance of the mission of FinCEN, including whether the information
shall have practical utility; (b) the accuracy of FinCEN's estimate of
the burden of the
[[Page 23652]]
collection of information; (c) ways to enhance the quality, utility,
and clarity of the information to be collected; (d) ways to minimize
the burden of the collections of information on investment advisers,
including through the use of automated collection techniques or other
forms of information technology; and (e) estimates of capital or start-
up costs and costs of operation, maintenance, and purchase of services
to provide information.
List of Subjects in 31 CFR Part 103
Administrative practice and procedure, Authority delegation
(Government agencies), Investment advisers, Counter money laundering,
Counter-terrorism, Currency, Reporting and recordkeeping requirements,
Securities.
PART 103--FINANCIAL RECORDKEEPING AND REPORTING OF CURRENCY AND
FOREIGN TRANSACTIONS
1. The authority citation for part 103 is revised to read as
follows:
Authority: 12 U.S.C. 1786(q), 1818, 1829b and 1951-1959; 31
U.S.C. 5311-5314 and 5316-5332; title III, secs. 312, 313, 314, 319,
321, 352, Pub. L. 107-56, 115 Stat. 307.
2. In subpart E, revise Sec. 103.56(b)(6) to read as follows:
Sec. 103.56 Enforcement.
* * * * *
(b) * * *
(6) To the Securities and Exchange Commission with respect to
brokers and dealers in securities; investment companies as that term is
defined in the Investment Company Act of 1940 (15 U.S.C. 80-1 et seq.);
and investment advisers as that term is defined in Sec. 103.150(a) of
this part;
* * * * *
3. In subpart I, add new Sec. 103.150 to read as follows:
Sec. 103.150 Anti-money laundering programs for investment advisers.
(a) Definition. For purposes of this section, the term investment
adviser means a person whose principal office and place of business is
located in the United States that:
(1) Is registered or required to be registered with the Securities
and Exchange Commission (SEC) under section 203(a) of the Investment
Advisers Act of 1940 (15 U.S.C. 80b-3(a)) and reports or is required to
report in Part 1A of SEC Form ADV (see 17 CFR 279.1) that it has assets
under management; or
(2) Is exempt from registration with the SEC pursuant to section
203(b)(3) of the Investment Advisers Act (15 U.S.C. 80b-3(b)(3)) and
that would be required, if it were registered with the SEC, to report
in Part 1A of SEC Form ADV that it has $30 million or more of assets
under management, unless such person is otherwise required to have an
anti-money laundering program pursuant to another provision of this
subpart, and is subject to examination by a Federal functional
regulator.
(b) Anti-money laundering program required. Effective [the date
that is 90 days after the date of publication of the final rule in the
Federal Register]:
(1) Each investment adviser shall develop and implement a written
anti-money laundering program reasonably designed to prevent the
investment adviser from being used for money laundering or the
financing of terrorist activities and to achieve and monitor compliance
with the applicable provisions of the Bank Secrecy Act (31 U.S.C. 5311
et seq.) (BSA) and this part. The investment adviser may exclude from
its anti-money laundering program any pooled investment vehicle it
advises that is subject to an anti-money laundering program requirement
under another provision of this subpart.
(2) Each investment adviser's anti-money laundering program must be
approved in writing by its board of directors or trustees, or if it
does not have one, by its sole proprietor, general partner, or other
persons who have similar functions. An investment adviser shall make
its anti-money laundering program available for inspection by FinCEN or
the SEC upon request.
(c) Minimum requirements. The anti-money laundering program shall
at a minimum:
(1) Establish and implement policies, procedures, and internal
controls reasonably designed to prevent the investment adviser from
being used for money laundering or the financing of terrorist
activities and to achieve and monitor compliance with the applicable
provisions of the BSA and this part;
(2) Provide for independent testing for compliance to be conducted
by the investment adviser's personnel or by a qualified outside party;
(3) Designate a person or persons responsible for implementing and
monitoring the operations and internal controls of the program; and
(4) Provide ongoing training for appropriate persons.
(d) Notice requirement for unregistered advisers. Each investment
adviser described in paragraph (a)(2) of this section (unregistered
adviser) must provide information to FinCEN as required by this
paragraph (d).
(1) Each unregistered adviser must file with FinCEN a Notice
described in Appendix D of this subpart. Completed notices may be
submitted to FinCEN:
(i) By accessing FinCEN's Internet Web site, http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.fincen.gov,
and entering the appropriate information as directed; or
(ii) By mail to: FinCEN, P.O. Box 39, Vienna, VA 22183.
(2) The Notice required by paragraph (d)(1) of this section must be
filed not later than 90 days after the unregistered adviser first
becomes subject to this section, and thereafter annually not later than
90 days after the end of the fiscal year of the unregistered adviser.
If an unregistered adviser subsequently terminates its advisory
business or ceases to be subject to this section, the unregistered
adviser must so advise FinCEN not later than 90 days thereafter
indicating such termination or cessation.
(3) Each unregistered adviser must include the following
information in the Notice required by paragraph (d)(1) of this section:
(i) The name of the unregistered adviser, including all family or
complex names, trade names, and doing-business-as names;
(ii) The complete street address, telephone number, and, if
applicable, the e-mail address of the unregistered adviser;
(iii) The name, telephone number, and, if applicable, e-mail
address of the person or persons designated pursuant to paragraph
(c)(3) of this section;
(iv) The total number of clients of the unregistered adviser; and
(v) The total assets under management of the unregistered adviser,
as determined under the instructions to SEC Form ADV, Part 1A, as of
the end of the adviser's most recent fiscal year.
(4) An unregistered adviser must file a revised Notice with FinCEN
if there is a change in any of the information required by paragraph
(d)(3)(i), (ii), or (iii) of this section. The revised Notice must be
filed in accordance with paragraph (d)(1) of this section not later
than 30 days after the date of any such change.
4. Add appendix D to subpart I of part 103 to read as follows:
Appendix D to Subpart I of Part 103 Unregistered Investment Advisers
Notice for Purposes of 31 CFR 103.150(d)
Complete either PART I or PART II of this Notice, as
appropriate.
Notice is given, on behalf of (insert all names of unregistered
adviser) ------ that:--------------------------------------------------
Part I
(1) The investment adviser is an unregistered adviser described in
31 CFR 103.150(a)(2)
[[Page 23653]]
(2) The address, e-mail address (if applicable), and telephone
number of the unregistered adviser are as follows:
ADDRESS:
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E-MAIL ADDRESS (if applicable):
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TELEPHONE NUMBER:
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(3) The name, e-mail address (if applicable), and telephone number
of the designated anti-money laundering program compliance officer
of the unregistered adviser are as follows:
NAME:------------------------------------------------------------------
E-MAIL ADDRESS:--------------------------------------------------------
TELEPHONE NUMBER:------------------------------------------------------
(4) The total number of clients of the unregistered adviser:-----------
(5) The total amount of assets under management of the unregistered
adviser, as determined under the instructions to SEC Form ADV, Part
1A, as of the end of the adviser's most recent fiscal year:
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Part II
The unregistered adviser is terminating its advisory business or
is otherwise no longer an unregistered adviser described in 31 CFR
103.150(a)(2) as of the following date:
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SUBMITTED BY:
Name:
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Title:
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Date:
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Dated: April 28, 2003.
James F. Sloan,
Director, Financial Crimes Enforcement Network.
[FR Doc. 03-10840 Filed 5-2-03; 8:45 am]
BILLING CODE 4810-02-P