The Treasury's Financial Crimes Enforcement Network ("FinCEN") has proposed anti-money laundering compliance requirements that, if adopted, would extend the Bank Secrecy Act ("BSA") regulations that govern mutual funds, broker-dealers, banks and insurance companies to also include certain private equity firms and hedge funds.

The rules would expand the definition of a "financial institution" to include SEC-registered investment advisers, which could include many asset managers, private equity firms and hedge funds, depending on their structure. The proposed rulemaking would require covered investment advisers to develop specific anti-money laundering ("AML") programs and procedures for filing suspicious activity reports ("SARs") when such activity is detected.

The proposed rule would require investment advisers to develop and implement a written AML program "reasonably designed to prevent the investment adviser from being used to facilitate money laundering or the financing of terrorist activities and to achieve and monitor compliance with the applicable provisions of the BSA and FinCEN's implementing regulations." The plan must be approved in writing – either by the firm's board of directors or trustees, or by its sole proprietor, general partner or trustee – and must also be made available to FinCEN or the SEC upon request.

The plan would be required to meet four minimum requirements:

  • Establish and implement policies, procedures and internal controls;
  • Provide for independent testing for compliance to be conducted by company personnel or by a qualified outside party;
  • Designate a person or persons responsible for implementing and monitoring the program's operations and internal controls; and
  • Provide ongoing training for appropriate persons.

The proposed rules state that FinCEN would delegate examination authority for compliance to the SEC. The agency is not at this time proposing a customer identification program requirement or including within the AML program requirements provisions that were recently proposed for other financial institutions. However, the agency says it anticipates addressing those issues with respect to investment advisers in subsequent rulemakings, with customer identification program requirements expected to be addressed via a joint rulemaking effort with the SEC.

By strengthening AML measures and increasing SAR requirements, FinCEN is attempting to improve oversight of areas of the U.S. financial system that it perceives to be vulnerable to market participants engaged in activities such as money laundering, terrorist financing or other illicit acts. However, the added requirements will also increase compliance costs and administrative burdens on affected private fund firms.

FinCEN is proposing that these requirements be met on or before six months from the effective date of the regulation. The agency is also seeking feedback on the amendments, specifically whether they would have a "significant economic impact on a substantial number of small entities." The public comment period on the proposed amendments closes on Nov. 2, 2015.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.