The U.S. Securities and Exchange Commission (SEC) and the Financial Crimes Enforcement Network (FinCEN) have jointly proposed a new rule that would require registered investment advisors (RIAs) and exempt reporting advisors (ERAs) to implement customer identification programs (CIPs) similar to those already in place for banks, credit unions, and brokerage firms.

Combating Illicit Activities

The primary goal of the proposed rule is to make it more challenging for bad actors to use fake identities to establish relationships with investment advisors for money laundering purposes, terrorist financing, or other illicit activities. Authorities have noted that criminal and corrupt actors have exploited gaps in the regulatory framework, using investment advisors as entry points into the U.S. financial system.

Customer Identification Requirements

Under the proposed rule, RIAs and ERAs would have to establish, document, and maintain written CIPs. These procedures would enable advisors to form a reasonable belief that they know the true identity of each customer. Advisors would need to obtain identifying information such as the customer’s name, date of birth or formation (for institutions), address, and identification number.

Complementary Proposals

This proposal complements an earlier regulatory proposal made by the Treasury Department this year, which would subject RIAs to anti-money-laundering and counterterrorism requirements under the Bank Secrecy Act. The Treasury Department officially stated that the customer identification proposal is intended to be consistent with longstanding requirements for other financial institutions.

Scope and Impact

The proposed rule would affect thousands of SEC-registered investment advisors and a smaller number of exempt investment advisors. However, it would not apply to state-registered investment advisory firms, which generally have less than $100 million in assets under management.

Public Comment Period

There will be a 60-day public comment period following the proposal, during which regulators may make changes based on the feedback received. The proposed rule marks a significant step towards closing regulatory gaps and ensuring a more secure financial system by preventing the misuse of investment advisory services for illicit purposes.