SEC and FinCEN Propose Customer Identification Program Requirements for SEC Registered Investment Advisers

Regulatory Compliance
June 12, 2024

On May 13, 2024, the U.S. Securities and Exchange Commission (SEC) and the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) jointly issued a notice of proposed rulemaking to certain investment advisers. The proposed rule would require SEC-registered investment advisers (RIAs) and exempt reporting advisers (ERAs) to establish, document, and maintain a written customer identification program (CIP). The CIP should include procedures for verifying the identity of each customer and maintaining records of the information used to verify a customer's identity.

This proposal follows a FinCEN proposal issued earlier this year that would include RIAs and ERAs in the definition of a "financial institution" under the Bank Secrecy Act (BSA) and subject them to anti-money laundering (AML), countering the financing of terrorism (CFT) and Know Your Client (KYC), requirements, including implementing and maintaining a risk-based AML program.

How The Proposed Rule Will Affect Private Funds

The proposed rule aims to prevent illicit finance activity involving investment advisers' customers by strengthening AML/CFT frameworks. It requires RIAs and ERAs to implement procedures to identify and verify customer identities, aligning with CIP requirements for other financial institutions like broker-dealers and mutual funds. Under these proposed requirements, the rulemaking would make it more difficult for persons to use fake identities to establish customer relationships with investment advisers for laundering money, financing terrorism, or engaging in other illicit finance activity.

If adopted, the proposal would require RIAs and ERAs to establish, document, and maintain written CIPs that include risk-based procedures for verifying the identity of each customer to the extent reasonable and practicable within a reasonable time before or after the customer's account is opened. RIAs and ERAs would be required to obtain certain identifying information with respect to each customer, such as the customer's name, date of birth or date of formation, address, and identification number. The proposed rule would also include procedures for maintaining records of the information used to verify a customer's identity and notifying customers that the adviser is requesting information to verify their identities.

The proposal is published on and will be published in the Federal Register. The public comment period will remain open for 60 days after the proposed release is published in the Federal Register.

What Investment Advisers Can Do Now to Prepare

While no immediate action is required, we encourage SEC-registered investment advisers to review their policies and procedures and subscription agreements as they relate to AML/CFT/KYC and determine if changes will need to be made to the information requested of new investors. Although it is unclear whether the rule will ask investment advisers to evaluate documentation on file for current investors, it would be prudent for advisers to complete an audit of the information that is currently on file.

How Petra Can Help

Petra Funds Group’s compliance team has decades of experience managing SEC regulatory compliance programs for private fund advisers. The group’s expertise enables them to provide insight and guidance on a wide range of regulatory compliance services, from investment adviser registration to ongoing compliance support to performing SEC mock examinations. Learn more about Petra’s comprehensive compliance offering here and contact Jesse Brown with questions.

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