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New Anti-Money Laundering Rules for Advisors?

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WASHINGTON -- Independent advisors could soon face a new complex set of anti-money laundering rules.

Forthcoming federal regulations could require all investment advisors to implement formal anti-money laundering programs -- a shift that would bring RIAs under a similar regulatory regime as that governing broker-dealers, mutual fund complexes and other financial institutions.

The Financial Crimes Enforcement Network, a division of the Treasury Department commonly known as FinCEN, is currently drafting a new set of anti-money laundering (or AML) rules for advisors, reprising a proposal that was introduced in 2003 but ultimately abandoned in 2008.

This time around, the rules aren't exactly imminent. The draft rules are currently under an interagency staff-level review, and would next pass to the full Treasury Department, which in turn would submit the proposal to the Office of Management and Budget for a final review before being released to the public for comment.

Each phase of the review process could take months -- potentially longer, if substantive changes are required.

Yet Steve Hudak, FinCEN's chief of public affairs, says the agency is committed to the process, and that the notice of proposed rulemaking could come "possibly this year."


"It is fair to say that we're addressing any potential money laundering risk from investment advisors," Hudak says. "As with any complicated rulemaking, involving many stakeholders, the process can be unpredictable," he adds.

When the proposed rules are introduced, they will likely reignite an old debate about the wisdom of requiring financial professionals who do not have custody over their clients' assets to set up a formal AML program and assume the liability associated with filing suspicious activity reports.

"There's an awful lot of work for very small risk," said Byron Bowman, general counsel at the advisor consultancy fi360. "I have a hard time seeing that the cost is worth it."

Opinions vary about how much of a burden the planned rules would create for advisors. Experts agree that the practical burden for advisors would play out on a case-by-case basis, but that small firms would generally be hit the hardest.

Advisors with AML programs already in place, including those who work for independent broker-dealers, will certainly have a head start, although they might have to adjust those policies to meet the contours of the regulations. Advisors who do have to draft a new policy from scratch would need to start by evaluating their risk exposure, looking at factors such as their mix of clients, products and services and the geography of their accounts.


Many advisors, even if they operate outside the scope of current anti-money laundering rules, have nonetheless been enhancing their internal controls as they warm to the risks of facilitating movement of dirty money. In a new survey conducted by the Investment Adviser Association, 80% of advisors polled said that they either have an AML policy in place or are subject to the requirements of an affiliate's policy.

Even without the specific requirement for an advisor AML program, SEC officials routinely inquire about firms' policies during exams -- a sign that having a program in place is seen as a best practice, says Marla Roeser, compliance director at Convergent Wealth Advisors.

"Although there's no specific rule that requires it, it's certainly the expectation of the SEC that you have one in place," said Roeser, who served as an SEC examiner and in the commission's Division of Trading and Markets prior to joining Convergent. "As an investment advisor, there's a lot of expectation from the regulators that aren't necessarily documented in rules. I think it's kind of covered under having a robust compliance program."

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