Reported by Scott H. Moss, Robert A. Johnston Jr., Samantha Sigelakis-Minski, and Angenny M. Rosario

Under the Notice of Proposed Rule Making (NPRM), Investment Advisers would be required to implement reasonable procedures to identify and verify the identity of their customers.³ The NPRM would define “account” as “any contractual or other business relationship between a person and an investment adviser under which the investment adviser provides advisory services.”⁴ “Customer” is defined as “a person—including a natural person or a legal entity—who opens a new account with an investment adviser.”⁵ Where the customer is a legal entity, the NPRM would obligate the Investment Adviser “to obtain information about individuals with authority or control over the account in order to verify the customer’s identity.”⁶ Notably, for a private fund manager, the fund adviser’s “client” to which it provides investment advice is typically the fund itself, not the investors in the fund. Accordingly, based on the plain language of the NPRM’s definitions of “account” and “customer,” the proposed CIP requirements arguably only would apply to the Investment Adviser’s advisory clients, e.g., in the case of a fund manager, the fund, and not to the investors in any advised funds. However, such a result would seem to be at odds with FinCEN’s stated concerns that pooled investment vehicles such as hedge funds and private equity funds are being used to launder criminal proceeds and to finance terrorism. We expect that public comments in response to the NPRM will seek clarity from FinCEN as to what the terms “account” and “customer” mean with respect to pooled investment vehicles like private funds, the Investment Adviser’s advised funds, or the underlying investors in those advised funds.

The NPRM would require that Investment Advisers implement a risk-based CIP appropriate for the Investment Advisers’ size and business. The NPRM would require Investment Advisers to collect the customer’s name, date of birth or date of formation, address, and identification number, all of which are standard CIP requirements of financial institutions (e.g., registered broker-dealers and banks).⁷ In certain instances, Investment Advisers may be required to collect additional information where necessary to verify the true identity of a customer.⁸ The purpose is to ensure that Investment Advisers hold a reasonable belief that they know their customers. Investment Advisers would be required to verify their customers “within a reasonable time before or after the customer’s account is opened.”⁹ In addition, the NPRM would require that Investment Advisers confirm that customers do not appear on any lists of known or suspected terrorists maintained by the Department of the Treasury.¹⁰ Lastly, the NPRM’s record retention requirements would obligate Investment Advisers to retain documents and information related to a customer’s identifying information “while the account remains open and for five years after the date the account is closed.”¹¹

Read full report: https://www.lowenstein.com/news-insights/publications/client-alerts/sec-and-fincen-propose-customer-identification-obligations-for-investment-advisers-aml AND “SEC, FinCEN Propose Customer Identification Program Requirements for Registered Investment Advisers and Exempt Reporting Advisers,” May 13, 2024, available at https://www.fincen.gov/news/news-releases/sec-fincen-propose-customer-identification-program-requirements-registered

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³See “Fact Sheet: Customer Identification Programs,” May 13, 2024, available at https://www.sec.gov/files/bsa-1-fact-sheet.pdf.
⁴ NPRM at page 9.
⁵ Id. at 10.
⁶Id. at 11.
⁷Id. at 15-16.
⁸Id. at 16.
⁹Id. at 15.
¹⁰Id. at 26.
¹¹Id. at 25.