July 22, 2024

VIA ELECTRONIC SUBMISSION (www.regulations.gov / www.sec.gov/rules/2024/05/cip)

Policy Division
Financial Crimes Enforcement Network
P.O. Box 39
Vienna, VA 22183

Secretary
U.S. Securities and Exchange Commission
100 F Street NE
Washington, DC 20549-1090

Re: Joint Notice of Proposed Rulemaking on Customer Identification Programs for Registered Investment Advisers and Exempt Reporting Advisers (FinCEN Docket Number FINCEN-2024-0011, SEC File Number S7-2024-02, RINs 1506-AB66 and 3235-AN34)

The Securities Industry and Financial Markets Association and its Asset Management Group (“AMG”) (together, “SIFMA”)¹ appreciate this opportunity to provide comments to the Financial Crimes Enforcement Network (“FinCEN”) and the U.S. Securities and Exchange Commission (the “SEC”) on their joint rule proposal (the “Proposed Rule”)² that would require SEC-registered investment advisers (“RIAs”) and exempt reporting advisers (“ERAs”) (together,“Covered Advisers”) to establish and maintain customer identification programs (“CIPs”).

SIFMA appreciates FinCEN’s and the SEC’s efforts to engage with stakeholders to ensure the effectiveness of CIP requirements for Covered Advisers and supports the overall policy objective of ensuring that the investment adviser industry is not abused by illicit actors engaged in money laundering, terrorist financing, and other illicit financial activities. SIFMA believes that revisions to the Proposed Rule to ensure consistency with existing CIP requirements and accurately reflect the investment adviser industry and its attendant risks would enhance this policy objective and are necessary to avoid imposing on Covered Advisers compliance
requirements that are overly burdensome or duplicative.

Below, SIFMA provides comments on the Proposed Rule and many of the questions FinCEN and the SEC pose in the proposing release. SIFMA welcomes the opportunity to meet with FinCEN and the SEC to provide additional details pertaining to the industry and context to our comments.

I. Executive Summary

SIFMA’s principal comments on the Proposed Rule are as follows.

• Revisions to Reduce Burden and Duplication:
  • Align requirements to those applicable under existing CIP rules. To achieve the proposing release’s stated goal of harmonization, SIFMA urges FinCEN and the SEC to ensure information collection requirements for Covered Advisers do not vary from those applicable to banks, broker-dealers, mutual funds, and other financial institutions currently subject to CIP obligations (“Currently Covered FIs”) (e.g., requiring the collection of date of formation for legal entity customers of Covered Advisers, when this data is not required under other CIP rules).
  • Avoid duplication with respect to Covered Advisers’ customers whose assets are held by qualified custodians. To avoid unnecessary burdens and potential customer confusion, the customers of a Covered Adviser whose assets are held at a qualified custodian (e.g., a U.S. bank or broker-dealer), as required by the U.S. federal securities laws, should be excluded from the scope of Covered Advisers’ CIP requirements.
  • Clarify that neither dual registrants nor affiliated advisers already subject to a CIP will need a separate CIP for their advisory activities. A final CIP rule for Covered Advisers should make clear that none of the following would be legally required to establish a separate CIP for their advisory activities: (i) a Covered Adviser that is a dual registrant; (ii) a Covered Adviser that is an operating subsidiary of a bank; or (iii) a Covered Adviser that is affiliated with a broker-dealer or bank and is subject to an enterprise-wide anti-money laundering (“AML”) program that complies with U.S. AML requirements, including the requirement to implement a CIP.
• “Accounts” Covered by the Proposed CIP Requirements:
  • Clarify the scope of the “accounts” definition to exclude relationships that are not both ongoing and tailored to the customer. More broadly, the reference to any contractual “or other business relationship” in the proposed “account” definition is unclear and should be revised to focus on ongoing, formal relationships under which a Covered Adviser provides investment advisory services tailored to the customer. The revised definition should clearly exclude relationships established to obtain investment research services or services such as financial plans and model portfolios. Among other relevant factors, the Covered Adviser in such relationships has no involvement with or visibility into customers’ access to U.S. markets.
  • Exclude accounts for customers whose assets are held by qualified custodians. As noted above, advisory customers whose assets are held at custodians with U.S. AML obligations should be excluded from the scope of Covered Advisers’ CIP requirements, as these customers are already subject to the custodians’ CIP procedures. As addressed in our comments on the proposed reliance provision, we do not believe that reliance is an appropriate means to address this concern, as qualified custodians may maintain assets for the advisory clients of thousands of Covered Advisers, do not typically enter into agreements with the Covered Advisers, and could be overwhelmed with requests for reliance agreements and processes to implement annual certification requirements—a highly burdensome regulatory outcome that would not meaningfully mitigate illicit finance risk.
  • Exclude ERISA accounts. FinCEN and the SEC have long recognized that accounts established to participate in an employee benefit plan under the Employee Retirement Income Security Act of 1974 (“ERISA”) are heavily regulated and pose minimal money laundering and terrorist financing risk, and the proposing release provides no indication that this assessment has changed. For this and other reasons described below, such accounts should be excluded from the “account” definition for purposes of a Covered Adviser’s CIP obligations.
  • Retain proposed exclusion for transferred accounts, with no regulatory verification obligation. SIFMA agrees with the proposed exclusion for accounts acquired by a Covered Adviser through acquisition, merger, purchase of assets, or assumption of liability. To ensure consistency with the CIP rules for Currently Covered FIs, no verification obligation should be imposed with respect to such accounts.
  • Do not impose a reverification requirement. A CIP rule for Covered Advisers should not require periodic reverification of customer identities. Such a requirement would be inconsistent with longstanding regulatory requirements and guidance.
• “Customers” Covered by the Proposed CIP Requirements:
  • Ensure consistency with other CIP regulations. SIFMA supports the Proposed Rule’s approach of applying a “customer” definition for Covered Adviser CIP requirements that is consistent with the CIP rules applicable to Currently Covered FIs (subject to SIFMA’s comments on the proposed “account” definition).
  • Retain approach of treating private funds, not underlying investors, as customers. SIFMA agrees with the Proposed Rule’s approach to treat only the fund that a Covered Adviser advises, and not investors in the fund, as the Covered Adviser’s customer for CIP purposes. This approach accurately reflects Covered Advisers’ relationships in the private fund context and aligns to the SEC’s investment adviser regulatory scheme.
  • To the extent that sub-advisers are in scope, affirm that a sub-adviser providing advisory services to a primary adviser should treat that adviser, and not its underlying clients, as the sub-adviser’s customer for CIP purposes. As explained in SIFMA’s comments on FinCEN’s proposal to impose AML program and suspicious activity report (“SAR”) filing requirements on Covered Advisers, SIFMA believes that sub-advisers should not be subject to an AML program requirement to the extent that they lack access to information regarding underlying customers and do not directly manage customers assets. To the extent that sub-advisers are not excluded and would be required to implement a CIP, SIFMA understands the proposed “customer” and “account” definitions to mean that a sub-adviser contracting to provide investment advisory services to a primary adviser would establish a “customer” relationship with the primary adviser only and should treat that adviser, and not its underlying clients, as the “customer” for CIP purposes. We request that the final rule affirm this approach, to the extent that sub-advisers are not otherwise excluded.
  • Retain exclusion for existing accounts, provided a Covered Adviser has a reasonable belief that it knows the customer’s true identity. SIFMA agrees with this exclusion, which is consistent with other CIP regulations.
  • Affirm application to Covered Advisers’ CIPs of longstanding regulatory guidance related to existing accounts and treatment of non-ERISA plans. As explained below, SIFMA requests that FinCEN and the SEC state clearly that interagency guidance interpreting the CIP rule for banks would apply to implementation of a Covered Adviser’s CIP.
• “Customers” Covered by the Proposed CIP Requirements: Add exceptions for closed-end funds, unit investment trusts, and business development companies. SIFMA requests that, in addition to the “customer” exclusions in the Proposed Rule, FinCEN and the SEC also exclude closed-end funds, unit investment trusts, and business development companies. These entities are subject to rigorous regulatory oversight from the SEC, and requiring Covered Advisers to apply CIP procedures to these entities is unlikely to identify or prevent illicit activity.
• Non-U.S. Covered Advisers and Activities: Exclude from scope of CIP rule. SIFMA believes that the scope of the Proposed Rule should be limited to Covered Advisers within the United States to avoid significant conflict of laws and compliance challenges for non-U.S. firms. SIFMA also requests that FinCEN and the SEC explicitly confirm that U.S. Covered Advisers will not be required to apply CIP requirements to their non-U.S. activities.
• CIP Minimum Requirements: Remove “deemed compliance” language for mutual funds, which are covered by exemption for financial institutions. As mutual funds already are covered by the exclusion from the “customer” definition for certain financial institutions, SIFMA requests that FinCEN and the SEC remove language from the Proposed Rule stating that a Covered Adviser advising a mutual fund may deem its CIP requirements with respect to the mutual fund satisfied if the mutual fund complies with CIP requirements applicable to it.
• Customer Identification and Verification Procedures: Remove date of formation requirement and customer notice for sponsored private funds.
  • Date of formation. SIFMA requests that the proposed requirement that Covered Advisers collect the date of formation for legal entity customers be removed. The CIP rules for Currently Covered FIs do not include this requirement, and obligating Covered Advisers to collect this information would be costly and inefficient and impede the ability of a Covered Adviser to leverage the reliance provision under the Proposed Rule.
  • Customer notice. SIFMA requests that FinCEN and the SEC waive the customer notice requirement for private funds created and managed by the relevant Covered Adviser; otherwise, the Covered Adviser would essentially be, needlessly, providing the notice to itself.
• Reliance:
  • Do not require active monitoring. SIFMA urges FinCEN and the SEC not to impose an “active monitoring” requirement under the proposed reliance provision. Such a requirement would be inconsistent with the CIP rules for Currently Covered FIs and would be burdensome, duplicative, and unnecessary.
  • Remove the annual certification requirement. SIFMA would strongly support a decision by FinCEN and the SEC to remove the annual certification requirement to avoid administrative burden and regulatory compliance risk.
• Proposed Compliance Date: Provide at least two years for compliance. SIFMA respectfully requests at least a two-year compliance period, including at least six months after the compliance date for any final AML program and SAR filing requirements for Covered Advisers. Considerable time will be needed to implement the CIP requirements, and Covered Advisers may become subject to other compliance obligations imposed by the SEC and FinCEN which, too, will require extensive implementation.

 

1. SIFMA, based in New York and Washington, D.C., is the voice of the nation’s securities industry, bringing together the shared interests of hundreds of broker-dealers, banks and asset managers. AMG represents U.S. asset management firms that manage more than 50% of global assets under management. The clients of AMG member firms include, among others, registered investment companies, endowments, state and local government pension funds, private sector Employee Retirement Income Security Act of 1974 pension funds and private funds. SIFMA’s Anti-Money Laundering & Financial Crimes Committee comprises a broad range of SIFMA member firms, including global, regional and small securities firms, as well as firms engaged in the institutional, retail, clearing and online segments. [↩]
2. FinCEN and SEC, “Customer Identification Programs for Registered Investment Advisers and Exempt Reporting Advisers,” 89 Fed. Reg. 44571 (proposed May 21, 2024) (“CIP Proposal”). [↩]