The SEC is proposing a new customer identification program following the Treasury Department's February 2024 proposal to curb potential money laundering.
The program would require RIAs and exempt reporting advisers to “implement reasonable procedures” to verify the identity of each client. Advisers will be required to obtain “certain identifying information” about each client, including their name, date of birth or education, address and ID number.
According to SEC Chairman Gary Gensler, the new rule would make it more difficult for clients to use false identities when dealing with advisers.
“I support this proposal because it can reduce the risk of terrorists and other criminals accessing U.S. financial markets to launder money, finance terrorism, or move funds for other illicit purposes, Gensler said.
The movement of the SEC follows the proposed rules disclosed by the US Treasury Financial Crimes Enforcement Network (FinCEN), which would apply to advisers registered with the SEC and those reporting as exempt advisers.
Under this rule, advisers must follow the restrictions of the Bank Secrecy Act, including implementing anti-money laundering programs and programs to combat potential terrorist financing. FinCEN did not include a customer identification program requirement, waiting for them to cooperate with the SEC in that regulation (which was accomplished with today's announcement).
The Treasury previously issued a risk alert on money laundering threats to the RIA industry, finding “national security risks” where “sanctioned individuals, corrupt officials, tax evaders and other criminal actors” were using RIAs as a backdoor to US securities.
“Criminal, corrupt and illegal actors have exploited the investment adviser sector to penetrate the US financial system and launder funds,” FinCEN Director Andrea Gacki said in a statement (today's rule was a joint proposal between FinCEN and SEC).
According to a fact sheet issued by the SEC, the proposal is “generally consistent” with the client identification program requirements for broker/dealers and mutual funds. In a distress alert last year, SEC examiners warned that b/d are not committing the necessary resources and staff to fulfill the LPP mandates. The commission was concerned that this gap could widen as sanctions against Russian nationals increased in the wake of that country's occupation of Ukraine.
The public comment period for the SEC/FinCEN proposal will be open for 60 days after the rule is published in the Federal Register.