Go Ahead and Take a CIP: SEC and Treasury Department Propose New Regulations for Investment Advisors

By: Richard F. Kerr, Jennifer L. Klass, C. Todd Gibson, and Kenneth Holston

On 13 May 2024, the Securities and Exchange Commission (SEC) and the Department of the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) jointly proposed rulemaking to implement section 326 of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (CIP Rulemaking), which would require SEC-registered investment advisers (RIAs) and exempt reporting advisers (ERAs) to establish written customer identification programs (CIP).

The proposal comes on the heels of FinCEN’s February 2024 proposal requiring advisers to maintain anti-money laundering (AML) compliance programs. The CIP Rulemaking, if adopted as proposed, will require RIAs and ERAs to maintain CIPs that, at a minimum, implement reasonable procedures to:

  1. Verify the identity of individuals seeking to open accounts to the extent reasonable and practicable;
  2. Respond to circumstances in which the adviser cannot form a reasonable belief that it knows the true identity of a client;
  3. Regularly consult government-provided lists of known or suspected terrorists or terrorist organizations to screen prospective account holders; and
  4. Maintain thorough records of the information used for identity verification.

Advisers would be able to rely on other financial institutions, such as affiliates, to satisfy their CIP requirements under certain circumstances. With regard to private fund customers, the CIP Rulemaking would require an investment adviser to collect identifying information of the private fund, including in some cases individuals with authority or control over the fund (which could include the investment adviser), but not the private fund’s investors.

Commissioner Mark T. Uyeda noted that it is premature to propose the CIP Rulemaking while there is still an open question as to which specific advisory services should be subject to an AML compliance program under the pending FinCEN proposal from February 2024.

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