Proposed Rule: Customer Identification Program Requirements for Registered Investment Advisers and Exempt Reporting Advisers

 

Proposed Rule: Customer Identification Program Requirements for Registered Investment Advisers and Exempt Reporting Advisers

Contributed By: Gabrielle Magdziarz

                           Senior Compliance Consultant

                             AdvisorAssist, LLC

On May 13, 2024 the Securities and Exchange Commission (SEC) and the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) jointly proposed customer identification program (CIP) requirements for RIAs and ERAs on the tailwind of the February 2024 proposal to designate RIAs and ERAs as “financial institutions” under the Bank Secrecy Act (BSA). If adopted, the rule will require RIAs and ERAs to implement a CIP that includes procedures for verifying the identity of each customer to the extent reasonable and practicable, and maintaining records of the information used to verify a customer’s identity. The below list is the proposed required minimum amount of client information that would be required to be collected per a CIP, however, verification methodologies may require additional documentation and data:

1. Name – referring to the client’s full legal name, but aliases or DBAs may be required to be obtained.
   
2. Date of birth for an individual or the date of formation for any person other than an Individual.
3. Residential or business address, unless other stipulations apply as proposed.
4. Identification number (SSN, TIN, legal identifiers) dependent upon whether the individual is domestic or foreign.

Clients will be informed of the Firm’s identity verification policies through a CIP customer notice, which may be presented on websites, in account applications, agreements, or through other written or verbal communications. The Firm must establish a reasonable belief in the true identity of its clients using either documentary or non-documentary verification methods, or a combination of both, as outlined in their risk-based procedures. Documentary methods include government-issued IDs for individuals and entity-proofing documents like certified articles of incorporation for businesses. Non-documentary methods involve checking financial statements, comparing client information against fraud databases, verifying information through third-party sources like credit reports, and checking references with other financial institutions. The Firm's verification policies must address situations where typical ID verification is challenged, such as when:

• An individual cannot present a valid government-issued photo ID.
• The investment advisor is unfamiliar with the presented documents.
• The advisor does not obtain documents for verification.
• There is no face-to-face meeting with a customer.
• Circumstances suggest an increased risk of identity verification failure.

In such cases, the Firm's CIP (Customer Identification Program) must include procedures for handling these situations, potentially escalating to filing a Suspicious Activity Report (SAR) if a reasonable belief in the customer’s identity cannot be established. Under this proposed provision, an investment advisor would be required to retain the information obtained about a customer while the account remains open and for five years after the date the account is closed. Although there are provisions for reliance on another financial institution for all, or some, of its requirements under the regulation, the investment advisor would remain responsible for ensuring compliance and an agreement would need to be in place stating as such. FinCEN and SEC anticipate that the effective date of the proposed rule will be 60 days after adoption, and is currently in its comment period. Specifically, under this proposed rule, an investment advisor would be required to develop and implement a CIP that complies with the requirements of this section on or before six months from the effective date of the regulation, but no sooner than the compliance date of the AML/CFT Program and SAR Proposed Rule, if adopted. AdvisorAssist will continue to monitor both proposals, with the expectation that another joint effort between the SEC and FinCEN is on the way. Should you have any questions or concerns, please reach out to your Consultant.

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