Annual Letter: 2025

This is our annual letter briefly reviewing various issues that our investment adviser clients should consider over the next few weeks.  We will be pleased to respond to questions, assist you in preparing needed forms and otherwise assist you in satisfying any of the requirements discussed below.  Please contact one of the attorneys in the Investment Funds & Advisers Group if you need assistance.

Legal and Regulatory Changes

1. Corporate Transparency Act – Injunction Puts Filing Requirements on Hold.  The Corporate Transparency Act requires that all corporations, limited liability companies and other business entities that are formed within any U.S. state or foreign jurisdiction, that are registered to do business in the U.S. and that are not exempt under one of 23 different exemptions (“Reporting Entities”), disclose certain information regarding their beneficial owners on a beneficial ownership information report (a “BOIR”). Entities formed before January 1, 2024, were initially required to file BOIRs by January 1, 2025.  Federal courts in the Fifth Circuit Court of Appeals then issued a nationwide injunction of the Corporate Transparency Act that prevented the U.S. government from enforcing the January 1, 2025, compliance deadline for existing Reporting Entities and any other BOIR filing deadlines for new Reporting Entities.

On January 23, 2025, the Supreme Court stayed the injunction so that Reporting Entities will again need to file.  For Reporting Entities that have already submitted BOIRs, there is nothing to be done at this time.  For Reporting Entities that have not yet filed BOIRs, they will need to file, although it is unclear as of today what the deadline is.  We will provide updates when the deadlines are announced.  Please see our client alerts regarding the Transparency Act for further information: Corporate Transparency Act Compliance Reminder and Guidance and Corporate Transparency Act – Nationwide Injunction Once Again Reinstated.

2. New Anti-Money Laundering Requirements.  On August 28, 2024, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) adopted a new rule requiring covered advisers to establish anti-money laundering (“AML”) and counter-terrorist financing programs and, if the need arises, file suspicious activity reports with FinCEN (the “FinCEN AML Rule”).  Advisers covered by the FinCEN AML Rule include exempt reporting advisers, most SEC-registered investment advisers, and foreign-located advisers (but only with respect to their U.S. activities) (“Covered Advisers”),[1] who must comply with the FinCEN AML Rule by January 1, 2026.  This FinCEN AML Rule is in addition to an adviser’s existing obligations to screen investors against the sanctions lists maintained by the Office of Foreign Asset Control.

The FinCEN AML Rule will require Covered Advisers to include the following elements in their AML programs: (a) internal policies, procedures and controls reasonably designed to prevent covered advisers from being used for money laundering, terrorist financing, or other illicit finance activities; (b) designation of one or more AML compliance officers; (c) provision of ongoing AML training for appropriate personnel; (d) independent testing of the AML program’s effectiveness; and (e) risk-based procedures for conducting ongoing customer due diligence and monitoring to (i) understand the nature and purpose of customer relationships for the purpose of developing and maintaining a customer risk profile, and (ii) identify and report suspicious transactions.  Covered Advisers must review their current screening and monitoring policies and add any required AML procedures not already addressed, such as suspicious activity reporting and independent testing.

Covered Advisers may contractually delegate the implementation of their AML programs to a third party, such as a fund administrator, but the Covered Adviser must remain fully responsible and legally liable for the program’s compliance and take reasonable steps to ensure that the third party conducts AML procedures effectively.

Covered Advisers will also be required to file Currency Transaction Reports for certain “transactions in currency” over $10,000 with FinCEN.  Currently, all investment advisers are required to report such transactions on Form 8300 and the Currency Transaction Reports will replace Form 8300 for Covered Advisers.  We intend to issue a client alert detailing FinCEN AML Rules requirements in greater detail shortly.

Additionally, the FinCEN AML Rule will require Covered Advisers to comply with existing Bank Secrecy Act Recordkeeping and Travel Rules, which require financial institutions to create and retain specified records for fund transmittals that equal or exceed $3,000 for transfers between financial institutions, subject to certain exceptions.

The adoption of the FinCEN AML Rule does not include specific requirements for Covered Advisers to implement a customer identification program or to collect beneficial ownership information for legal entity customers.  Those requirements are subject to a proposed separate joint rulemaking between FinCEN and the SEC, which has not yet resulted in a final rule.

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[1] State-registered advisers, family offices, SEC-registered advisers that report no AUM on their Form ADVs and SEC-registered advisers who are registered solely because they are mid-sized advisers, multistate advisers or pension consultants are not subject to the FinCEN AML Rule.