February 2024
2024 Investment
Adviser Risk Assessment
Department of the Treasury
2024 Investment
Adviser Risk Assessment
i
2024 ◆ Investment Adviser Risk Assessment
Table of Contents
1. Executive Summary .......................................................................... 1
2. Market Structure and Regulatory Framework ..................................... 3
A. Investment Adviser Sector Participants ................................................................ 4
i) Investment Advisers ..................................................................................................4
ii) Investment Companies ..............................................................................................6
iii) Other Key Participants in Investment Advisory Activities ..........................................11
B. Investment Adviser Regulatory Framework .......................................................... 12
3. Illicit Finance Risks ......................................................................... 16
A. Threats ................................................................................................................ 16
i) Laundering of Illicit Proceeds Through Investment Advisers and Private Funds ........16
ii) Russian political and Economic Elites’ Access to U.s. Investments .............................20
iii) Foreign State Actors That Could Use Investment Funds to Access
Critical Infrastructure or Sensitive Technologies ....................................................... 20
iv) Investment Advisers Defrauding Their Clients ...........................................................22
B. Vulnerabilities ..................................................................................................... 23
i) Regulatory Vulnerabilities ..........................................................................................23
ii) Advisory Activities Built on Segmentation and Cross-Border Activity .......................26
iii) Business Practices That Promote Secrecy of Client Information .................................28
C. Consequences ...................................................................................................... 28
4. Existing Mitigation Measures ........................................................... 29
A. AML/CFT Measures ............................................................................................. 29
B. Non-AML/CFT Rules and Regulations ................................................................. 29
C. Enforcement ........................................................................................................ 30
i) Federal Enforcement ...................................................................................................30
ii) State Enforcement.......................................................................................................31
D. Whistleblower Reward Programs ........................................................................ 31
5. Residual Risks ................................................................................. 32
6. Annexes .......................................................................................... 34
Annex 1: Methodology ............................................................................................... 34
Annex 2: Securities and AML/CFT Regulatory Requirements for IAs
and Other Entities Involved in IA Activity...... ........................................ .....35
Annex 3: Summary Information Requested on Form ADV.......................................... 36
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2024 ◆ Investment Adviser Risk Assessment
1. EXECUTIVE SUMMARY
1
The investment adviser (IA) industry in the United States consists of a wide range of business models that
provide a variety of financial services to retail investors, high-net-worth individuals, private institutions,
and governmental entities (including but not limited to local, state, and foreign government funds). The
assets managed by investment advisers registered with the U.S. Securities and Exchange Commission
(SEC) (known as registered investment advisers or RIAs), investment advisers exempt from SEC registration
(exempt reporting advisers or ERAs), and state-registered investment advisers (who are generally
prohibited from registering with the SEC) vastly exceed the holdings of U.S. banks.
Oversight of the investment adviser industry by federal and state securities regulators is broadly focused
on protecting investors and the overall securities market from fraud and manipulation. Investment
advisers are generally not subject to comprehensive anti-money-laundering and countering the financing
of terrorism (AML/CFT) regulations and are not examined for AML/CFT compliance. Some investment
advisers may perform certain AML/CFT functions if the entity is also a registered broker-dealer (i.e., a dual
registrant), is a bank, or is an operating subsidiary of a bank;
2
other investment advisers are ailiates
of banks or broker-dealers, which may implement an enterprise-wide AML/CFT program that would
include that investment adviser. Additionally, some investment advisers may perform certain AML/CFT
functions through contractual obligations for a joint customer of another financial institution subject
to the Bank Secrecy Act (BSA). But the practice is not uniform across the investment adviser sector and
investment advisers’ implementation of voluntary measures is not subject to comprehensive enforcement
or examination. The absence of uniform AML/CFT requirements across all investment advisers also
creates a circumstance where providers of the same financial services may be subject to dierent AML/
CFT obligations (if any), and an investor or client seeking to obscure the origin of funds or its identity can
choose an adviser that is not required to apply AML/CFT measures to its clients and activities.
A review of law enforcement cases, BSA reporting, and other information available to the U.S. government
has identified several illicit finance threats involving investment advisers. First, IAs have served as an entry
point into the U.S. market for illicit proceeds associated with foreign corruption, fraud, and tax evasion,
as well as billions of dollars ultimately controlled by Russian oligarchs and their associates. IAs (including
those that are exempt from SEC registration) and their advised funds, particularly venture capital funds, are
also being used by foreign states, most notably the People’s Republic of China (PRC) and Russia, to access
certain technology and services with long-term national security implications through investments in early-
stage companies. Finally, advisers (RIAs, ERAs, and state-registered advisers) have defrauded their clients
and stolen their funds.
Investment advisers may be vulnerable to these threats for several reasons. First, the investment adviser
sector is generally not required to implement comprehensive AML/CFT obligations, which creates arbitrage
1 This risk assessment has been coordinated with sta from relevant Treasury oices and bureaus, as well as sta from the Federal
Bureau of Investigation (FBI), the Criminal Division of the Department of Justice, and the Securities and Exchange Commission
(SEC). This risk assessment also builds on previous analysis of illicit finance risk in the investment adviser sector. See, e.g.,
Treasury, 2022 National Money Laundering Risk Assessment, pp. 63-66, https://home.treasury.gov/system/files/136/2022-National-
Money-Laundering-Risk-Assessment.pdf.
2 Investment advisers that are banks (or bank subsidiaries) subject to the jurisdiction of the Oice of the Comptroller of the Currency
(OCC), the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), and the
National Credit Union Administration (NCUA) (collectively, the Federal Banking Agencies, or FBAs) are accordingly also subject
to applicable FBA regulations imposing AML/CFT requirements on banks. See, e.g., 12 C.F.R. §§ 5.34(e)(3) and 5.38(e)(3) (OCC
requirements governing operating subsidiaries of national banks and Federal savings associations).
2024 ◆ Investment Adviser Risk Assessment
2
opportunities for bad actors by allowing them to access the U.S. financial system through investment
advisers with weaker or non-existent client due diligence. Second, in many cases, advisory business
activities are segmented across intermediaries (and potentially national borders). This may create an
information asymmetry: to the extent that AML/CFT obligations apply, the obliged entities (such as
custodian banks or broker-dealers) working with an investment adviser may not necessarily have a direct
relationship with the client (or, in the private fund context, underlying investor in the private fund) and may
be unable to require an adviser to disclose relevant information.
3
At the same time, those entities that can
obtain investor information (typically the adviser and certain service providers for the advised funds) are
not required to do so or to report potentially suspicious activity. Third, certain business practices oen
promote the secrecy of client or investor identity and information, and the outsourcing of key compliance
responsibilities.
This assessment finds that the highest illicit finance risk in the investment adviser sector is among ERAs
(who advise private funds exempt from SEC registration), followed by RIAs who advise private funds,
and then RIAs who are not dually registered as, or ailiated with, a broker-dealer (or is, or ailiated with,
a bank). The private funds advised by RIAs, such as hedge and private equity funds, as well as venture
capital funds, held approximately $20 trillion in assets under management (AUM) as of Q4 2022, and have
limited reporting obligations under the federal securities laws. Investment advisers managing these funds
also may routinely invest assets from foreign legal entities that are generally not required to disclose
their ultimate beneficial owners. As of Q4 2022, private funds managed by RIAs represented $284 billion
in equity beneficially owned by non-U.S. investors where the RIA did not know, and could not reasonably
obtain information about, the non-U.S. beneficial ownership because the beneficial interest was held
through a chain involving one or more third-party intermediaries.
4
Further, many of these funds are
domiciled outside of the United States in jurisdictions with varying levels of AML/CFT regulation, and where
Treasury assesses it is routine practice to rely on representations and warranties from intermediaries who
represent investors when it is not possible to obtain investor-identity and source-of-funds information.
5
3 However, as noted below, some RIAs have already implemented voluntary AML/CFT programs pursuant to the Securities Industry
and Financial Markets Association (SIFMA) No-Action Letter under which the sta of the SEC’s Division of Trading and Markets
stated that it would not recommend enforcement action if a broker-dealer reasonably relies on RIAs to perform some or all
aspects of the broker-dealer’s customer identification program (CIP) obligations or the portion of customer due diligence (CDD)
requirements imposing beneficial ownership identification and verification requirements for legal entity customers, provided that
certain conditions are met. See SEC, Letter to Mr. Bernard V. Canepa, Associate General Counsel, Securities Industry and Financial
Markets Association (SIFMA), Request for No-Action Relief Under Broker-Dealer Customer Identification Program Rule (31 C.F.R. §
1023.220) and Beneficial Ownership Requirements for Legal Entity Customers (31 C.F.R. § 1010.230) (Dec. 9, 2022), https://www.sec.
gov/files/nal-sifma-120922.pdf (SIFMA No-Action Letter). This request for No-Action Relief was originally issued in 2004, has been
periodically reissued, and remains eective.
4 See SEC, Private Fund Statistics, Fourth Calendar Quarter 2022 (2022 Q4 Private Fund Statistics), https://www.sec.gov/files/
investment/private-funds-statistics-2022-q4.pdf. Question 16(m) on Form PF requires the reporting fund to identify the
approximate percentage of the reporting fund’s equity that is beneficially owned by dierent types of investors, including
“Investors that are not United States persons and about which the foregoing beneficial ownership information is not known
and cannot reasonably be obtained because the beneficial interest is held through a chain involving one or more third party
intermediaries.”
5 See, e.g., Financial Action Task Force, Concealment of Beneficial Ownership Information (Jul. 2018), pp. 73-86, https://www.fatf-gafi.
org/content/dam/fatf-gafi/reports/FATF-Egmont-Concealment-beneficial-ownership.pdf.
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2024 ◆ Investment Adviser Risk Assessment
2. MARKET STRUCTURE AND REGULATORY FRAMEWORK
There are thousands of investment advisers in the United States with a wide range of business models
geared towards providing advisory services to many dierent types of clients. Some of the advisory
services that investment advisers provide include portfolio management, financial planning, and
pension consulting. Advisory services can be provided on a “discretionary” or “non-discretionary” basis.
6
Investment advisers provide their expertise to a wide range of clients, including retail investors, high-
net-worth individuals, private institutions, and governmental entities (including local, state, and foreign
government funds).
7
Investment advisers oen work closely with their clients to formulate and implement
their clients’ investment strategies. Investment advisers may be organized in a variety of legal forms,
including corporations, sole proprietorships, partnerships, or limited liability companies.
8
As of July 2023, there were 15,391 RIAs with approximately $125 trillion in AUM.
9
In addition, there were
approximately 17,000 state-registered investment advisers across the United States,
10
and 5,846 ERAs, who
are exempt from registering with the SEC, but must file certain information with the SEC.
11
RIAs and ERAs
manage billions of dollars on behalf of individuals, institutional investors, or private funds, while state-
registered investment advisers with smaller portfolios advise small businesses and individual investors.
Most investment advisers are generally subject to certain reporting requirements, but the scope of those
requirements depends on whether the adviser is an RIA, registered at the state-level, or potentially
exempt from registration as an ERA or otherwise not required to register with a federal or state securities
regulator.
12
Registration requirements, in turn, generally hinge on the amount of an adviser’s AUM and
other factors, as explained below. RIAs are subject to various SEC rules and regulations governing,
among other things, their marketing and disclosures to clients, best execution for client transactions, and
disclosures of conflicts of interest and disciplinary information. ERAs must still file an abbreviated Form
ADV with the SEC but are generally subject to fewer reporting and recordkeeping requirements than RIAs.
Certain state-registered investment advisers may be subject to similar requirements under state securities
laws and regulations.
13
Investment advisers, depending on their registration status, are also generally
subject to examination by the SEC or state securities regulators.
6 An adviser has discretionary authority or manages assets on a discretionary basis if it has the authority to decide which securities to
purchase and sell for the client. An adviser also has discretionary authority if it has the authority to decide which investment advisers
to retain on behalf of the client. See Glossary to Form ADV, p. 28, https://www.sec.gov/about/forms/formadv-instructions.pdf.
7 See Part 1A, Item 5.D of Form ADV for a list of examples of dierent types of advisory clients.
8 See Part 1A, Item 3.A. of Form ADV.
9
The number of RIAs and corresponding AUM, and the number of ERAs, are based on a Treasury review of Form ADV information filed as of
July 31, 2023. This Form ADV data is available at Frequently Requested FOIA Document: Information About Registered Investment Advisers
and Exempt Reporting Advisers, http://www.sec.gov/foia/docs/invafoia.htm. The $125 trillion in AUM includes approximately $22 trillion in
assets managed by mutual funds, which are advised by RIAs and are subject to AML/CFT obligations under the BSA and its implementing
regulations. However, other parts of the sector, such as the $20 trillion managed for private funds, are not subject to comprehensive AML/
CFT requirements (but still report some information on Form ADV).
10 North American Security Administrators Association, NASAA Investment Adviser Section 2023 Annual Report, p. 3 (NASAA 2023 Annual
Report), https://www.nasaa.org/wp-content/uploads/2023/09/2023-IA-Section-Report-FINAL.pdf.
11 Information About Registered Investment Advisers and Exempt Reporting Advisers, http://www.sec.gov/foia/docs/invafoia.htm.
12 For instance, an investment adviser may be exempt from both federal and certain state requirements if it has less than $25 million
AUM and fewer than six clients in a state. These advisers are not required to register, nor are they ERAs.
13 See, e.g., Cal. Corp. Code, Ch. 3, §§ 25230-25238.
2024 ◆ Investment Adviser Risk Assessment
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Unless an investment adviser is dually registered as a broker-dealer (i.e., a dual registrant), is a bank (or a
bank subsidiary), or otherwise ailiated with a bank or broker-dealer, an investment adviser generally does
not implement AML/CFT program, reporting and recordkeeping measures.
14
A. Investment Adviser Sector Participants
i) Investment Advisers
An investment adviser, as defined by the Investment Advisers Act of 1940 (Advisers Act),
15
is a person or
firm that, for compensation, is engaged in the business of providing advice to others or issuing reports or
analyses regarding securities.
16
Designation as an investment adviser is a legal status that means that an
individual or company has certain statutory obligations and is registered, or required to be registered, as an
investment adviser with either the SEC or a state securities regulator, or is exempt from such requirements.
Common names for investment advisers include, but are not limited to, asset managers, investment
counselors, investment managers, portfolio managers, and wealth managers.
17
Most investment advisers must submit a Form ADV, a self-disclosure form that collects certain information
about the adviser.
18
Form ADV collects certain information about the adviser, including (depending on
the adviser’s registration status) its AUM, ownership, number of clients, number of employees, business
practices, custodians of client funds, and ailiations, as well as certain disciplinary or material events of
the adviser or its employees. ERAs who are not registered with the SEC or a state securities regulator are
only required to file an abbreviated version of Form ADV—they are required to answer fewer client-related
questions and provide less information about the services they provide. Form ADV does not require
investment advisers to disclose the names of individual clients or investors.
19
SEC-Registered Investment Advisers. Unless eligible to rely on an exemption, investment advisers that
manage more than $110 million AUM must register with the SEC, as well as submit a Form ADV and update it
at least annually.
20
The SEC administers and enforces the federal securities laws applicable to RIAs. As of July
31, 2023, there were 15,391 RIAs, reporting approximately $125 trillion in AUM for their clients.
21
RIAs employ
individual investment adviser representatives (IARs). IARs generally must be licensed in the states where they
work and are generally required to pass a credentialing exam before they can be licensed. According to the
Investment Adviser Association, at the end of 2022, RIAs employed approximately 390,000 IARs.
22
14 According to an analysis of Form ADV data, there were 436 RIAs dually registered as broker-dealers that managed approximately
$10 trillion, and 20 RIAs that are banks that managed approximately $1.8 trillion. See supra n. 9. See Section B.1, infra, for
additional information on IA implementation of AML/CFT measures.
15 See 15 U.S.C. § 80b-1 et seq.
16 See 15 U.S.C. § 80b-2(a)(11) for the definition of “investment adviser.” Some persons and firms are statutorily excluded from the
definition, including certain broker-dealers (§ 80b-2(a)(11)(C)), certain publishers (§ 80b-2(a)(11)(D)), and family oices (§ 80b-2(a)(11)(G)).
17 See Financial Industry Regulatory Authority (FINRA), Investment Advisers, https://www.finra.org/investors/learn-to-invest/
choosing-investment-professional/investment-advisers.
18 Investment advisers register with the SEC by filing Form ADV and are required to file periodic updates. Form ADV is available at
https://www.sec.gov/files/formadv.pdf. A detailed description of Form ADV’s requirements is available at https://www.sec.gov/
oiea/investor-alerts-bulletins/ib_formadv.html. An investment adviser may register with a state securities authority by filing
Form ADV with that authority.
19 Advisers to private funds are, however, required to name their private fund clients on Section 7.B.(2) of Schedule D of Form ADV
Part 1A. In some cases, those names may be coded.
20 See 17 C.F.R. §§ 275.203-1 & 204-1.
21 See supra n. 9.
22 See Investment Adviser Association, Investment Adviser Industry Snapshot 2023, pp. 19-20 (Investment Adviser Association
Snapshot), https://investmentadviser.org/wp-content/uploads/2023/06/Snapshot2023_Final.pdf.
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2024 ◆ Investment Adviser Risk Assessment
In recent years, almost all assets managed by RIAs (over 90% in 2022) have been held on a discretionary
basis, meaning that the RIA decides which securities to purchase and sell for a client or which other
investment advisers to retain on behalf of the client.
23
Further, in these cases, the RIA is the direct customer
of the bank or broker-dealer that holds the RIA’s client funds or securities. Approximately 3,800 RIAs
24
advise private funds, but do not qualify for an exemption from SEC registration (because, for example,
they advise private funds with over $150 million in AUM in the United States or do not solely advise venture
capital funds).
Exempt Reporting Advisers. An ERA is an investment adviser that would be required to register with the SEC
but is statutorily exempt from such requirement
25
because: (1) it is an adviser solely to one or more venture
capital funds; or (2) it is an adviser solely to one or more private funds and has less than $150 million AUM
26
in the United States.
27
Even though they are not required to register, ERAs must still file an abbreviated Form
ADV with the SEC, and the SEC maintains authority to examine ERAs. As of July 31, 2023, there were 5,846
ERAs that were exempt from registering with the SEC but had filed an abbreviated Form ADV.
28
• Private Fund Advisers. Private fund advisers, a type of ERA, are exempt from registering with the SEC if
they exclusively advise private funds and have less than $150 million AUM in the United States. As of July 31,
2023, there were approximately 4,400 exempt private fund advisers, approximately 500 of which were also
venture capital advisers.
29
• Venture Capital Advisers. Venture capital advisers, another type of ERA, are exempt from registering with
the SEC if they provide services only to venture capital funds,
30
regardless of the amount of AUM.
31
As of July
31, 2023, there were approximately 2,000 exempt venture capital advisers, approximately 500 of which were
also private fund advisers.
32
State-Registered Investment Advisers. State-registered investment advisers generally have less than $100
million in AUM. State-registered investment advisers are generally prohibited from registering with the SEC and
instead register with and are supervised by the relevant state authority, unless they meet certain exceptions or
their state does not supervise these entities.
33
State-registered investment advisers also file a Form ADV, which
23 Id. at p. 13.
24 See 2022 Q4 Private Fund Statistics, p.4, supra n. 4.
25 An adviser that is eligible to file reports as an ERA may nonetheless elect to register with the SEC as an RIA so long as it meets the criteria
for registration. An investment adviser that relies on one of these exemptions must still evaluate the need for state registration.
26 Form ADV uses the term “regulatory assets under management” (RAUM) instead of “assets under management.” Form ADV
describes how advisers must calculate RAUM and states that in determining the amount of RAUM, an adviser should “include the
securities portfolios for which [it] provide[s] continuous and regular supervisory or management services as of the date of filing”
the form. See Form ADV, Instructions for Part 1A, Instruction 5.b.
27 See Sections 203(l) and 203(m) of the Advisers Act and 17 C.F.R. § 275.203(m)-1, respectively. ERAs are exempt from registration
with the SEC, but are required to file reports on Form ADV with the SEC and are subject to certain rules under the Advisers Act.
28 The number of ERAs is derived from a Treasury review of Form ADV information filed as of July 31, 2023. See supra n. 9.
29 Id.
30 See 17 C.F.R. § 275.203(l)-1 (defining “venture capital fund”).
31 Certain venture capital advisers may be registered with the SEC if they no longer satisfy the criteria to be ERAs (e.g., they no longer
pursue a venture capital strategy (by seeking to hold securities in companies past the initial public oering stage or pursuing
hedge-fund like investment strategies)) or otherwise opt to register with the SEC.
32 Based on a Treasury review of Form ADV information filed as of July 31, 2023. See supra n. 9.
33 See 17 C.F.R. § 275.203A-2. Other exceptions to the prohibition on SEC registration include: (1)an adviser that would be required
to register with 15 or more states (the multi-state exemption); (2)an adviser advising a registered investment company; (3)an
adviser ailiated with an RIA; and (4)a pension consultant. Persons satisfying these criteria and the definition of “investment
adviser” may register as such with the SEC. Investment advisers with a principal oice and place of business in New York and
over $25 million AUM are required to register with the SEC.
2024 ◆ Investment Adviser Risk Assessment
6
they submit to the relevant state regulator. State-registered investment advisers tend to be small, with 81
percent having one or two employees, and 99 percent having 10 or fewer employees.
34
As of December 31, 2022,
there were 17,063 state-registered investment advisers who have approximately $420 billion in AUM.
35
Foreign Private Adviser. A foreign private adviser is not required to register with the SEC if it: (1) has no
place of business in the United States; (2) has, in total, fewer than 15 clients in the United States and
investors in the United States in private funds advised by the adviser; (3) has aggregate assets under
management attributable to these clients of less than $25 million; and (4) does not hold itself out generally
to the public in the United States as an investment adviser.
36
Unlike ERAs, advisers specifically exempt
under the foreign private adviser exemption are not subject to reporting or recordkeeping provisions under
the Advisers Act, are not subject to examination, and do not make any filings with the SEC.
Family Oices. Family oices typically operate as advisory entities established by wealthy families to
manage their wealth and provide related services to family members. Family oices are statutorily
excluded from the definition of “investment adviser” under the Advisers Act.
37
Under SEC regulations,
a “family oice” is defined as a company that: (1) only has “family clients” (as defined in the rule, and
referring generally to individuals related by a common ancestor); (2) is wholly owned by family clients and
exclusively controlled by family members and/or family entities; and (3) and does not hold itself out to the
public as an investment adviser.
38
This exemption does not apply to multi-family oices, which manage the
wealth of two or more unrelated families.
Other exemptions from registration apply for investment advisers to insurance companies,
39
charitable
organizations,
40
certain small business investment companies (SBICs),
41
certain rural business investment
companies (RBICs),
42
and commodity trading advisors.
43
Unregistered Investment Advisers. These include individuals or firms that should be registered with the
SEC or an appropriate state securities regulator, but, potentially in violation of federal or state law, are not,
or that have insuicient AUM and/or clients to be required to register with the states or the SEC.
ii) Investment Companies
Generally, an investment company is a pooled investment vehicle (PIV) that issues its own securities and
is primarily engaged in the business of investing in other securities. A PIV is an entity—oen referred
to as a fund—that an investment adviser or its ailiate creates to pool money from multiple investors.
Investment companies vary significantly in terms of size, number and type of investors, holding periods,
34 See NASAA 2023 Annual Report at p. 5, supra n. 9.
35 Id. at p. 3.
36 See 15 U.S.C. §§ 80b-2(a)(30) and 80b-3(b)(3).
37 See 15 U.S.C. § 80b-2(a)(11)(G).
38 See 17 C.F.R. § 275.202(a)(11)(G)-1.
39 These advisers are exempt if their only clients are insurance companies. 15 U.S.C. § 80b-3(b)(2).
40 Charitable Organization Advisers are exempt if they (1) are registered as or work for a charitable organization and (2) provide
investment advice only to charitable organizations, funds not defined as investment companies, trusts, or donative instruments,
or trust beneficiaries. 15 U.S.C. § 80b-3(b)(4).
41 15 U.S.C. § 80b-3(b)(7).
42 15 U.S.C. § 80b-3(b)(8).
43 Commodity trading advisors are exempt if they are registered with the Commodity Futures Trading Commission (CFTC) as
such and whose business does not consist primarily of acting as an investment adviser to investment companies or business
development companies. 15 U.S.C. § 80b-3(b)(6)(A). A commodity trading advisor is also exempt if it is registered with the CFTC
as such and advises a private fund. 15 U.S.C. § 80b-3(b)(6)(B).
7
2024 ◆ Investment Adviser Risk Assessment
and investment strategy.
44
An investment company is subject to the regulatory regime established by the
Investment Company Act of 1940 (Company Act) and is required to register with the SEC, unless it qualifies
for an exemption. There are four categories of investment companies:
45
open-end investment companies,
46
closed-end investment companies,
47
unit investment trusts (UITs),
48
and face amount certificate
companies.
49
Many registered open-end investment companies (e.g., mutual funds or exchange-traded
funds) are subject to AML/CFT obligations under the BSA and its implementing regulations.
50
However, not all companies that issue securities and are primarily engaged in the business of investing
in securities are considered “investment companies” as defined in the Company Act. Some are excluded
from the definition of “investment company,” such as private funds, and are therefore not regulated as
investment companies (or required to register as such) under the federal securities laws.
SEC-Registered Investment Companies. In addition to filing initial registration forms, registered
investment companies must periodically file certain SEC and shareholder reports, meet minimum capital
requirements, and file certain notices or pay fees to state regulators.
51
In addition, Section 13 of the
Securities Exchange Act of 1934 (Exchange Act) requires investment managers who directly or indirectly
manage discretionary accounts that hold certain publicly-traded equity securities to file reports if they
own more than five percent of a voting class of an equity security (Schedules 13D and 13G),
52
as well as
quarterly reports on certain investment holdings (Form 13F). According to the Investment Adviser
44 A few common types of funds include mutual funds, exchange-traded funds, hedge funds, private equity funds, and venture
capital funds. See SEC Capital Raising Glossary, https://www.sec.gov/education/glossary/jargon-z#IC.
45 See 15 U.S.C. §§ 80a-4, 80a-5(a).
46 An open-end fund continuously pools funds and invests the money in various asset classes. Open-end funds can continuously
oer shares to new investors. A registered open-end fund may be structured as a mutual fund, in which case its shares do not
trade on a secondary market, or an exchange-traded fund, in which case the fund’s shares will trade on a registered exchange.
The shares are priced daily based on the net asset value (NAV) of the fund’s holdings. Investors can sell their shares back to the
fund (mutual fund) or into the market (exchange traded fund) if they want to redeem them.
47 A closed-end fund invests funds raised in its initial public oering in to invest in various asset classes. It does not continually oer
new shares to investors, but a registered closed-end fund’s shares can trade on a secondary market, such as the New York Stock
Exchange or the NASDAQ Stock Market. The shares are priced continuously, and may trade at a premium or discount to their NAV.
The closed-end fund is not required to buy back shares from investors seeking to redeem their shares.
48 A UIT invests the money raised from a one-time public oering in a generally fixed portfolio of stocks, bonds, or other securities.
A UIT does not actively trade its investment portfolio but buys a relatively fixed portfolio of securities and holds them with little or
no change for the life of the UIT. A UIT will terminate and dissolve on a date that is specified at the time the UIT is created.
49 Face-amount certificate companies are investment companies that are engaged or propose to engage in the business of issuing face-
amount certificates of the installment type, or which have been engaged in such business and have any such certificates outstanding.
50 See 31 C.F.R. § 1010.100(gg) and 31 C.F.R. § 1024. As used in this risk assessment, “mutual fund” has the same definition as in
FinCEN’s regulations, and refers to an “investment company” (as the term is defined in Section 3 of the Investment Company Act
(15 U.S.C. 80a–3)) that is an “open-end company” (as that term is defined in Section 5 of the Investment Company Act (15 U.S.C.
80a–5)) that is registered or is required to register with the SEC under Section 8 of the Investment Company Act (15 U.S.C. 80a–8).
See 31 C.F.R. § 1010.100(gg). Exchange-traded funds (ETFs) are a type of exchange-traded investment product that must register
with the SEC under the Investment Company Act and are generally organized as either an open-end company (“open-end fund”)
or unit investment trust. The SEC’s ETF Rule (rule 6c-11 under the Investment Company Act), issued in 2019, clarified ETFs are
issuing “redeemable securit[ies]” and are generally “regulated as open-end funds within the meaning of Section 5(a)(1) of the
[Investment Company] Act.” FinCEN’s definition of a mutual fund under 1010.100(gg) applies to an ETF that is registered as an
“open-end company” (as the term is defined in Section 5 of the Investment Company Act).
51 See SEC, Investment Company Registration and Regulation Package, https://www.sec.gov/investment/fast-answers/
divisionsinvestmentinvcoreg121504htm.html#P52_4641.
52 See SEC, Exchange Act Sections 13(d) and 13(g) and Regulation 13D-G Beneficial Ownership Reporting, https://www.sec.gov/corpfin/
divisionscorpfinguidancereg13d-interphtm.
2024 ◆ Investment Adviser Risk Assessment
8
Association, there were approximately 25,000 registered investment companies that held approximately
$37 trillion in AUM as of 2022.
53
Exemptions from SEC Registration. Section 3(c) of the Company Act excludes certain issuers from the
definition of investment company. Many companies, including many hedge funds and private equity funds,
rely on one of the exclusions from the definition of investment company set forth in Section 3(c)(1) and
Section 3(c)(7) of the Company Act.
54
However, registered investment companies can pursue investment
strategies similar to hedge and private equity funds, although with additional leverage and liquidity
restrictions.
55
• Private Funds. A private fund is defined as an issuer that would be an investment company, as defined
in section 3 of the Company Act, but for section 3(c)(1) or 3(c)(7) of the Company Act.
56
Section 3(c)(1)
provides an exclusion from the definition of “investment company” for any issuer whose outstanding
securities (other than short-term paper) are beneficially owned by not more than 100 persons, or in the case
of a qualifying venture capital fund 250 persons, and which is not making and does not presently propose
to make a public oering of its securities. Section 3(c)(7) provides an exclusion from the definition of
“investment company” for any issuer, the outstanding securities of which are owned exclusively by persons
who, at the time of acquisition of such securities, are qualified purchasers, and which is not making and
does not at the time propose to make a public oering.
57
• According to the SEC, based on data from RIAs, as of Q4 2022, there were approximately 43,500 private
funds holding approximately $20 trillion AUM and 3,800 advisers
58
advising these funds.
59
The SEC noted
that between 2017 and 2022, there had been a 70 percent increase in AUM managed by advisers to
private funds.
60
While the main oice of 90 percent of these advisers to private funds are located in the
United States, only 50 percent of the private funds that they advise are domiciled in the United States.
Approximately 47 percent of such private funds are domiciled abroad (including Cayman Islands 32 percent,
Ireland 5 percent, Luxembourg 4 percent).
61
U.S. investment advisers structure private funds in a variety of ways, taking into account many factors,
including investor base and investment strategy. One possible structure may be the following: A U.S.
investment adviser may sponsor oshore private funds to pool capital from multiple foreign investors, as
well as certain tax-exempt U.S. investors. Oshore private funds may be feeder funds, used to pool these
foreign, tax-exempt investments and move the combined value to another private fund, known as a master
fund (generally by acquiring interests in the master fund). Oshore private funds may also serve as master
funds. The master fund then further pools this capital with investments from taxable U.S. investors (either
directly or indirectly through a U.S.-based feeder fund) and implements the investment strategy of the IA.
53 Investment Adviser Association Snapshot, pp. 32-33, supra n. 22.
54 See 15 U.S.C. § 80b-2(a)(29).
55 For example, Bridgewater Associates is an RIA that manages over $100 billion for large institutional investors and pursues
multiple investment strategies.
56 See supra n. 54.
57 The term “qualified purchaser” is an investor that meets certain financial standards as defined in section 2(a)(51) of the Company
Act (15 U.S.C. § 80a-2(a)(51)). For example, an individual may be a qualified purchaser if the investor owns $5 million or more in
investments,and an entity may qualify if it owns and invests on a discretionary basis at least $25 million in investments.
58 These include only RIAs with at least $150 million in private fund AUM, and do not include RIAs with less than $150 million
in private fund U.S. AUM, ERAs, or state-registered IAs. These advisers are not required to file Form PF, but report general
information about the private funds they manage on Form ADV.
59 See 2022 Q4 Private Fund Statistics, supra n. 4.
60 See SEC 2022 Examination Priorities, p. 15, https://www.sec.gov/files/2022-exam-priorities.pdf.
61 See 2022 Q4 Private Fund Statistics, supra n. 4.
9
2024 ◆ Investment Adviser Risk Assessment
While foreign persons may invest in U.S.-based funds directly, instead of through oshore funds, there is a
disincentive to do so, as domestic funds may lead to U.S. tax consequences for investors.
Other exemptions to registration under the Company Act are provided for certain of the following:
62
government agencies and their instruments; issuers primarily doing business other than investing or trading in
securities; excluded issuers such as brokers, charitable organizations, pension plans, and church plans; issuers
located in U.S. possessions that primarily conduct business in those jurisdictions; RBICs;
63
and SBICs.
64
Example: Hedge Fund Structure
A “hedge fund” is not a legal classification, but rather is a description of a private fund that pursues
a certain investment strategy and is usually exempt from registration under the Company Act. Many
hedge funds seek to profit by using leverage (i.e., borrowing to increase investment exposure, which also
increases risk), short-selling (which is an important service oered by prime brokers to hedge funds), and
other speculative investment practices. Hedge funds typically charge both management fees (from 1 to 2
percent of AUM, payable to the investment adviser), and then performance fees (or incentive allocations),
which are typically 20 percent of the profits and payable to the fund’s sponsor (oen an ailiate of the
investment adviser). Below is an example of the relationships among the actual investment vehicle (the
hedge fund) and its investors (or limited partners), sponsor (or general partner), investment adviser,
custodian, prime broker, and other professional services providers.
62 See generally 15 U.S.C. § 80a-3(b), 3(c), and 6 for exemptions under the Company Act.
63 RBICs are licensed and regulated by the U.S. Department of Agriculture. They are privately-owned investment funds that invest in
qualifying small businesses, primarily in rural areas.
64 SBICs are licensed and regulated by the Small Business Administration. They are privately-owned investment funds that invest in
qualifying small businesses.
Investors
(e.g., Limited Partners)
Sponsor
(e.g., General Partner)
Board of Directors
(sometimes)
Registrar and
Transfer Agent
Legal Adviser
Custodian
Investment
Advisers
Investment
Manager
Prime Broker
(s)
(or asset custodians)
Executing
Brokers
Auditors Administrators
2024 ◆ Investment Adviser Risk Assessment
10
Example: Private Equity Fund Structure
A private equity fund is a type of private fund that is managed and advised by a private equity firm, which
may be an investment adviser. Private equity funds pursue a variety of investment strategies (for example,
buyout, growth equity) and do not oer investors redemption rights in the ordinary course. A typical
investment strategy undertaken by a private equity fund is to take a controlling interest in a portfolio
company and engage actively in the management and direction of the business to increase its value. Some
private equity funds may specialize in making minority investments in fast-growing businesses or startups.
Similar to hedge funds, private equity fund managers charge a management fee (one to two percent of
committed or invested capital), and receive performance-based compensation. The performance-based
compensation is generally approximately 20 percent of profits from investments, and it may be referred to
as “carried interest” or an “incentive allocation.”
The chart above is an example that includes oshore investment and domestic investment funds. This is for illustrative
purposes only as funds may be structured dierently and it is not unique to private equity funds.
LPs
(U.S. Taxable
Investors and Certain
Super Tax Exempts)
Buyout
Fund I
Onshore, L.P.,
a Delaware limited
partnership
Top Holding Company
for Port. Co. A
Port. Co. A
Buyout
Fund I Blocker
LLC,
a [Delaware //
Cayman Islands] limited
liability company
Buyout
Fund I GP, L.P.
(the General Partner), a
Delaware limited partnership
LPs (Non-U.S. Investors
and U.S. Tax
Exempts)
LPs
(Non-U.S. Inves-
tors and U.S. Tax
Exempts)
#
1
#
2
#
3
#
4
#
5
#
6
Buyout
Fund I
Oshore, L.P.,
a Cayman Islands limited
partnership
•
Buyout Management
Company, L.P., the investment
adviser, would enter into an
investment management
agreement with both funds
(entities #2 and #3). The
investment adviser is not
pictured for simplicity.
•
The investment management
agreement authorizes the
investment adviser to act
on behalf of the funds, and
it usually lays out the fees
the funds will pay to the
investment adviser.
•
The investment adviser and
the general partner (entity
#1) act on behalf of the funds
(entities #2 and #3) and serve
as the nerve center for the fund
structure.
•
The day-to-day operations
are typically carried out by the
investment adviser. That entity
is usually the employer and
enters into various contracts,
such as lease agreements for
oice space.
11
2024 ◆ Investment Adviser Risk Assessment
iii) Other Key Participants in Investment Advisory Activities
Fund Administrators. These are third-party entities that provide valuation, administrative, and other
services to a fund and its investors. These services include calculating fees, maintaining books and records,
and handling subscriptions and redemptions.
65
Many fund administrators also conduct due diligence on
potential investors and may implement AML/CFT requirements (where required by the fund’s domestic
law) or voluntary AML/CFT programs on behalf of the fund. Some large financial institutions have in-house
fund administrators that service their own funds as well as well external funds; but other administrators are
independent entities based outside of the United States (for instance, the Cayman Islands and Ireland are
popular jurisdictions for fund administration activities).
Aggregators/Feeders. These are individuals or entities that help consolidate investments from high-net
worth individuals or institutional investors, typically through a broker-dealer, for placement into a private
fund that the investors may not be able to access on their own because they do not meet asset or income
requirements to invest in private funds, do not otherwise have relationships with private fund advisers, or
because they wish to avoid having to disclose their identities. Aggregators may be registered as investment
advisers, broker-dealers, or other types of financial entities, or may be unregistered.
Prime Brokers. A prime broker is a bank or broker-dealer that oers services to large institutional clients,
family oices, or hedge funds. These services include the execution of trades, settlement, financing,
(including margin lending), access to research and management meetings, and custody.
66
An adviser
can have more than one prime broker, and a fund is not obligated to route all of its business through the
prime broker(s) that it has (e.g., the fund may execute a purchase of shares “away” at another broker and
then have the shares that it purchased through another broker be delivered to one of its prime brokers to
hold those shares in custody).
67
Because prime brokers are banks or broker-dealers, they are subject to
comprehensive AML/CFT obligations, either under the BSA and its implementing regulations, or in the case
of prime brokers operating outside of the United States
68
, similar foreign AML/CFT regimes, but the eective
implementation of these AML/CFT regimes may vary by jurisdiction.
Qualified Custodians. As discussed further below, Rule 206(4)-2 (the Custody Rule) under the Advisers
Act requires RIAs that have custody of client funds or securities generally to maintain those funds and
securities with a “qualified custodian”, defined primarily to encompass BSA-defined financial institutions.
69
Qualified custodians can be banks, registered broker-dealers, futures commission merchants, or certain
65 According to the Investment Adviser Association, as of 2022, 69 percent of private funds report using a third-party administrator
(86 percent for hedge funds, 60 percent for private equity funds). Investment Adviser Association Snapshot, p. 68, supra n. 22.
66 The SEC has explained that an investment adviser has a duty with respect to “best execution” of a client’s transactions where the
adviser has the responsibility to select broker-dealers to execute client trades (typically in the case of discretionary accounts).
See Regulation Best Interest: The Broker-Dealer Standard of Conduct, Final Rule, 84 Fed. Reg. 33318, 33412, (Jul. 12, 2019). In meeting
this obligation, an adviser must seek to obtain the execution of transactions for each of its clients such that the client’s total cost
or proceeds in each transaction are the most favorable under the circumstances.
67 According to the Investment Adviser Association, only 13 percent of private funds use a prime broker. This is down from 24
percent in 2012, and due to the significant increase in the number of private equity funds, which do not need prime brokering
services, as a share of private funds overall. Investment Adviser Association Snapshot, p.68, supra n. 22. See also Interpretive
Release Concerning the Scope of Section 28(e) of the Securities Exchange Act of 1934 and Related Matters, Exchange Act Rel. No. 23170
(Apr. 28, 1986); see also Commission Guidance Regarding Client Commission Practices under Section 28(e) of the Securities Exchange Act
of 1934, Exchange Act Rel. No. 54165 (Jul. 18, 2006).
68 See NASDAQ, Glossary of Stock Market Terms, https://www.nasdaq.com/glossary/p/prime-broker.
69 17 C.F.R. § 275.206(4)-2. The SEC recently proposed amendments to the Custody Rule. See SEC, Safeguarding Advisory Client Assets,
Investment Advisers Act Release No.6240 (Feb. 15, 2023), 88 Fed. Reg. 14672 (Mar. 9, 2023).
2024 ◆ Investment Adviser Risk Assessment
12
foreign entities. As of 2022, 94 percent of private funds use a qualified custodian.
70
Qualified custodians
are generally subject to comprehensive AML/CFT obligations, either under the BSA and its implementing
regulations or in the case of qualified custodians operating outside of the United States, similar foreign
AML/CFT regimes
71
, but the eective implementation of these AML/CFT regimes varies by jurisdiction.
General Partner (GP). A GP is an individual or an entity—typically ailiated with the fund’s adviser—that
raises money from limited partners (LPs) for a private fund organized as a limited partnership and that both
invests in and manages the fund.
72
A fund that is organized using a dierent corporate structure, such as a
limited liability company (LLC), has a managing member or other manager under applicable state law and
governing documents of the fund instead of a general partner.
Limited Partner (LP). An LP is an investor who commits capital to a private fund.
73
Unlike a GP, an LP’s
participation in the fund’s investment activities is restricted (i.e., the LP generally lacks investment
discretion with respect to how the fund uses the capital that it receives), and the LPs personal liability for
fund debt is generally limited to the amount of money that the LP contributed or committed to contribute
to the private fund. The relationship of an LP to the fund and the GP is governed by a limited partnership
agreement. For a fund that is organized as an LLC, the investor is referred to as a “member” under
applicable state law and the governing documents of the fund, and the investment adviser (or its ailiate)
is typically referred to as the “manager” or “managing member.”
B. Investment Adviser Regulatory Framework
Laws and Regulations. The Advisers Act forms, along with its implementing rules and regulations, the
primary framework governing investment advisory activity (as well as certain aspects of other activities
undertaken by investment advisers), along with other federal securities laws and their implementing rules
and regulations, such as the Company Act, the Securities Act of 1933 (Securities Act) and the Exchange
Act.
74
Since the Advisers Act was amended in 1996 and 2010, generally only investment advisers who have
at least $100 million AUM or advise a registered investment company may register with the SEC.
75
Other
investment advisers typically register with the state in which the investment adviser (IA) maintains its
principal oice and place of business. Some of the key Advisers Act implementing regulations relevant to
this risk assessment are summarized below:
• Custody Rule. As discussed above, the Custody Rule,
76
which generally requires that client securities
and funds over which an RIA has custody be held at a “qualified custodian” (which may be a financial
institution that is subject to U.S. AML/CFT obligations but also can be a foreign financial institution subject
to comparable AML/CFT obligations), is intended to protect advisory clients from loss, misuse, the or
misappropriation by, and the insolvency or financial reverses of, RIAs. The qualified custodian either
maintains client funds and securities in a separate account for each client under that client’s name, or in
accounts that contain only client funds and securities under the name of the investment adviser as agent or
trustee for clients.
70 See Investment Adviser Association Snapshot, p. 68, supra n. 22.
71 See 17 C.F.R. § 275.206(4)-2 (d)(6) (defining qualified custodian).
72 SEC, Capital Raising Glossary, https://www.sec.gov/education/glossary/jargon-z#GP.
73 Id., https://www.sec.gov/education/glossary/jargon-z#LP.
74 See SEC, Division of Investment Management, Laws and Regulations, https://www.sec.gov/investment/laws-and-rules.
75 Investment advisers with more than $100 million assets under management may register with the SEC, and investment advisers
with more than $110 million in assets under management must register with the SEC, unless eligible for an exception. See 17
C.F.R. § 275.203A-1.
76 17 C.F.R.§ 275.206(4)-2. The SEC recently proposed amendments to the Custody Rule. See supra n. 69.
13
2024 ◆ Investment Adviser Risk Assessment
• Compliance Rule. Under the Compliance Rule, an RIA must adopt and implement written policies and
procedures reasonably designed to prevent violations of the Advisers Act and its implementing rules
and regulations.
77
These policies and procedures should take into consideration the nature of that firm’s
operations and should be designed to prevent, detect, and promptly correct any violations promptly.
The Compliance Rule also requires each RIA to review its policies and procedures no less frequently than
annually to determine their adequacy and the eectiveness of their implementation. The review should
consider any compliance matters that arose during the previous year, any changes in the business activities
of the RIA or its ailiates, and any changes in the applicable laws or regulations. Finally, the Compliance
Rule requires each RIA to designate a chief compliance oicer to administer its compliance policies and
procedures.
• Books and Records Rule. RIAs are required to make and keep certain books and records relating to their IA
business.
78
These include:
financial and accounting records;
records that pertain to providing investment advice and transactions in client accounts with respect to
such advice;
records that document the RIA’s authority to conduct business in client accounts;
advertising and performance records;
records related to the Code of Ethics Rule;
records regarding the maintenance and delivery by the RIA of written disclosure documents and disclosure
documents provided by certain solicitors who seek clients on the RIA’s behalf; and
policies and procedures adopted and implemented under the Compliance Rule, including any
documentation prepared in the course of the RIA’s annual review.
Some RIAs, such as those that custody client funds or provide supervisory or management services, are
required to maintain additional records.
Reporting Requirements: Form ADV and Form PF. Generally, RIAs, state-registered investment advisers,
and ERAs are required to file a Form ADV with the SEC, the relevant state authority, or both; the
submissions are publicly available.
79
This form collects identifying information about the adviser, such as
contact information; registration type and status; controlling persons, owners, and executive oicers; and
types of services oered. The questions about information related to clients include the total number of
clients, percentage of clients that are non-U.S. persons, a count of each type of client (e.g., high-net-worth
individuals, charitable organizations, pension, and profit-sharing plans), the qualified custodians managing
the underlying assets for each individual fund, and their corresponding amount of regulatory AUM.
Additional supplements to Form ADV are required depending on the type of investment adviser (RIA vs.
state-registered) and types of activities (e.g., managing private funds). For instance, all RIAs who advise
private funds and ERAs complete Section 7.B.(1) (Private Fund Reporting) of Schedule D of Form ADV
for each private fund they advise, which collects certain information regarding the private fund and its
service providers, including the name of the auditor, prime broker, custodian, and administrator. ERAs
are required to answer fewer client-related questionsand are not required to provide as much information
about the services they provide.
77 17 C.F.R.§ 275.206(4)-7.
78 17 C.F.R.§ 275.204-2.
79 See 17 C.F.R. §§ 275.203-1 & 204-4; see also supra n. 16.
2024 ◆ Investment Adviser Risk Assessment
14
While Form ADV requires investment advisers to answer general questions relating to clients, advisers are
not required to disclose in Form ADV the names of individual clients (in many cases) or investors. According
to the FBI, the lack of this information has presented challenges for law enforcement investigations, as law
enforcement may have to obtain client identity information elsewhere, which oen requires additional
time and investigative resources.
RIAs that manage one or more private funds are also required to file Form PF,
80
but the information
reported varies based on the size as well as classification of the private fund.
81
Form PF collects
information about the percentage of the funds’ equity that is beneficially owned by dierent types of
clients such as broker-dealers, pension plans, individuals who are U.S. persons, and individuals who are
non-U.S. persons (but not investor names). For non-U.S. persons, Form PF requires that the RIA identify
the percentage of investor assets for which beneficial ownership information is not known and cannot
reasonably be obtained because the beneficial interest is held through a chain involving one or more third-
party intermediaries. As of Q4 2022, private fund advisers reporting on Form PF noted that the beneficial
ownership of their private funds included $375 billion by non-U.S. individuals, and that they could not
reasonably ascertain the beneficial owners for $284 billion AUM attributed to non-U.S. investors.
82
Form PF must be submitted by any RIA that (1) manages one or more private funds, and (2) collectively
(e.g., with its ailiated entities) had at least $150 million in private fund AUM as of the last day of its most
recently completed fiscal year.
83
Some private fund advisers that are required to report on Form ADV are
not required to file Form PF (for example, ERAs, which includes advisers to venture capital funds as well as
advisers with less than $150 million in private fund AUM).
84
Unlike Form ADV, Form PF is non-public; it is
provided to both the SEC and the Financial Stability Oversight Council (FSOC) and is intended to enhance
investor protection and provide the FSOC with data for use in assessing systemic risk.
85
Fiduciary Obligation. An investment adviser’s fiduciary duty to its clients under the Advisers Act applies
to all persons or entities who meet the definition of “investment adviser” regardless of whether the
adviser is registered.
86
The fiduciary duty comprises a duty of care and a duty of loyalty. The investment
adviser must always serve the best interest of its client, which is a fund in the case of a fund adviser, and
not subordinate its client’s interest to its own. In other words, the adviser cannot place its own interests
ahead of the interests of its client. This combination of care and loyalty been characterized as requiring the
investment adviser to act in the “best interest” of its client at all times.
87
This includes a duty of undivided
loyalty and utmost good faith, and the avoidance of conflicts of interests with their client, or full disclosure
of the conflict. Investment advisers must employ reasonable care to avoid misleading clients and
investment advisers have a fiduciary duty to provide full and fair disclosure of all material facts to clients
80 See 15 U.S.C. § 80b-4(b).
81 Reporting Form for Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading
Advisers. Form PF is available at https://www.sec.gov/files/formpf.pdf. For example, “large hedge fund advisers” and “large
liquidity fund advisers” generally submit portions of Form PF quarterly, whereas other advisers generally submit portions of Form
PF annually.
82 See 2022 Q4 Private Fund Statistics, supra n. 4.
83 See 17 C.F.R. § 275.204(b)-1.
84 Id.
85 See 15 U.S.C, § 80b-4(b)(7).
86 See SEC, Commission Interpretation Regarding Standard of Conduct for Investment Advisers, Investment Advisers Act Release No. 5248
(Jun. 5, 2019), 84 Fed. Reg. 33669 (Jul. 12, 2019).
87 Id.
15
2024 ◆ Investment Adviser Risk Assessment
and prospective clients, and to avoid misleading clients.
88
Generally, facts are “material” if a reasonable
investor would consider them to be important. Departure from this fiduciary standard may constitute
fraud upon clients.
Examination. RIAs are subject to examination by the SEC’s Division of Examinations. The SEC’s
examination program is a risk-based program. An entity may be selected for examination for any number
of reasons including, but not limited to, a statutory mandate that requires the Commission to examine the
entity; the entity’s risk profile; a tip, complaint, or referral; or a review of a particular compliance risk area.
89
The scope of an examination will depend on the entity’s business model, associated risks, and the reason
for conducting the examination. An examination typically includes a review of the entity’s operations,
disclosures, conflicts of interest, and compliance practices with respect to certain core areas, including
but not limited to, custody and safekeeping of client assets, valuation, portfolio management, fees and
expenses, and brokerage and best execution. During an examination, the sta requests documents and
information applicable to these core areas to gain an understanding of the entity’s conflicts of interest and
its risks and corresponding controls, as well as to test the eectiveness of the entity’s compliance policies
and procedures for monitoring, mitigating, and managing such risks and conflicts of interest.
Within the Division of Examinations, the Investment Adviser/Investment Company Examination Program
completed more than 2,300 examinations of RIAs in FY22.
90
Examinations are confidential, and may result
in one of three outcomes: (1) a finding of no further action, (2) a deficiency letter, and/or (3) a referral to the
SEC’s Division of Enforcement, other regulators, or criminal authorities.
Enforcement. The SEC Division of Enforcement sta conducts investigations into possible violations of
the federal securities laws, and litigates the SEC’s enforcement proceedings in the federal courts and in
administrative courts.
91
In FY 2021, the SEC filed a total of 697 enforcement actions, of which 159, or 23
percent, were against RIAs or registered investment companies.
92
This reflects the Division’s focus on fraud
and other misconduct by financial professionals in this space.
93
88 Id.
89 See generally SEC, Information for Entities Subject to Examination or Inspection by the Securities and Exchange Commission (Mar. 2023),
https://www.sec.gov/files/exam-brochure.pdf.
90 See SEC 2022 Examination Priorities, https://www.sec.gov/files/2022-exam-priorities.pdf.
91 See SEC, About the Division of Enforcement, https://www.sec.gov/enforce/Article/enforce-about.
92 SEC, Press Release, https://www.sec.gov/news/press-release/2021-238.
93 SEC, Addendum to Division of Enforcement Press Release Fiscal Year 2021, https://www.sec.gov/files/2021-238-addendum.pdf.
2024 ◆ Investment Adviser Risk Assessment
16
3. ILLICIT FINANCE RISKS
A. Threats
This risk assessment identifies four main categories of illicit finance activity involving the investment
adviser sector in the United States. First, in some instances, the investment adviser industry has served
as an entry point into the U.S. market for illicit proceeds associated with foreign corruption, fraud, and tax
evasion. Second, certain advisers manage billions of dollars ultimately controlled by sanctioned entities
including Russian oligarchs and their associates who help facilitate Russia’s illegal and unprovoked war
of aggression against Ukraine. Third, certain RIAs and ERAs and the private funds that they advise are
also being used by foreign states, most notably the People’s Republic of China (PRC) and Russia, to access
certain technology and services with long-term national security implications through investments in early-
stage companies. Fourth, certain investment advisers have stolen client assets, including through fraud.
To inform and support this risk assessment, Treasury conducted an analysis of available information,
including select BSA reports filed between 2013 and 2021 that were associated with RIAs and ERAs.
94
That
analysis found that 15.4 percent of RIAs and ERAs were associated with or referenced in at least one SAR
(i.e., they were identified either as a subject or in the narrative section of the SAR) during this time. Further,
the number of SAR filings associated with RIAs or ERA increased by approximately 400 percent between
2013 and 2021—a disproportionately higher increase than the overall increase in SAR filings, which was
approximately 140 percent.
95
The most common activity types of suspicious activity identified in the investment adviser-related SARs
were (in order of number of filings) (1) other suspicious activities, (2) securities/futures/options, (3) money
laundering, and (4) fraud. In federal criminal cases involving an investment adviser as a defendant, the
most common oense charged by the U.S. government was fraud. The remainder of this section contains
descriptions of categories of threats as well as case studies and examples.
96
i) Laundering of Illicit Proceeds Through Investment Advisers and Private Funds
Private funds can be an attractive entry point for illicit proceeds because they present a possibility of higher
returns on capital (as compared to other investment opportunities) in addition to anonymity. This is in
contrast to other, more costly forms of money laundering, such as trade-based money laundering or informal
value transfer systems. Like other types of pooled accounts or legal entities, they can be used to obscure
the names of individual investors or beneficial owners so that the investment fund is identified as the owner
of a particular asset. However, there are a wide variety of private funds, and some have characteristics that
have traditionally been seen as less attractive to money launderers. For instance, some hedge funds may
have lock-up periods of more than a year while venture capital funds and private equity funds generally do
not permit any withdrawals of capital aer initial investment in the fund and have longer lock-up periods due
to the time it takes for the private companies in which those funds invest to go public or otherwise provide
an exit strategy for these funds. While these restrictions may deter criminals who need immediate access to
illicit proceeds, they are unlikely to deter illicit actors who seek stable returns, have a medium- to long-term
investment horizon, and do not need immediate access to capital.
94 Information derived from an analysis of select BSA reporting.
95 From a FinCEN review of the total number of SARs filed between 2013 and 2021.
96 These examples demonstrate that investment advisers and the funds they advise have been implicated in certain financial
crimes, and show the scope of potential benefit from imposing certain AML/CFT obligations on RIAs and ERAs.
17
2024 ◆ Investment Adviser Risk Assessment
In federal criminal cases involving money laundering charges reviewed in this assessment that involved an
investment adviser, former adviser, or individual who held themselves out as an adviser, the most common
predicate crimes charged were foreign corruption, fraud, and tax evasion. The mechanisms for laundering illicit
proceeds through investment advisers and private funds vary, but generally consist of obscuring the illicit origins
of funds and pooling them with legitimate funds to invest in U.S. securities, real estate, or other assets.
In some instances, the investment adviser or other financial professional may form a private fund through
which illicit proceeds can be transferred as part of a money laundering scheme. While past examples have
featured investment advisers complicit in illegal activity, an investment adviser may be unwittingly complicit
in this type of activity if they are not required to understand the origin of funds or nature of their owner.
A client wishing to launder money could ask an investment adviser to establish a private fund to certain
specifications without informing the adviser of the client’s broader scheme. Without AML/CFT requirements
for investment advisers, the investment adviser might not have any obligation to evaluate potential money
laundering or other illicit finance activity risks and could participate without inquiring further. In addition,
without any reporting obligation for investment advisers, law enforcement would have to rely on information
about investment advisers’ clients as reported by banks, broker-dealers, and other financial institutions that
do have reporting obligations but lack direct access to the underlying advisory client.
• In January 2021, the Department of Justice announced the settlement of a civil forfeiture action against
assets of Sefira Capital LLC (Sefira) and 31 subsidiary corporations, which own high-end commercial
and residential real estate throughout the United States.
97
According to the complaint, the defendant
corporations allegedly accepted millions of dollars of narcotics proceeds laundered through the shadow
financial system commonly known as the Black Market Peso Exchange (BMPE), for investment in various real
estate ventures. Sefira is a Florida-based boutique investment company that has raised over $100 million in
capital from various investors (Sefira Investors) to invest in real estate projects primarily in the Southeastern
United States.
98
From 2016 to 2019, Sefira or its subsidiaries received millions of dollars in criminal proceeds
from certain Sefira Investors as part of an eort by drug traicking organizations and others to launder the
criminal proceeds through the BMPE.
• In November 2019, Mark Scott, a former equity partner at the law firm Locke Lord LLP, was convicted of
one count of conspiracy to commit money laundering and one count of conspiracy to commit bank fraud.
According to the Department of Justice, beginning in 2016, Scott established fake private equity investment
funds in the British Virgin Islands, known as the “Fenero Funds” to launder approximately $400 million in
proceeds of a large international pyramid fraud scheme called OneCoin. Scott claimed that the investments
were from “wealthy European families,” when in fact the money represented proceeds of the OneCoin
fraud scheme. Scott layered the money through Fenero Fund bank accounts in the Cayman Islands and the
Republic of Ireland. As part of the scheme, Scott and his co-conspirators lied to banks, including U.S. banks,
and other financial institutions, to cause those institutions to make transfers of OneCoin proceeds and
evade AML procedures.
99
In January 2024, Scott was sentenced to 10 years in prison.
100
97 Department of Justice, “Acting Manhattan U.S. Attorney Announces Settlement Of Civil Forfeiture Claims Against Over $50 Million
Laundered Through Black Market Peso Exchange,” (Jan. 12, 2021), https://www.justice.gov/usao-sdny/pr/acting-manhattan-us-
attorney-announces-settlement-civil-forfeiture-claims-against-over.
98 Id.
99 Department of Justice, “Former Partner Of Locke Lord LLP Convicted In Manhattan Federal Court Of Conspiracy To Commit
Money Laundering And Bank Fraud In Connection With Scheme To Launder $400 Million Of OneCoin Fraud Proceeds,” (Nov. 21,
2019), https://www.justice.gov/usao-sdny/pr/former-partner-locke-lord-llp-convicted-manhattan-federal-court-conspiracy-
commit-money.
100 Department of Justice, “Former Law Firm Partner Sentenced To 10 Years In Prison For Laundering $400 Million Of OneCoin
Fraud Proceeds”, (Jan. 25, 2024), https://www.justice.gov/usao-sdny/pr/former-law-firm-partner-sentenced-10-years-prison-
laundering-400-million-onecoin-fraud.
2024 ◆ Investment Adviser Risk Assessment
18
• In October 2019, Frank Roberto Chatburn Ripalda (Chatburn), a dual U.S. and Ecuadorian citizen, pleaded
guilty to one count of conspiracy to commit money laundering.
101
Chatburn worked at a financial advisory
firm, Biscayne Capital, that had been registered with the SEC as an RIA.
102
The money laundering conspiracy
was related to a scheme to pay bribes to oicials of Ecuador’s state-owned and state-controlled oil company,
PetroEcuador. According to his admissions at the plea hearing, Chatburn conspired with an oil services
contractor to pay nearly $3 million in bribes to Ecuadorian oicials in an eort to obtain and retain contracts
with PetroEcuador. As a financial advisor to the contractor, Chatburn agreed to make bribe payments for the
benefit of several then-PetroEcuador oicials through the use of shell companies and bank accounts in the
United States, Panama, the Cayman Islands, Curacao, and Switzerland. To conceal the bribe payments and
to promote the scheme, Chatburn established Panamanian shell companies with Swiss bank accounts on
behalf of two then-PetroEcuador oicials. Chatburn also admitted that he conspired with a third Ecuadorian
government oicial to conceal bribe payments for the oicial from Odebrecht S.A., a Brazilian construction
conglomerate. Chatburn facilitated hiding these bribe payments by conducting the transactions through
several shell companies and bank accounts in multiple jurisdictions, including in the United States.
103
• In July 2018, U.S. law enforcement arrested two alleged participants, Matthias Krull and Gustavo Adolfo
Hernandez Frieri (Hernandez), in a billion-dollar international scheme to launder funds obtained through
embezzlement, fraud, and bribery from Venezuelan state-owned oil company Petroleos De Venezuela
S.A. (PDVSA).
104
According to the stipulated factual proer filed in connection with his plea agreement,
Hernandez conspired to launder approximately $12 million in PDVSA bribe proceeds by creating a private
fund, domiciled in the Cayman Islands, and with a U.S. bank as custodian.
105
Specifically, he admitted that
he conspired to launder $7 million in bribe payments related to a loan scheme, and $5 million in bribe
payments related to a separate currency exchange scheme, through his investment advisory firm located in
the United States. Separately, a co-conspirator in the scheme set up fraudulent bond schemes in which fake
bonds would be issued, money transferred into the private fund, and then the bonds would “default.”
106
In
August 2018, Krull pleaded guilty to one count of conspiracy to commit money laundering, and in November
2019, Hernandez, a former investment adviser, also pleaded guilty to conspiracy to commit money
laundering in connection with his role in the scheme.
107
101 Department of Justice, “Miami-Based Financial Advisor Pleads Guilty for Conspiring to Launder Money Relating To FCPA and
Ecuadorian Bribery Law Violations,” (Oct. 11, 2019), https://www.justice.gov/opa/pr/miami-based-financial-advisor-pleads-
guilty-conspiring-launder-money-relating-fcpa-and.
102 In 2016, Chatburn agreed to settle SEC charges by paying a $100,000 penalty, disgorgement of $78,924, and prejudgment
interest of $8,052. Chatburn also was barred from working as an investment adviser or with an investment company with a right
to reapply in four years and was ordered to cease and desist from committing or causing any future violations of the securities
laws. See SEC, “SEC Charges Former Miami-based Investment Adviser and Its Principals With Failure to Disclose Multiple
Conflicts of Interest to Clients,” (May 27, 2016), https://www.sec.gov/files/litigation/admin/2016/ia-4399-s.pdf; see also In Re
Administrative Proceeding, File No. 3-17263, In the Matter of Biscayne Capital International, LLC, Roberto G. Cortes, Ernesto H.
Weisson, Juan Carlos Cortes, and Frank R. Chatburn, (May 27, 2016), https://www.sec.gov/litigation/admin/2016/ia-4399.pdf.
103 Department of Justice, “Miami-Based Financial Advisor Pleads Guilty for Conspiring to Launder Money Relating To FCPA and
Ecuadorian Bribery Law Violations,” https://www.justice.gov/opa/pr/miami-based-financial-advisor-pleads-guilty-conspiring-
launder-money-relating-fcpa-and.
104 Department of Justice, “Former Swiss Bank Executive Pleads Guilty to Role in Billion-Dollar International Money Laundering
Scheme Involving Funds Embezzled from Venezuelan State-Owned Oil Company,” (Aug. 22, 2018), https://www.justice.gov/opa/
pr/former-swiss-bank-executive-pleads-guilty-role-billion-dollar-international-money-laundering; Department of Justice, “Two
Members of Billion-Dollar Venezuelan Money Laundering Scheme Arrested,” (Jul. 25, 2018), https://www.justice.gov/opa/pr/two-
members-billion-dollar-venezuelan-money-laundering-scheme-arrested.
105 Factual Proer (Dkt. 164), United States v. Hernandez, No. 18-cr-20685 (S.D. Fl. Nov. 26, 2019), https://www.justice.gov/criminal-
fraud/file/1316831/download.
106 Criminal Compl., United States v. Guruceaga (), 18-mj-3119 (S.D. Fl. Jul. 24, 2018), https://www.justice.gov/criminal-fraud/
file/1119981/download.
107 Plea Agreement (Dkt. 163), United States v. Hernandez, (S.D. Fl. Nov. 26, 2019), https://www.justice.gov/criminal-fraud/
file/1316826/download.
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2024 ◆ Investment Adviser Risk Assessment
• In September 2016, a New York-based alternative investment and hedge fund manager, Och-Zi Capital
Management Group LLC and related entities, entered into resolutions to resolve civil and criminal charges
and agreed to pay penalties to the Department of Justice and SEC of approximately $400 million in
connection with a widespread scheme involving the bribery of oicials in various countries, including
the Democratic Republic of Congo (DRC) and Libya.
108
According to the companies’ admissions to the
Department of Justice, between 2005 and 2015, Och-Zi, through its subsidiary OZ Africa Management
GP LLC, paid millions of dollars in bribes to high level oicials in the DRC to obtain preferential access to
investment opportunities in the mining sector.
109
Additionally, from 2007 to 2010, Och-Zi used a third-party
to secure investments from the Libyan Investment Authority knowing that the agent would need to pay
bribes in order to do so.
110
Och-Zi’s books and records also did not accurately describe the true purposes
for which managed investor funds were used, and the company did not have adequate internal controls to
detect or prevent the bribes.
111
• In December 2012, investment funds ailiated with Low Taek Jho (Low) laundered approximately $150
million diverted from 1Malaysia Development Berhad’s (1MDB) 2012 bond issuance into the U.S. financial
system. Low was CEO of Jynwel Capital Limited, an investment adviser to a private equity fund in Asia.
112
Through a subsidiary of Jynwel Capital Limited, Low purchased equity interests in a vehicle managed
by the Electrum Group, a private equity firm in the United States “whose oices are located in New York
and Colorado, invests in public and private companies involved in the exploration and development of
natural resources, precious metals, base metals, and oil and gas.”
113
Electrum Group, LLC is registered with
the SEC as an RIA. To conceal their origin, the funds were moved through multiple accounts owned by
dierent entities on or about the same day in an unnecessarily complex manner with no apparent business
purpose.
114
108 Department of Justice, “Och-Zi Capital Management Admits to Role in Africa Bribery Conspiracies and Agrees to Pay $213
Million Criminal Fine”, (Sep. 29, 2016,) https://www.justice.gov/opa/pr/och-zi-capital-management-admits-role-africa-bribery-
conspiracies-and-agrees-pay-213; see also SEC, Press Release, “Och-Zi Hedge Fund Settles FCPA Charges,” (Sep. 29, 2016),
https://www.sec.gov/news/press-release/2016-203. Unlike some of the other case examples in this section, this case does
not involve the movement of illicit proceeds through an adviser, but instead details how an adviser can be involved in bribing
public oicials to access investment opportunities for other clients. It is being included to demonstrate how an adviser could be
involved in illicit finance activity tied to its own investment decisions.
109 United States v. Ochs-Zi Capital Management Group, LLC (Deferred Prosecution Agreement) p.29, (E.D.N.Y. Sep. 29, 2016), https://
www.justice.gov/opa/file/899306/download.
110 Id.
111 SEC, Press Release, “Och-Zi Hedge Fund Settles FCPA Charges,” (Sep. 29, 2016), https://www.sec.gov/news/press-
release/2016-203.
112 The U.S. government has secured guilty pleas or settlements in several cases tied to the 1MDB scheme. See, e.g., Department of
Justice, “Former Goldman Sachs Investment Banker Convicted in Massive Bribery and Money Laundering Scheme,” (Apr.8, 2022),
https://www.justice.gov/usao-edny/pr/former-goldman-sachs-investment-banker-convicted-massive-bribery-and-money-
laundering. Low represented to counterparties and potential business partners that Jynwel Capital Limited was an investment
adviser to a private equity fund.
113 Verified Compl. for Forfeiture (Dkt. 3) ¶ 760, United States v. Real Property Located in London, United Kingdom Titled in the Name
of Red Mountain Global Ltd., No. 19-cv-1326, (C.D. Cal. Feb. 22, 2019), https://www.justice.gov/opa/press-release/file/1134376/
download.
114 See id. ¶ 204-12.
2024 ◆ Investment Adviser Risk Assessment
20
ii) Russian Political and Economic Elites’ Access to U.S. Investments
Investment advisers and the private funds they advise have served as an important entry point into the
U.S. financial system for wealthy Russians seeking to obscure their ownership of U.S. assets.
115
Although
many of these Russian individuals were not sanctioned by the U.S. government prior to Russia’s full-scale
invasion of Ukraine in February 2022, their wealth was sometimes associated with corruption, the of state
assets, or other illicit activity well before their designation.
A Treasury review of select BSA reporting filed between January 2019 and June 2023 identified more than
20 investment advisers located in the United States advising private funds where the adviser was identified
as having significant ties to Russian oligarch investors or Russian-linked illicit activities. This review also
identified 60 additional investment advisers located in the United States who managed private funds
in which identified Russian oligarchs have invested, although there was no indication the adviser was
engaged in any illicit activity.
According to information available to the U.S. government, oen, a member of the Russian elite or their
trusted proxy invests in a public or private U.S. company with the assistance of a wealth management
firm, which is usually located in an oshore jurisdiction such as Bermuda, the Cayman Islands, or Cyprus,
but services primarily Russian customers. The wealth management firm invests that money in dollars
through the U.S. financial system, oen into U.S. technology companies in fields including biotechnology
and artificial intelligence. The scale of these investments is significant and may include billions of dollars
invested for a single Russian oligarch. These investments are sometimes made directly by the foreign
wealth management firm, and in other instances through a U.S.-based RIA or ERA.
In other instances, funds may be routed through a consulting firm or other entity acting as an investment
adviser but not registered with or reporting to the SEC or a state regulator. For instance, on September 19,
2023, the SEC announced charges against Concord Management LLC (Concord) and its owner and principal,
Michael Matlin, for operating as unregistered investment advisers to their only client—a wealthy former
Russian oicial widely regarded as having political connections to the Russian Federation.
116
As of January
2022, Concord and Matlin allegedly managed investments for their sole client with an estimated total value
of $7.2 billion in 112 dierent private funds.
iii) Foreign State Actors That Could Use Investment Funds to Access Critical Infrastructure
or Sensitive Technologies
Some strategic nation-state competitors to the United States, most notably the PRC, may see private
funds as a back door to acquire assets of interest in the United States, such as equity stakes in companies
developing critical or emerging technologies. While there are certain transactions for which notice must
115 See FinCEN Alert, FIN-2023-Alert002, FinCEN Alert on Potential U.S. Commercial Real Estate Investments by Sanctioned Russian Elites,
Oligarchs, and Their Proxies, p. 4 (Jan. 25, 2023). In addition to Russian investors, investors tied to China and Saudi Arabia have
invested in U.S. private funds. See, e.g., The German Marshall Fund of the United States, Policy Brief: An Eective American Regime
to Counter Illicit Finance (Dec. 2018), https://securingdemocracy.gmfus.org/wp-content/uploads/2018/12/An-Eective-American-
Regime-to-Counter-Illicit-Finance.pdf.
116 In March 2022, the United Kingdom and the European Union sanctioned Matlin and Concord’s client and the client’s assets
were subsequently frozen. The SEC's complaint alleges that, a month prior, in February 2022, Concord and Matlin assisted the
client in his attempts to redeem investments and/or sell his securities portfolio. See SEC, Press Release 2023-186, SEC Charges
New York Firm Concord Management and Owner with Acting as Unregistered Investment Advisers to Billionaire Former Russian
Oicial (Sep. 19, 2023), https://www.sec.gov/news/press-release/2023-186.
21
2024 ◆ Investment Adviser Risk Assessment
be provided to the interagency Committee on Foreign Investment in the United States (CFIUS)
117
, most
transactions reviewed by CFIUS are filed voluntarily.
118
Where transactions are not voluntarily submitted
to CFIUS for review, CFIUS agencies actively work to identify those transactions, including whether such
transactions may be a covered transaction under the CFIUS regulations and may raise national security
considerations, and assess whether to request that the parties file with CFIUS.
119
Foreign state-funded investment vehicles may seek to hide their involvement in foreign investments
through oshore legal entities and intermediaries in an eort to gain access to sensitive technology,
processes, or knowledge that can enhance their domestic development of microelectronics, artificial
intelligence, biotechnology and biomanufacturing, quantum computing, and advanced clean energy,
among others. These state-funded investment vehicles could persuade an investment adviser to a private
fund to grant them access to granular details about the technology or processes used by a company in
which the fund is invested, including information that a limited partner investor seeking only an economic
return may not typically request. Investment advisers are currently not required to report such suspicious
activity.
PRC. According to the FBI, the PRC government routinely conceals its ownership or control of investment
funds to disguise eorts to steal technology or knowledge and avoid notice to CFIUS.
120
According to a
report by the Oice of the U.S. Trade Representative, state-guided PRC venture capital fund activity in
the United States is motivated by the PRC’s Made in China 2025 plan and its military-civil fusion strategy,
directing investments towards developing technology with dual-use capabilities.
121
In 2016, the PRC
government explicitly endorsed the use of overseas venture capital funds to invest in “seed-based and
start-up technology,” demonstrating the link between the funds and government priorities.
122
Russia. According to information available to the U.S. government, Russian elites and government entities
are moving hundreds of millions of dollars annually through the U.S. financial system by using U.S. and
foreign venture capital firms to invest in U.S. technology companies.
• A Treasury review of select BSA reporting identified several U.S. venture capital firms with significant ties to
Russian oligarch investors that invested in firms developing emerging technologies with national security
applications. These include autonomous vehicle technology and artificial intelligence systems, as well as
contractors to the U.S. military, intelligence, and other government agencies.
• Further, according to information available to the U.S. government, the U.S.-designated, state-owned
Russian Venture Company, which is funded by the U.S.-designated Russian Direct Investment Fund, endows
117 CFIUS is an interagency committee authorized to review certain transactions involving foreign investment in the United States to
determine the eect of such transactions on the national security of the United States.
118 See Treasury, “Remarks by Assistant Secretary for Investment Security Paul Rosen at the Second Annual CFIUS Conference,”
(Sept. 14, 2023), https://home.treasury.gov/news/press-releases/jy1732.
119 Id.
120 See Hearing Before the U.S.-China Economic and Security Review Commission, p. 139, “Chinese Investments in the United
States: Impacts and Issues for Policymakers,” (Jan. 26, 2017), https://www.uscc.gov/sites/default/files/transcripts/Chinese%20
Investment%20in%20the%20United%20States%20Transcript.pdf; see also Remarks by FBI Director Christopher Wray,
“Countering Threats Posed by the Chinese Government Inside the U.S.,” (Jan. 31, 2022), https://www.fbi.gov/news/speeches/
countering-threats-posed-by-the-chinese-government-inside-the-us-wray-013122.
121 Oice of the United States Trade Representative, “Findings of the Investigation into China’s Acts, Policies, and Practices Related
to Technology Transfer, Intellectual Property, and Innovation under Section 301 of the Trade Act of 1974,” p. 14, (Mar. 22, 2018),
https://ustr.gov/sites/default/files/Section%20301%20FINAL.PDF.
122 PRC State Council, “National 13
th
Five-Year Plan for the Development of Strategic Emerging Industries,” (Nov. 29, 2016),
https://cset.georgetown.edu/publication/national-13th-five-year-plan-for-the-development-of-strategic-emerging-
industries/#:~:text=During%20the%2013th%20Five%2DYear,healthy%20economic%20and%20social%20development.
2024 ◆ Investment Adviser Risk Assessment
22
Russian seed funds to invest in emerging technology. The seed funds create a venture capital company,
oen of a similar name to the seed fund and registered outside of Russia, to invest in U.S. technology firms.
· The U.S. government has also identified instances where the leadership of certain investment firms has
attempted to remove overt ties to Russia or Russian names. Russian investors have obfuscated their
connections to Russia, including by relocating to other jurisdictions and changing their names, to continue
investing in U.S. technology companies through venture capital vehicles.
iv) Investment Advisers Defrauding Their Clients
The most common form of illicit activity involving investment advisers identified in the scope of this
assessment involves IAs defrauding their clients. Unscrupulous individuals oen use their real or perceived
status as a legitimate IA to attract clients with promises of high returns and then steal their money,
oen following a Ponzi or Ponzi-like scheme.
123
In most of the identified cases, authorities pursued civil
or criminal enforcement for violations of the federal securities laws against the IA or other associated
individuals. While they do not involve the laundering of illicit proceeds by IAs, they are being included
consistent with the methodology described at Annex 1.
• In December 2021, the founder of a New York financial advisory and investment company that had been
registered with the SEC as an investment adviser was charged with wire fraud, investment adviser fraud, and
money laundering in connection with a scheme to misappropriate more than $1 million from current and
prospective clients. As alleged in the indictment, the individual, who has been an IAR, executed a calculated
scheme in which he repeatedly lied to his current and prospective clients about putting their money into
legitimate investments, when, in reality, he stole their money to fund his lavish lifestyle. As noted in the
indictment, the victims sent multiple wire transfers to the private bank account of the advisory firm, and the
individual then misappropriated the funds into his own personal banking account, among other things.
124
• In October 2021, the SEC charged a former New Jersey broker-dealer representative and IAR with stealing
nearly $3 million from his advisory clients and brokerage customers, which he used to buy gold coins and
other precious metals and funneled to family credit card accounts that he controlled. Specifically, the
complaint alleges that from January 2016 to January 2021, the individual, who worked at a dual registrant,
transferred funds from his clients’ and customers’ accounts to pay o balances in credit card accounts
held in the names of his wife and parents. The individual also allegedly caused checks to be fraudulently
drawn on his clients’ and customers’ accounts. The complaint alleges that the individual made at least 137
fraudulent transactions and used the stolen funds to purchase gold coins and other precious metals, buy
luxury goods, and make electronic fund transfers to himself.
125
123 A Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors. See SEC, “Ponzi
Scheme”, https://www.investor.gov/protect-your-investments/fraud/types-fraud/ponzi-scheme.
124 Department of Justice, “Founder of Investment Advisory Firm Charged with Wire Fraud, Investment Adviser Fraud and Money
Laundering,” (Dec. 6, 2021), https://www.justice.gov/usao-edny/pr/founder-investment-advisory-firm-charged-wire-fraud-
investment-adviser-fraud-and-money; United States v. Slothower (Indictment) Case 2:21-cr-00602 (E.D.N.Y Dec. 21, 2021). The SEC
also filed charges against the RIA and its founder for misappropriating funds from a client and prospective client, defrauding
investors, and submitting false information on SEC filings. See SEC, Litigation Release No. 25171, SEC Charges Investment
Adviser and His Advisory Business for Misappropriating More than $1 Million from a Client and Prospective Client and Defrauding
Investors (Aug. 17, 2021), https://www.sec.gov/litigation/litreleases/lr-2517.
125 See SEC, Litigation Release No. 25251, SEC Charges Financial Adviser with Stealing Investor Funds to Pay o Credit Cards, Buy
Gold Coins (Nov. 1, 2021), https://www.sec.gov/litigation/litreleases/lr-25251; see also S.E.C. v. Welsh Complaint, Case No. 2:21-cv-
19387 (D.N.J. Oct. 28, 2021), https://www.sec.gov/files/litigation/complaints/2021/comp25251.pdf.. The Department of Justice
pursued parallel criminal charges against the same individual. See Department of Justice, “Bergen County Investment Advisor
Arrested for Stealing Millions from Clients”, (Oct. 28, 2021), https://www.justice.gov/usao-nj/pr/bergen-county-investment-
advisor-arrested-stealing-millions-clients.
23
2024 ◆ Investment Adviser Risk Assessment
• In September 2021, Jason Rhodes, the co-founder, chief investment oicer, and chief compliance oicer for
Sentinel Growth Fund Management, LLC (“Sentinel”), was sentenced to 48 months in prison for securities
fraud, wire fraud, investment adviser fraud, and conspiracy charges. Those charges relate to Rhodes’s
participation in a scheme to defraud over 25 investorsin Sentinel out of more than $25 million by lying to
the investors and using investor funds for his own personal use, and to make repayments to earlier investors
in a Ponzi-like manner.
126
• In April 2019, the SEC charged an individual and several entities he controlled with operating a Ponzi
scheme that defrauded his investment advisory clients out of $7 million. The SEC alleged that the individual
provided investment advice to school district employees, hospital employees, veterans, and neighbors,
most of whom were unsophisticated investors. According to the complaint, the individual had his own
California-registered investment adviser, and through that firm, oered clients the opportunity to invest
in tax-free “private placements” that purportedly provided quarterly dividends of about 5 percent. The
complaint alleges that, in reality, there were no private placements. The complaint alleged the individual
was simply running a Ponzi scheme by taking new investor money and using it to pay quarterly dividends
to existing investors and his personal expenses. According to the complaint, the individual also oered
investors the opportunity to invest in his farm, but investor funds in these ventures were commingled with
investments in his advisory firm and used as part of the Ponzi scheme fraud as well.
127
B. Vulnerabilities
i) Regulatory Vulnerabilities
Lack of Comprehensive and Uniform AML/CFT Obligations
“Investment advisers” presently are not included in the definition of “financial institution” under the BSA
or its implementing regulations.
128
This means that, although they have Form 8300 obligations to report
cash transactions above $10,000, investment advisers typically are not subject to most of the AML/CFT
program, recordkeeping, or reporting obligations that apply to banks, broker-dealers, and certain other
financial institutions.
129
With limited exceptions (e.g., licensed as a bank), investment advisers are not
required to maintain an AML/CFT program (consisting of internal controls, an AML/CFT oicer, independent
testing, and employee training), and do not have independent SAR filing, customer due diligence (CDD),
or customer identification program (CIP) obligations. These are key elements of AML/CFT compliance
through which an investment adviser would identify and report to law enforcement and regulators a client,
investor, or transaction that may be associated with illicit finance activity.
126 Department of Justice, “Co-Founder Of Investment Fund Sentenced To 4 Years In Prison For Defrauding Investors Of Over $25
Million”, (Sep. 1, 2021), https://www.justice.gov/usao-sdny/pr/co-founder-investment-fund-sentenced-4-years-prison-defrauding-
investors-over-25. Based on Rhodes’s guilty plea in the criminal case, the SEC barred him from association with any investment
adviser, broker, dealer, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating
organization. See In the Matter of Jason B. Rhodes, Administrative Proceeding File No. 3-20632 (October 22, 2021).
127 See SEC, Litigation Release No. 24461, SEC Charges San Diego-Based Investment Adviser with Running a Ponzi Scheme (Apr.
26, 2019), https://www.sec.gov/litigation/litreleases/lr-24461. The individual also pleaded guilty to state criminal charges for
securities fraud and grand the, and was sentenced to 12 years in prison. See California Department of Insurance, “Poway
conman sentenced to 12 years in prison for $7 million Ponzi scheme targeting seniors,” (Jul. 23, 2020), https://www.insurance.
ca.gov/0400-news/0100-press-releases/2020/release068-2020.cfm.
128 See 31 C.F.R. § 1010.100(t).
129 Investment advisers are, like any other “person,” subject to an obligation to file Form 8300. 31 C.F.R. §1010.330(a)(1)(i), (e)(1); 26
C.F.R. § 1.6050I–1(e).
2024 ◆ Investment Adviser Risk Assessment
24
As noted above, some investment advisers may perform certain AML/CFT functions if the entity is also a
registered broker-dealer (i.e., a dual registrant), is a bank, or is an operating subsidiary of a bank;
130
other
investment advisers are ailiates of banks or broker-dealers that may implement an enterprise-wide AML/
CFT program that would include that investment adviser. A Treasury analysis of Form ADV data found
that approximately three percent of RIAs were dually registered as a broker-dealer or licensed as a bank,
and that these entities held about 10 percent of the AUM held by all RIAs.
131
The same analysis found that
approximately 20 percent of RIAs, representing approximately 75 percent of the total AUM of RIAs, were
ailiated with either a bank or broker-dealer.
In other circumstances, an investment adviser may perform AML/CFT functions via contract with a broker-
dealer (e.g., CIP for joint customers) or other financial institution, such as when the adviser advises an
open-end registered investment company (e.g., mutual fund). For instance, some RIAs have already
implemented voluntary AML/CFT programs pursuant to the SIFMA No-Action Letter under which the sta
of the SEC’s Division of Trading and Markets stated that it would not recommend enforcement action if a
broker-dealer relies on RIAs to perform some or all aspects of the broker-dealer’s CIP obligations or the
portion of CDD requirements regarding beneficial ownership requirements for legal entity customers,
provided that certain conditions are met, including that the RIA implements its own AML/CFT program.
132
Mutual funds, which are advised by approximately 10 percent of RIAs
133
and hold approximately
$22.1 trillion in assets,
134
are also subject to AML/CFT obligations under the BSA and its implementing
regulations.
135
Outside of these circumstances, some investment advisers have voluntarily implemented certain AML/CFT
measures, such as CDD or other CIP requirements. However, because these programs are not required by
any regulations under the BSA, advisers have wide discretion in what information to request from their
clients and private fund investors. Additionally, RIAs and ERAs are not examined for compliance with
voluntary AML/CFT measures, so advisers who voluntarily adopt such measures may not be made aware
of deficiencies or gaps in their programs via examination. In addition, there are limited enforcement
mechanisms under the BSA to pursue against an adviser for failing to implement such measures.
While the programs discussed above provide some AML/CFT coverage for parts of the investment adviser
industry, they mean that investment advisers providing the same financial services have diering AML/CFT
obligations. For example, depending on corporate structure, policies and practice, stand-alone investment
advisers are likely subject to dierent AML/CFT compliance approaches than investment advisers that are
part of a bank or financial holding company; and an investor or client seeking to obscure the origin of its
funds, or its identity can choose an investment adviser that has no AML/CFT obligations.
The fact that investment advisers are not currently BSA-defined financial institutions also limits the ability
of investment advisers to provide highly useful information to law enforcement, regulators, and other
relevant authorities. For instance, because they are not BSA-defined financial institutions, investment
advisers are not aorded the protection from liability (safe harbor) that applies to financial institutions
130 See supra, n. 2.
131 See supra, n. 9.
132 See SIFMA No-Action Letter, supra n. 3.
133 Information derived from a Treasury review of Form ADV information, supra, n. 9.
134 According to the Investment Company Institute 2023 Investment Company Factbook, as of December 31, 2022, U.S. mutual funds
held approximately $22.1 trillion in AUM, while ETFs held approximately $6.4 trillion in AUM. Investment Company Institute, 2023
Investment Company Factbook, p. 2, https://www.ici.org/system/files/2023-05/2023-factbook.pdf.
135 See supra n. 50.
25
2024 ◆ Investment Adviser Risk Assessment
when filing SARs.
136
investment advisers are able to file voluntary SARs, without the safe harbor, they face
increased legal risk from customers or other counterparties. Investment advisers are also currently unable
to receive and respond to law enforcement requests for information under Section 314(a) of the USA
PATRIOT Act as these information-sharing provisions apply only to BSA-defined financial institutions.
137
Additionally, investment advisers, or associations of investment advisers, that are not BSA-defined
financial institutions cannot voluntarily share information under Section 314(b) of the USA PATRIOT
Act. Moreover, at present, existing BSA-defined financial institutions are limited in their ability to share
information potentially related to money laundering or terrorist financing with investment advisers (and
vice versa), because investment advisers are not BSA-defined financial institutions.
138
Non-AML/CFT Regulatory Exemptions
Some of the existing registration exemptions result in limited reporting requirements for investment
advisers and investment funds that service wealthy and financially sophisticated
139
individuals and
institutional investors who invest in private investment companies. While these exemptions may be
consistent with the investor protection purpose of the Advisers Act and Company Act and the scope of the
Securities Act, these wealthy investors may be the same individuals or entities that present higher risks for
using investment advisers to place and hide illicit proceeds.
Exemptions for PIVs in CDD Rule and Beneficial Ownership Information Reporting Rule
Under the Corporate Transparency Act, many PIVs are exempt from having to disclose their beneficial
owners to FinCEN.
140
Similarly, FinCEN’s CDD Rule requires covered financial institutions to identify the
beneficial owners of legal entity customers, but excludes PIV customers advised by certain financial
institutions, including a financial institution regulated by a federal functional regulator or a bank regulated
by a State bank regulator (this includes RIAs).
141
Moreover, if a covered financial institution’s customer is a
PIV advised by a type of financial institution not covered by this exclusion, the covered financial institution
is only required to identify a single individual with significant responsibility to control, manage, or direct
the PIV to comply with the CDD Rule’s beneficial ownership identification requirement.
142
In practice, this
would generally not result in identification of the underlying investors in a private fund, which, as explained
above, may be limited partners whose ability to influence the fund’s operations is limited by contractual
agreement.
These exemptions were intended to prevent entities that already disclosed control or ownership
information to the U.S. government from having a duplicative requirement, or to apply to entities where
ownership fluctuates frequently, making collection of ownership information very diicult.
143
However, for
136 31 U.S.C. § 5318(g)(3)(A).
137 See 31 C.F.R. § 1010.520.
138 See 31 C.F.R. § 1010.540.
139 Certain private funds are only available to qualified purchasers, who are generally defined as investors that are financially
sophisticated. “Qualified purchaser” is defined in section 2(a)(51) of the Company Act. See 15 U.S.C. § 80-2(a)(51).
140 See 31 U.S.C. § 5336(a)(11)(B)(xviii); 31 C.F.R. § 1010.380(c)(2)(xviii). To the extent applicable, PIVs operated or advised by
ERAs described in section 203(m) of the Advisers Act (private fund advisers with less than $150 AUM), are not included in the
exemption. See also 31 U.S.C. §5336(b)(2)(C); 31 C.F.R. § 1010.380(b)(2)(iii) (requiring foreign PIVs otherwise exempt to provide
information about one individual who exercises substantial control over the entity).
141 See 31 C.F.R. § 1010.230(e)(2)(xi).
142 See 31 C.F.R. § 1010.230(e)(3)(i).
143 See, e.g., FinCEN, Beneficial Ownership Information Reporting Requirements, Notice of Proposed Rulemaking, 86 Fed. Reg. 69920,
69928 (Dec. 8, 2021); FinCEN, Customer Due Diligence Requirements for Financial Institutions, Final Rule, 81 Fed. Reg. 29398, 29415
(May 11, 2016).
2024 ◆ Investment Adviser Risk Assessment
26
investment advisers, the practical impact of these exemptions would be that an adviser would generally
not be required to identify the underlying investors in private funds (including foreign legal entities used as
investment vehicles).
Broker-Dealers Shiing to IA Registration
In recent years, some broker-dealers have terminated or withdrawn their broker-dealer registration and
instead registered as IAs.
144
As a result, an increasing number of advisory clients and their assets may not
have direct customer relationships with entities subject to comprehensive AML/CFT obligations.
ii) Advisory Activities Built on Segmentation and Cross-Border Activity
Reliance on Third- Party Administrators Subject to Varying Regulatory Obligations
It is common for RIAs that manage private funds to contract with third-party administrators for a range of
administrative tasks, including investor due diligence and identity verification. Some funds, regardless of
AUM size, may seek to outsource many compliance and reporting functions to limit administrative costs
and seek to transfer liability. While some third-party administrators are located in the United States and
may be ailiated with larger financial institutions, others are located in oshore financial centers where
private funds are routinely domiciled, usually for tax or other commercial reasons unrelated to AML/CFT
regulation, such as the Cayman Islands.
145
The due diligence and verification practices of these oshore fund administrators are not uniform and may
vary based upon the requirements of the local regulatory regime as well as the requirements of the fund’s
adviser. While some investment advisers may rely on these administrators to manage their perceived
risk or to comply with local regulatory requirements, the piecemeal review of investor information is not
a substitute for comprehensive AML/CFT compliance measures. These third-party administrators may
also face legal and regulatory challenges in receiving and verifying documentation from foreign legal
entity investors in funds they service. Further, eective AML/CFT supervision of fund administrators based
outside the United States oen is still nascent, with foreign regulators taking few enforcement actions to
date.
146
AML/CFT Obligations Not with Client-Facing Entity
Investment advisers engage in trading or transactional activities on behalf of their clients through
relationships with financial institutions that are subject to AML/CFT obligations, such as broker-dealers and
banks, among others. For instance, as discussed above, the Custody Rule under the Advisers Act requires
RIAs that have custody of client funds or securities generally to maintain those funds and securities with a
qualified custodian, defined primarily to encompass BSA-defined financial institutions.
147
144 According to the SEC, the number of broker-dealers declined from over 6,000 in 2005 to less than 4,000 in 2018, while the
number of IAs increased from approximately 9,000 in 2005 to over 13,000 in 2018. See Regulation Best Interest: The Broker-Dealer
Standard of Conduct, Final Rule, 84 Fed. Reg. 33318, 33412 (July 12, 2019). This may be occurring because the broker-dealer
may view the typical IA compensation (a flat fee or a percentage of assets managed) as more lucrative than the broker-dealer
compensation (fees from trades executed for clients). There are also instances of firms that have been disbarred from acting as
broker-dealers that are now registering as IAs to maintain their involvement (and clients) in investment activities.
145 See Caribbean Financial Action Task Force Mutual Evaluation of the Cayman Islands (Mar. 2019), p. 26, https://www.fatf-gafi.
org/media/fatf/documents/reports/mer-fsrb/CFATF-Cayman-Islands-Mutual-Evaluation.pdf. While a fund may be domiciled or
registered in the Cayman Islands, the adviser managing that fund may be located in the United States and/or registered with the
SEC.
146 Id., pp. 135-139 (Cayman Islands received the lowest possible rating for supervision). Additionally, fund administrators in the
Cayman Islands filed only 37 SARs in 2017. Id., p. 116.
147 17 C.F.R. § 275.206(4)-2. The SEC recently proposed amendments to the Custody Rule. See supra n. 69.
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2024 ◆ Investment Adviser Risk Assessment
While investment advisers oen do not take possession of financial assets, they nonetheless may have a
more direct relationship with the clients they advise and thus are oen better positioned than custodians
to obtain the necessary documentation and information from and about the client that is relevant for AML/
CFT purposes.
148
If some of these assets include the proceeds of illegal activities, or are intended to further
such activities, an investment adviser’s AML/CFT program could help discover such issues and prevent the
client from further using the U.S. financial system, while reporting such information for law enforcement
purposes. For example, in some cases, an investment adviser may be the only person or entity with a
complete understanding of the source of a client’s invested assets, background information regarding the
client, or the objectives for which the assets are invested.
Other market participants may, for example, hold and trade assets in an account controlled by an adviser,
but these parties, as intermediaries, oen rely solely on the investment adviser’s instructions and lack
independent knowledge of the adviser’s clients. Further, an investment adviser may use multiple broker-
dealers or banks for trading and custody services, making it diicult for one financial institution in the
chain to have a complete picture of an investment adviser’s activity or to detect suspicious activity
involving the investment adviser. Without complete information, such an institution may not have
suicient information to file a SAR, or it may be required to file a SAR that only has partial information
concerning the investment adviser’s transactions on behalf of a particular client. This limits the ability of
law enforcement to identify illicit activity that may be occurring through investment advisers.
Inability to Identify the Ultimate Beneficial Owner or Client
Some investment advisers provide advisory services to clients that structure their investments through
several layers of U.S. and foreign legal entities or arrangements, such as limited liability companies (LLCs)
and trusts, oen referred to colloquially as “shell companies.” Such structures may be used for legitimate
tax reasons, but can be used to obfuscate the source of funds for either natural person or legal entity
investors and obscure unlawful conduct.
An additional challenge is the use of nominee arrangements, in which an intermediary (oen a foreign
bank or overseas custodial service provider) agrees to be identified as the nominal investor and essentially
acts as a “shield” for individuals who want to make investments without disclosing their identities or
source of funds. These nominee arrangements can be used in connection with other intermediaries in the
ownership chain (e.g., the nominee may be acting on behalf of a foreign asset manager, who in turn has the
relationship with an illicit actor or politically exposed person (PEP)). While these nominee arrangements
oen can have legitimate purposes, if they are not explicitly identified in required reports or records,
they can be abused to obscure potentially illicit funds and make it extremely diicult (if not impossible)
for regulators to identify and fully understand the nature and extent of illicit finance risks in this sector.
As of Q4 2022, private fund advisers reporting on Form PF noted that they did not know, and could not
reasonably obtain information about, the non-U.S. beneficial ownership of approximately $284 billion in
private fund AUM.
149
In addition, data privacy or other laws or regulations in eect in oshore jurisdictions, or contractual
obligations, may impact how certain customer information is shared with investment advisers, broker-
dealers, and other financial institutions (and by extension, U.S. law enforcement and regulators). While
148 See SIFMA No-Action Letter supra n. 3 (incoming letter to SEC stating “RIAs oen have the most direct relationship with the
customers they introduce to broker-dealers and are best able to obtain the necessary documentation and information from and
about the customers”).
149 See supra n. 4.
2024 ◆ Investment Adviser Risk Assessment
28
some investment advisers are introduced to new foreign investors by foreign entities subject to AML/CFT
obligations (such as a broker-dealer), this practice is not consistent, as other introducers or promoters may
be individuals with no AML/CFT obligations.
Common Use of Representations Where LP Beneficial Ownership Cannot Be Verified
Where an RIA is unable to identify the ultimate beneficial owner or source of funds, the RIA may fulfill
any client due diligence or identification requirements (its own or those of counterparties) by receiving
a representation from a third party that the beneficial owner is (1) not on a U.S., United Nations, or
foreign sanctions list and (2) not a PEP. However, this representation does not enable the RIA (and those
regulated financial institutions providing access to the U.S. financial system) to assess the illicit finance
risk associated with the beneficial owner of its client. This approach necessarily fails to capture risks
unrelated to PEP or sanctioned status, such as a source of wealth from illicit or non-transparent means.
Even with respect to PEP or sanctions risks, a negative representation framing would not necessarily
permit the financial institution to ascertain the degree of related risk (e.g., being an associate or potential
proxy for an individual presenting such risks). This risk is heightened in the context of the use of nominee
arrangements described above. Further, while the RIA may have a contractual recourse against the third
party if its representations turn out to be false, the U.S. government would not be able to address the harm
to financial transparency and national security outside of criminal prosecution.
iii) Business Practices That Promote Secrecy of Client Information
There are commercial and regulatory incentives in the investment adviser business to keep client
information private. First, investment advisers are hesitant to disclose the identities of their clients
to other financial institutions because the information helps them maintain market share and
competitiveness. For instance, some investment advisers may be reluctant to have a broker-dealer contact
their clients because they view the broker-dealer as a competitor.
150
C. Consequences
Exploitation of the investment adviser sector by illicit actors is especially consequential because of
the vast sums managed by investment advisers. For instance, private funds, which are not subject to
comprehensive AML/CFT obligations, hold approximately $20 trillion in AUM.
151
Additionally, because of the nature of the investment adviser business, the illicit finance risk of investment
advisers will pass to broker-dealers and qualified custodians, who may lack the ability to assess the client
of the investment adviser and the client’s source of funds (or, with respect to a private fund, the private
fund’s underlying investors and their sources of funds). For instance, several of the broker-dealer AML/CFT
enforcement actions identified in the 2022 National Money Laundering Risk Assessment resulted from the
actions of complicit investment advisers.
152
As advisers do not have an independent SAR filing obligation,
their prime brokers or custodians may file with respect to the clients of those advisers, but the limited
number of filings by those entities on illicit finance tied to investment adviser clients further reduces
visibility into potential investment adviser links to illicit activity.
150 See SIFMA No-Action Letter, supra n. 3.
151 See supra n. 4.
152 See Treasury, 2022 National Money Laundering Risk Assessment, pp. 54-56.
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2024 ◆ Investment Adviser Risk Assessment
4. EXISTING MITIGATION MEASURES
A. AML/CFT Measures
While investment advisers are generally not subject to any comprehensive AML/CFT requirements, they
may in some instances carry out certain AML/CFT functions, such as CIP, CDD, and SAR filing. Some
investment advisers may perform certain AML/CFT functions if the entity is also a registered broker-dealer
(i.e., a dual registrant), is a bank, or is an operating subsidiary of a bank;
153
other investment advisers are
ailiates of banks or broker-dealers, which may implement an enterprise-wide AML/CFT program that
would include that investment adviser. An investment adviser may also perform AML/CFT functions via
contract with a broker-dealer (e.g., CIP for joint customers) or other financial institution, such as when the
adviser advises an open-end registered investment company (e.g., mutual fund).
Outside of these circumstances, some RIAs have voluntarily implemented certain AML/CFT measures, such as
due diligence or identification requirements. However, these voluntary programs give RIAs wide discretion in
what information to request, and are not subject to any regulations under the BSA. Further, to the extent these
RIAs do not integrate comprehensive AML/CFT program requirements into their broader compliance programs,
they may lack familiarity with and understanding of the goals and objectives of the AML/CFT regime.
B. Non-AML/CFT Rules and Regulations
RIAs are subject to various SEC rules and regulations governing, among other things, their marketing and
disclosures to clients, best execution for client transactions, and disclosures of conflicts of interest and
disciplinary information, among others. However, these regulatory requirements are not designed to
explicitly address AML/CFT risks; they are designed to protect clients against fraud, misappropriation, or
other illegal conduct by an RIA. In some circumstances, they may require the collection or disclosure of
information that imposes restrictions similar to some AML/CFT measures.
• Custody Rule. Qualified custodians also acting as the executing broker may be in a position to detect
and report IA the, fraud, or market manipulation, where the transactions themselves may be suspicious.
Without identifying information about the IA client and their source of funds, however, qualified custodians
will be limited in their ability to detect other types of illicit proceeds associated with that IA client.
Additionally, an RIA may use multiple qualified custodians or multiple brokers. This means that one
qualified custodian or broker may not have the complete picture of an RIA’s activity. The qualified custodian
or broker may not have suicient information to file a SAR, or will file a SAR with only partial information
on transactions, hindering law enforcement from understanding the full scope of a money laundering
scheme.
154
• Compliance Rule. While the Compliance Rule oers the SEC a helpful cause of action for failure to
implement policies and procedures to prevent violations of the Advisers Act or the rules adopted
thereunder, the Compliance Rule does not address the requirements of the BSA or impose explicit
requirements for an Oice of Foreign Assets Control (OFAC) compliance program.
155
153 See supra, n. 2.
154 See, e.g., SEC, Commission Interpretation Regarding Standard of Conduct for Investment Advisers, Investment Advisers Act Release
No. 5248 (Jun. 5, 2019), 84 Fed. Reg. 33669, 33674-75 (Jul. 12, 2019) (discussing an investment adviser’s duty to seek best execution
of a client’s transactions where the investment adviser has the responsibility to select broker-dealers to execute client trades).
155 While OFAC sanctions requirements are separate from AML/CFT requirements, investment advisers, like other U.S. persons, must
comply with OFAC sanctions. Some investment advisers may have policies and procedures to comply with OFAC sanctions.
2024 ◆ Investment Adviser Risk Assessment
30
• Books and Records Rule. The Advisers Act requires an RIA to maintain certain books and records, as
prescribed by the SEC. Under the books and records rule adopted under the Advisers Act, an RIA is required
to keep certain books and records that relate to its investment advisory business. While these records may
be useful for demonstrating fraud, the of client assets, or other violations of law by an RIA, if they do not
pertain to the client’s beneficial owner or source of wealth, then they will have limited utility in detecting
and mitigating the risk that an RIA could facilitate the laundering of illicit proceeds.
C. Enforcement
i) Federal Enforcement
Civil Enforcement. The SEC investigates and pursues enforcement actions against investment advisers
that violate the federal securities laws and regulations promulgated thereunder. However, as noted above,
investment advisers (with some exceptions) generally do not have obligations under the BSA. The SEC
has promulgated regulations for broker-dealers to comply with certain BSA regulations (including the
CDD Rule)
156
and has pursued enforcement action against broker-dealers that failed to apply AML/CFT
obligations to their investment adviser customers.
157
While this may capture suspicious activity by the
investment adviser (such as market manipulation or fraud), it would be less likely to identify suspicious
activity by an investment adviser’s client, particularly if activity routed through that broker-dealer involved
purchases or sales consistent with routine trading activity but the funding of such trading was the result of
illicit proceeds.
Criminal Prosecution. The Department of Justice actively pursues criminal violations of federal law by
investment advisers, including violations of anti-money laundering, securities, tax, and anti-corruption
laws. Based on cases identified for purposes of this assessment, these criminal prosecutions commonly
involve investment fraud or the of client assets by complicit investment advisers. There are fewer cases of
investment advisers being criminally charged for facilitating the movement of illicit proceeds generated by
a separate crime.
There are several barriers to criminally prosecuting investment advisers for money laundering. Unlike other
financial intermediaries, investment advisers generally do not have BSA obligations. This means, for instance,
that bringing charges against an adviser for willfully failing to file SARs with respect to a client involved in criminal
activity may present challenges. Additionally, because an investment adviser is not required to engage in specific
levels of diligence on clients’ sources of wealth, proving that an investment adviser had knowledge that funds were
derived from criminal activities can be particularly challenging. Further, law enforcement does not receive SAR
filings that may also help identify criminal conduct.
156 The SEC enforces 17 C.F.R. § 240.17a-8 (Rule 17a-8), which obligates a broker-dealer to comply with certain BSA regulations, and
gives the SEC authority to bring enforcement actions against broker-dealers that violate the BSA’s reporting, recordkeeping, and
record retention requirements, including the SAR and CIP rules. In addition to federal law, broker-dealers are required to comply
with applicable self-regulatory organization rules, such as FINRA Rule 3310 (Anti-Money Laundering Compliance Program). The
SEC has also promulgated a rule that requires registered investment companies to adopt and implement written policies and
procedures reasonably designed to prevent violation of the federal securities laws, defined to include the BSA. See 17 C.F.R. §
270.38a-1.
157 See, e.g., Securities and Exchange Commission v. Charles Schwab & Co., Inc, No. 18-Civ-3942 (N.D. Cal. Jul. 2, 2018), https://www.
sec.gov/litigation/litreleases/2018/lr24189.htm. The SEC has also pursued enforcement action against mutual funds for failure
to comply with the BSA and its implementing regulations. See e.g., DWS Investment Management Americas Inc., Investment
Company Act Rel. No. 6431, (Sept. 25, 2023).
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2024 ◆ Investment Adviser Risk Assessment
ii) State Enforcement
Like their federal counterparts at the SEC, state and territorial authorities responsible for overseeing
state-registered entities are primarily focused on protecting investors and the overall securities market
in their jurisdictions. Common areas of focus include elder fraud and exploitation, commodities and
precious metals, internet and social media solicitations, and digital asset-related activities. In FY 2021, state
regulators reported more than 1,661 securities-related enforcement actions as a whole, over 80 percent of
which were civil or administrative enforcement actions.
158
These included 267 enforcement actions against
investment advisers and IARs.
While state regulators have suicient authority to pursue civil and criminal action for violations of state
securities laws, similar to their federal counterparts, generally state-registered investment advisers do not
have AML/CFT obligations. State regulators are also incentivized to apply those resources to fraud and
other crime aecting investors in their states, and not activity that may originate in another U.S. state or
outside of the United States, and does not harm local investors.
D. Whistleblower Reward Programs
There are several “whistleblower” programs that oer rewards for voluntary disclosure of violations
of federal securities laws and regulations and AML/CFT laws and regulations. For example, the SEC
Whistleblower Program oers awards to eligible whistleblowers who provide original information
that leads to successful SEC enforcement actions with total monetary sanctions exceeding $1 million.
Additionally, FinCEN’s implementation of its Anti-Money Laundering and Sanctions Whistleblower
Program is currently underway. Under this program, eligible whistleblowers will receive monetary
awards amounting to 10 to 30 percent of penalties collected by Treasury or the Department of Justice if
their original information leads to qualifying actions involving violations of covered statutes such as the
BSA and the International Emergency Economic Powers Act. These programs can create incentives for
non-government actors to report illicit finance activity even in the absence of comprehensive AML/CFT
requirements.
158 See NASAA, 2022 Enforcement Report, https://www.nasaa.org/wp-content/uploads/2021/09/2021-Enforcement-Report-Based-
on-2020-Data-FINAL.pdf.
2024 ◆ Investment Adviser Risk Assessment
32
5. RESIDUAL RISKS
Based on research to date derived from cases, BSA filings, public reporting, and discussions with law
enforcement and the sta at the SEC, we assess there is a material risk investment advisers could
be misused for illicit finance, although the degree of risk is not uniform across the sector. Given the
aforementioned attributes of the advisory business and the lack of comprehensive AML/CFT requirements
for investment advisers, some money launderers may see some investment advisers as a lower-risk way
to enter the U.S. financial system. For example, this could occur when a money launderer moves funds
derived from illegal activity into a brokerage account of an adviser (including an omnibus account) or other
financial account that is advised by an investment adviser. In this situation, although the broker-dealer
would have AML/CFT obligations under the BSA, it may be diicult for the broker-dealer to discharge its
AML/CFT duties as eectively as the investment adviser (e.g., to detect and report suspicious activity),
given the investment adviser would have the most relevant information (client identity and source of
wealth).
The highest illicit finance risk lies among ERAs, where there are either more limited reporting requirements
(under the federal securities laws) or none at all. Private funds, such as hedge funds or private equity
funds, are not registered with the SEC, and may accept investors without knowing the ultimate beneficial
owners or sources of funds. Further, approximately half of these funds are domiciled outside the
United States, oen in jurisdictions where the practice is to rely on representations and warranties from
intermediaries who represent investors when it is not possible to obtain investor identity and source of
funds information.
Venture capital funds are at risk of exploitation because of their limited transparency (to the extent that
they are managed by ERAs and are unregistered), as evidenced by exposure to the types of misuse noted
above, particularly by Russian oligarchs and their associates. Additionally, venture capital funds have been
identified as an avenue for foreign state adversaries to access technology and companies with significant
national security implications. Finally, as noted above, advisers to venture capital funds are able to rely on
a registration exemption regardless of their AUM.
While RIAs may be more transparent and are subject to more regulatory requirements than ERAs, those
that are not dually registered as or ailiated with a bank or broker-dealer present the next highest
illicit finance risk, as existing SEC registration and reporting alone do not significantly mitigate the risks
addressed by AML/CFT requirements. One quarter of the 15,000 RIAs advise private funds, which are
vulnerable to exploitation as described above, and the other asset management and advisory services RIAs
oer can be exploited by illicit actors, particularly for legal entity investors who obscure their owner or the
underlying source of funds.
159
Those RIAs that are dually registered as or ailiated with a bank or broker-
dealer may be more likely to implement AML/CFT obligations with respect to their investment advisory
clients as part of their enterprise-wide risk management. This is a relevant risk mitigating factor, but there
is a lack of consistency across the industry, which enables regulatory arbitrage. Banks and broker-dealers
(that are not dually registered as RIAs) also may custody funds or conduct transactions in the name of the
RIA and be unable to identify the underlying clients.
159 Even without oering private funds, an RIA can provide a range of investment options, such as direct investment in private
companies, or the purchase of specific stocks or bonds on behalf of a client.
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2024 ◆ Investment Adviser Risk Assessment
Approximately 81 percent of state-registered advisers have only one or two employees,
160
and depending
on the state with which they are registered, may be subject to fewer reporting requirements (compared
to RIAs). However, state-registered investment advisers must register with the SEC above a certain AUM
threshold. Given these factors and the limited instances Treasury has identified in which state-registered
advisers have been misused to move illicit proceeds or funds associated with sanctioned persons,
additional information collection to support regulatory action would be beneficial.
Single family oices are at a relatively lower risk for illicit finance. Despite their exemption from
registration and regulation under the Advisers Act, they cannot have advisory clients outside of family
members and some limited others, so ascertaining the source of funds should be relatively simple.
Additionally, Treasury has identified very few case examples or other information indicating family oices
are at risk of being misused to facilitate illicit finance or other criminal activity.
160 See NASAA 2023 Annual Report, p. 5, supra n. 10.
2024 ◆ Investment Adviser Risk Assessment
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6. ANNEXES
Annex 1: Methodology
The terminology and methodology of this sectoral risk assessment is based in part on the guidance of the
Financial Action Task Force (FATF), the international standard-setting body for AML/CFT safeguards. The
following concepts are used in this risk assessment:
Threats: For purposes of this assessment, threats are the predicate crimes or threat actors (individuals,
groups, and entities) that are associated with illicit finance involving this sector.
Vulnerabilities: Vulnerabilities are what facilitate or create the opportunity for illicit finance. They may
relate to a specific feature of a financial sector or product including market structure and entry, channels of
distribution, or a weakness in law, regulation, supervision, or enforcement.
Consequences: Consequences refers to the impact or harm that illicit finance may cause and includes the
eect of the underlying criminal and terrorist activity on financial systems and institutions, as well as the
economy and society more generally. The consequences of money laundering or terrorism financing may
be short or long term in nature and relate to populations, specific communities, the business environment,
or national or international interests, as well as the reputation and attractiveness of a country’s financial
sector.
Risk: Risk is a function of threat, vulnerability, and consequence. It represents an overall assessment,
taking into consideration the eect of mitigating measures including regulation, supervision, and
enforcement.
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2024 ◆ Investment Adviser Risk Assessment
Annex 2: Securities and AML/CFT Regulatory Requirements for IAs and
Other Entities Involved in IA Activity
Investment Advisers
Entity
Registration?
Reporting? Examination?
AML/CFT Obligations Under the BSA?
SEC-Registered
Investment
Adviser
Yes (SEC) Yes (SEC) Yes (SEC) No.
An RIA may implement at least some
AML/CFT obligations if it is dually
registered as a broker-dealer or licensed
as a bank or is an operating subsidiary
of a bank, or if it is part of a large
financial holding company and subject
to an enterprise-wide AML program, or
performs AML measures contractually.
Exempt
Reporting
Advisers
No (exempt
from SEC
registration)
Yes (SEC) Yes (SEC) No. A private fund adviser may
implement certain AML/CFT obligations
contractually or have a voluntary AML
program.
State-
Registered IAs
Yes (State
authorities)
Yes (State
authorities)
Yes (State
authorities)
No.
Foreign IAs No No No Not under U.S. law, but may have
similar obligations under laws of foreign
jurisdictions where they operate.
Other Entities Involved in IA Activity
Entity
Registration?
Reporting? Examination? AML/CFT?
Prime Broker
Yes Yes Yes Yes (usually a bank or broker-dealer)
Qualified
Custodian
Yes Yes Yes Yes (must be a bank (U.S. or foreign),
broker-dealer, or futures commission
merchant).
Fund
Administrator
No No No Not in the U.S., but some
foreign jurisdictions (Ireland,
Cayman Islands) do impose AML
requirements. Also may have AML
requirements if fund administrator is
part of a bank or broker-dealer.
Limited Partner
No No No No
General Partner
No No No No
Auditor
Yes (PCAOB) Yes (PCAOB) No No
2024 ◆ Investment Adviser Risk Assessment
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Annex 3: Summary Information Requested on Form ADV
Form ADV has five parts: 1A, 1B, 2A, 2B, and 3, as well as additional Schedules. RIAs, state-registered
IAs, and ERAs all must fill out at least some of Form ADV and provide periodic updates. SEC-registered
entities submit the form to the SEC, while state-registered entities submit the form to their respective state
regulator(s). A summary of the key provisions is below.
• Part 1A asks about the investment adviser’s business including identifying information, basis for
registration, and number of employees. It also asks about the IA’s types of clients, such as individuals,
investment companies, pooled investment vehicles; assets under management; the types of advisory
services each IA oers; and questions about where funds are custodied. Part 1A also contains several
supplemental schedules. Schedules A through C include questions about direct owners, executive oicers,
and indirect owners of the investment adviser. Schedule D includes questions about private funds, to
include the types of private funds, the associated custodian and prime broker, the fund administrator, and
auditor.
• Part 1B asks additional questions required by state securities authorities.
• Part 2A generally requires advisers to provide copies to advisory clients of the narrative brochures that IAs
must create and deliver about the advisory firm. This item does not apply to ERAs.
• Part 2B generally requires advisers to create and deliver brochure supplements containing information
about certain supervised persons. This requirement applies to all RIAs and IAs seeking to register with the
SEC, but it does not apply to ERAs.
• Part 3 requires advisers to create a relationship summary (Form CRS) containing information for retail
investors (defined as natural persons). This item applies to all IAs registering or registered with the SEC, but
does not apply to ERAs.
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2024 ◆ Investment Adviser Risk Assessment
