May 2, 2019

Can a registered investment adviser rely on another financial institution for KYC?


A US private equity firm is raising money for a new fund.  While soliciting interest from various financial institutions, it is contacted by a large US bank that would like to invest in the fund on behalf of a number of high net-worth individual clients.  As a registered investment adviser (RIA), the private equity firm is not required to have an AML compliance program in place.  However, as a best practice, it has implemented “know your customer” (KYC) procedures.  The high net-worth individual clients are reticent to provide identifying information to the private equity fund.  Is it possible for the private equity firm to rely on the bank’s KYC of the individuals?

Key Considerations:

  • The Financial Crime Enforcement Network (FinCEN) at the US Department of the Treasury has not finalized its proposed rule requiring RIAs to implement AML policies and procedures.  Therefore, RIAs are not subject to any specific AML requirements. 
  • However, the Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations published its 2018 Examination Priorities in February 2018 stating that “Examiners will review for compliance with applicable anti-money laundering requirements, including whether firms are appropriately adapting their AML programs to address their regulatory obligations.”  RIAs will be expected to have an KYC program in place.
  • By using FinCEN’s regulations for financial institutions as general guidance, the private equity fund could rely on the bank’s KYC program under three conditions:
    • The reliance must be reasonable under the circumstances;
    • The other financial institution must be subject to a requirement to establish an AML program under 31 USC § 5318(h) and have a federal functional regulator; and
    • The other financial institution must enter into a contract requiring an annual certification that it has implemented an AML program and will perform the specified requirements of firm’s KYC.