All Things FinReg


On July 19, the Financial Crimes Enforcement Network (FinCEN), a bureau within the US Department of the Treasury responsible for the Bank Secrecy Act, issued guidance in the form of frequently asked questions (FAQs) regarding its recently adopted customer due diligence requirements (CDD Rule). The FAQs offer a condensed summary of the CDD Rule’s requirements, but FinCEN has missed an opportunity to address an ambiguity in the CDD Rule regarding its application to private investment vehicles.

As explained in our White Paper on this subject (FinCEN Requires Financial Institutions to Obtain Beneficial Ownership Information), the CDD Rule requires “covered financial institutions” (federally regulated banks and federally insured credit unions, mutual funds, brokers or dealers in securities, futures commission merchants, and introducing brokers in commodities) to obtain beneficial ownership information for a “Legal Entity Customer.” Although the term Legal Entity Customer is broad, it does exclude, among other entities,

  1. an investment adviser registered (RIA) with the US Securities and Exchange Commission (SEC);
  2. a registered entity, commodity pool operator (CPO), commodity trading adviser (CTA), retail foreign exchange dealer, swap dealer, or major swap participant—each as defined in Section 1a of the Commodities Exchange Act—that is registered with the CFTC; and
  3. a pooled investment vehicle that is operated or advised by a financial institution that is excluded from the definition of Legal Entity Customer (Investment Vehicle Exclusion). In addition, the CDD Rule contains limited beneficial ownership collection requirements for pooled investment vehicles that are operated or advised by a financial institution that is not excluded from the definition of a Legal Entity Customer (Limited Collection Provision).

As explained in our White Paper, the CDD Rule is ambiguous about whether a pooled investment vehicle operated or advised by an RIA or CTA would be excluded from the definition of a Legal Entity Customer. Although RIAs and CTAs are excluded from the definition of a Legal Entity Customer, it is unclear whether they would be deemed “financial institutions” for purposes of the CDD Rule’s Investment Vehicle Exclusion and the Limited Collection Provision. This is because the beneficial ownership requirements of the CDD Rule are codified at 31 CFR part 1010, which indicates that, with respect to terms used in 31 CFR chapter X, “where not otherwise distinctly expressed or manifestly incompatible with the intent thereof, terms shall have the meanings ascribed in this subpart.” FinCEN did not separately define a “financial institution” for the purposes of the CDD Rule, and the definition of a financial institution in 31 CFR §1010.100(t), which does not include RIAs or CTAs, therefore would control for purposes of the CDD Rule’s applicability. In turn, pooled investment vehicles advised by them would be subject to the CDD Rule’s Legal Entity Customer beneficial ownership reporting requirements.


The context in which the discussion regarding pooled investment vehicles occurs in the preamble to the CDD Rule suggests that this ambiguity may have resulted from a drafting oversight. The effect of this oversight, however, is particularly significant when one considers that pooled investment vehicles are most frequently operated or advised by RIAs and CTAs, and not by federally or state-regulated regulated banks or broker-dealers that come within the definition of a financial institution in 31 CFR §1010.100(t). A reading of “financial institution” that excludes RIAs and CTAs, and therefore results in pooled funds advised by a RIA or CTA being caught up in the beneficial ownership reporting requirements, appears “manifestly incompatible with the intent” of the CDD Rule, given FinCEN’s statements in the preamble that non-US-managed mutual funds, hedge funds, and private equity funds would only be subject to limited information collection requirements. Regrettably, FinCEN’s FAQs missed an opportunity to clarify an important aspect of the rule’s requirements.