SEC & FinCEN Announcement
On May 13, 2024, the Securities and Exchange Commission (SEC) and the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a joint notice of proposed rulemaking (NPRM) to apply customer identification program obligations to certain investment advisers. The proposed rule would require SEC-registered investment advisers (RIAs) and exempt reporting advisers (ERAs) to, among other things, implement a CIP that includes procedures for:
- Verifying the identity of each customer to the extent reasonable and practicable; and
- Maintaining records of the information used to verify a customer’s identity, including name, address, and other identifying information
This proposal is a continuation of a new era of stringent regulatory scrutiny in financial transactions. New regulations have been proposed and implemented, and more are likely to come. The message from the SEC and FinCEN is clear: the financial sector, particularly investment managers and advisers, must prepare for an environment where compliance is non-negotiable.
What This Means For Real Estate Investment Firms
This proposal is a continuation of a new era of stringent regulatory scrutiny in financial transactions. New regulations have been proposed and implemented, and more are likely to come. The message from the SEC and FinCEN is clear: the financial sector, particularly investment managers and advisers, must prepare for an environment where compliance is non-negotiable.
A Continuation of Regulatory Scrutiny
Earlier this year FinCEN added requirements for beneficial owner reporting [1] under the CTA. FinCEN also proposed adding investment advisers [2] to the list of businesses classified as “financial institutions” under the BSA.
In each regulatory rule proposal FinCEN states that it is working to “significantly improve efforts to protect the U.S. financial system” and “bring the U.S. in line with international counterparts” [3]
This is likely not the last compliance regulation that FinCEN will implement. The FATF’s 2016 Mutual Evaluation of the United States identified that “The Federal authorities have a good understanding of the risks of complex structures of legal persons and arrangements being used to hide ownership and launder money. However, serious gaps in the legal framework prevent access to accurate beneficial ownership information in a timely manner. Fundamental improvements are needed in these areas.” [4]
The Impact of Non-Compliance
Non-compliance could lead to significant financial losses, including potential shutdowns of operations and asset seizures. It will deliver a substantial blow to investor confidence and your firm’s reputation:
- Financial Penalties & Fines: Non-compliance with SEC and FinCEN regulations can result in substantial fines. For instance, penalties for violations of the Bank Secrecy Act (BSA) can range from $5,000 per violation to $1,000,000, or 1% of the assets of a financial institution, whichever is greater, for every day that the violation occurs. [5] Repeated or willful violations can result in even higher fines.
- Criminal Charges: In severe cases, non-compliance can lead to criminal charges against individuals or firms. This can include charges for facilitating money laundering, fraud, or other illicit activities.
- Litigation: Non-compliance can expose firms to lawsuits from investors or other stakeholders, seeking compensation for losses or damages incurred due to the firm’s failure to adhere to regulatory requirements.
The new regulations are not just proposals—they could likely be enacted soon, and the consequences of non-compliance can be severe. These changes could come into effect quickly, leaving little time for preparation.
Firms that fail to adapt and proactively implement compliance processes might fall behind competitors who are better prepared, risking their market position.
The Playbook for Real Estate Investment Firms
How can real estate firms prepare for an era of increased financial scrutiny and regulations?
InvestNext has built a suite of tools and integrated solutions to enable sponsors to not only comply with existing regulations, but future-proof their firm for future regulations. You can apply this playbook to:
- Prepare for increased compliance requirements
- Get ahead of impending compliance requirements by implementing efficient processes before FinCEN and the SEC mandate them.
- Enhance credibility
- As investors look to be more selective with their investments in 2024 and beyond, they’re looking for the smart investment. Streamlined compliance processes that are easy for investors builds their confidence in your firm.
- Think beyond regulation
- Establish clear and effective compliance processes throughout the entire lifecycle of your deal. Protect your reputation and keep deals on track by detecting potential issues at the start of your raise or during investor onboarding.
KYC
Implement comprehensive KYC processes to ensure compliance and build trust with investors. Simplify your KYC process through an integrated solution that works seamlessly with your investor portal and CRM. Send requests, manage rejections, and track statuses directly in InvestNext. Eliminate unnecessary manual steps to save time and increase efficiency.
- Send requests to your investors directly from the InvestNext dashboard.
- Investors can verify identity data, authenticate IDs,and confirm liveness in minutes, reducing your compliance workload and keeping your projects on track.
- With over 14,000 IDs accepted and taking less than 1 minute on average to verify identities your investors can move quickly through the process and make their commitment.
- Ongoing monitoring for 12 months reduces your compliance risk
Investor Accreditation
Incorporating an integrated accreditation service standardizes and automates key compliance processes, ensuring you maintain compliance for 506(c) offerings while providing a seamless investor experience.
- For Sponsors: Maintain compliance by delivering an investor-friendly experience from the commitment flow. This includes obtaining new accreditation letters within 12 hours directly in the investor portal via Accredd, uploading existing accreditation letters, and allowing self-attestation of accreditation status.
- For Investors: Easily obtain new accreditation letters or upload existing ones directly in the portal. Self-attestation options are available for those with an existing relationship, ensuring compliance with SEC regulations and avoiding penalties or capital raising stoppages.
- Accreditation Certification: Thoroughly vetting an investor’s accreditation status ensures your business’s health, reputation, and future. The integrated accreditation feature is flexible, allowing for various methods of accreditation certification.
Inbound Funding
Utilize secure ACH payments with integrated AML checks to add an extra layer of safety and compliance to inbound funding processes.
- AML Checks: When setting up secure ACH payments, the system performs a one-time integrated AML check, confirming the investor’s identity and checking watchlists at the time the bank account is connected. This process supports over 10,000 financial institutions, ensuring robust compliance.
- Beneficial Owners Verification: When setting up secure ACH payments, certify the beneficial owners to comply with increased compliance requirements. This process is guided by FINRA requirements and embedded in the existing workflow.
Leverage Technology for Accurate Audit Trails
Moving key processes to a trustworthy digital system reduces human error and improves accuracy, providing improved visibility into legal document management, fund flows, and user activities.
- Document Management: The system keeps a complete record of all documents signed by investors, with accurate dates and times. E-signature templates ensure documents are filled out correctly, and audit trails show how and when documents were added, signed, countersigned, or modified.
- Transaction Tracking: Track the flow of investor funds with precise date logging for all inbound and outbound transactions. This transparency allows you to follow the flow of an investor’s money from initial investment to project completion.
- Activity Logs: Maintain detailed logs of all investor and admin activities within the portal. This ensures transparency and accountability, making it easier to demonstrate compliance during regulatory audits.
By integrating these components into your compliance strategy, you can not only meet regulatory requirements but also leverage compliance as a strategic asset for growth. Utilizing advanced technology and services ensures accuracy, reduces risks, and enhances investor confidence, paving the way for a more secure and scalable business. Schedule a demo and let’s identify how InvestNext can support your compliance journey.
Sources
[4] https://www.fatf-gafi.org/en/publications/Mutualevaluations/Mer-united-states-2016.html
