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A New Era of Compliance for Investment Advisors: Preparing for the 2026 FinCEN Rule

By Nona Patronite, Managing Director of Investigative Services

Background checks are a critical component of due diligence in private equity deals. These investigations help stakeholders identify potential risks, whether legal, reputational, or operational, that could impact deal value or post-transaction performance. While financial and legal reviews are standard, background checks provide a deeper layer of insight into the individuals and entities involved in a transaction.

What’s the New Rule?

On August 28th, 2024, the Financial Crimes Enforcement Network (FinCEN) issued a final rule that could change the AML and KYC compliance landscape for investment advisors. Effective on January 1st, 2026, the “Combatting Illicit Finance and National Security Threats in the Investment Advisor Sector” rule will include many investment advisors under the scope of the Bank Secrecy Act (BSA) for the first time.

The time to prepare is now, especially for small and mid-sized firms without large compliance teams.

Who’s Affected?

This rule applies to investment advisors1 including Registered Investment Advisors (RIAs) and Exempt Reporting Advisors (ERAs) who have historically not been subject to the BSA. Why the prior exclusion? It was assumed that other financial institutions involved in fund administration, such as broker-dealers or custodians, would handle AML compliance. However, FinCEN has concluded that this assumption creates risk based on several factors:

  1. Investment advisors often manage large pools of assets, such as private funds, trusts, and cross-border accounts.
  2. Many advisors have authority to direct client funds or structure investments, making them attractive to malevolent actors.
  3. ERAs and smaller RIAs have historically operated with less regulatory scrutiny, increasing the opportunity for misuse.

Including ERAs and RIAs under the BSA umbrella allows FinCEN to close the “regulatory blind spot” and to align AML requirements with the realized risks in this sector. The takeaway: whether or not AML procedures are currently implemented across these firms, the requirements will become mandatory in January.

What’s the Relationship Between KYC and AML?

KYC obligations form the backbone of effective AML compliance. Key components of KYC include:

  1. Customer identification on onboarding
  2. Risk profiling each client
  3. Defining standards for onboarding clients
  4. Ongoing monitoring of risk and suspicious behavior

How Can LCG Help?

Some of the new requirements surrounding customer due diligence (CDD) and enhanced due diligence (EDD) require specialized investigation and documentation. While an internal compliance team may already be reviewing the new rule, LCG’s Investigative Services Group can streamline the due diligence process to help effectively meet obligations without overextending intern resources with:

  • Verification of customer identities and sources of funds
  • Comprehensive background investigations
  • Efficient, cost-effective due diligence services aligned with regulatory expectations

The time to assess preparedness for the new ruling is now. For questions involving KYC and AML compliance, or to schedule a CDD/EDD engagement, contact Nona Patronite, Managing Director of LCG’s Investigative Services Group.

1 As defined under 31 C.F.R. § 1010.100(nnn)

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