SEC Penalizes Investment Advisor for Misleading AML Compliance Statements

The Case

The SEC’s order finds that, from at least October 2018 until January 2022, an investment advisory firm stated in its offering materials and other documents provided to prospective and existing private fund investors that it was voluntarily complying with AML due diligence laws despite those laws not applying to investment advisors. Furthermore, the firm also claimed that it conducted specific types of AML due diligence on prospective investors and ongoing AML due diligence monitoring on existing investors. 

According to the order, the firm’s private fund investors included multiple foreign-based entities with opaque beneficial ownership and sources of wealth. The order finds that the firm did not, in fact, always conduct the AML due diligence as described, including on an entity owned by an individual publicly reported to have suspected connections to money laundering activities. As noted in the order, a foreign court eventually froze the assets of one of the firm’s private funds that held funds from that investor. The SEC’s order further finds that the firm failed to adopt and implement written policies and procedures reasonably designed to ensure the accuracy of offering materials and other documents provided to prospective and existing investors.

Regulatory Implications

This case highlights key regulatory themes that investment advisors should consider:

Investor Disclosures Must Be Accurate
Any statement made to investors—whether regarding AML compliance, risk controls, or investment strategies—must reflect actual practices. Misrepresentations, even unintentional ones, can lead to enforcement actions.

AML Due Diligence is a Growing Concern for Private Funds
Although investment advisors are not formally subject to AML regulations like banks and broker-dealers, the SEC expects firms to evaluate the risks posed by foreign-based investors with opaque ownership structures.

Foreign Regulatory Risks Can Impact US Firms
A foreign court's freezing of the firm’s assets demonstrates that failing to properly vet investors can have serious legal and operational consequences.

Written Policies Are Essential
The SEC expects investment advisors to have policies that help confirm the accuracy of offering materials and investor disclosures before distribution.

Practical Guidance for Firms

To mitigate similar regulatory risks, firms should consider the following:

Assess Investor Disclosures for Accuracy

• Conduct a detailed review of all investor-facing documents to confirm that commitments and procedures align with actual practices.

• If a firm voluntarily follows AML procedures, they must be consistently applied.

Strengthen Internal Controls Around Investor Due Diligence

• Private fund managers should develop a risk-based approach to assess investor backgrounds, even if AML laws do not apply.

• If foreign-based investors are accepted, evaluate the transparency of their ownership structures and funding sources.

Develop Written Verification Procedures

• Establish an internal process to review and approve offering materials before sharing them with investors.

• Assign responsibility to compliance teams to confirm that all statements made in investor communications are factual and up to date.

Monitor Regulatory Trends and Enforcement Priorities

• Stay informed about SEC enforcement actions involving private fund managers and investor disclosures.

• Regularly update compliance programs to align with evolving expectations in AML and investor risk assessment.

InnReg can help investment advisors enhance their compliance frameworks, refine investor disclosures, and mitigate risks tied to AML due diligence. Our expertise can assist firms in developing effective compliance strategies that align with SEC expectations while maintaining operational efficiency.