SEC Settles Charges with Mutual Fund Adviser for AML Related Violations

Who may be interested: Registered Investment Companies, Boards of Directors, Investment Advisers.

Quick Take: The SEC recently settled charges with an investment adviser relating to the Adviser’s failure to develop an anti-money laundering (AML) program for mutual funds it advised. Since 2002, regulations adopted pursuant to the Bank Secrecy Act (BSA) have required open-end registered investment companies (commonly, mutual funds) to develop and implement AML programs tailored to the mutual fund’s operational and distribution structures. These AML programs must be designed to prevent the use of the mutual funds in money laundering or terrorist financing activity and must be approved by the trustees or directors of the mutual funds. Further, these programs must include an independent testing requirement, a designated compliance oversight officer, and are normally coordinated with programs of the mutual funds’ service providers. Finally, these programs must be periodically reviewed and updated.

The SEC order found that the Adviser caused the mutual funds it advised to fail to adopt and implement an AML program reasonably designed to comply with the BSA and its implementing regulations (FinCEN Regulations). The order stated that from approximately 2017 to 2021 the mutual funds adopted an umbrella AML policy, which addressed the operations of the Adviser’s parent company and certain of its entities but did not address the specific operational and compliance requirements for the mutual fund business. Approving and relying upon this type of umbrella AML program contravened FinCEN Regulations requiring mutual funds to adopt AML programs tailored to their own business structures.

In addition, the mutual funds’ AML program utilized a transaction monitoring system that generated alerts regarding transactions indicating suspicious activity for review. However, the system failed to maintain or review multiple transaction types, and many of the alerts generated by the system were never reviewed by appropriate personnel. Further, relevant mutual fund personnel were not educated and trained on AML related issues as required under FinCEN Regulations.

As a result, the SEC order found that the Adviser caused the mutual funds to violate Investment Company Act Rule 38a-1, which requires mutual funds to adopt and implement written policies and procedures reasonably designed to prevent violations of the federal securities laws, including the BSA.

Without admitting or denying the charges, the Adviser agreed to a cease-and-desist order and agreed to pay a civil penalty of $6 million to settle the charges.

The SEC’s Press Release can be found here

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm or its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.