SEC charges Navy Capital for failure to comply with AML regulations: Alleges company did not follow its policies.

The SEC brought charges against Navy Capital Green Management, LLC, a registered investment adviser, citing violations of the Investment Advisers Act of 1940 concerning Anti-Money Laundering (AML) policies. Navy Capital agreed to settle the charges without admitting or denying wrongdoing, paying a $150,000 civil penalty, agreeing to cease any further violations, and accepting censure. The SEC’s actions underscore its commitment to ensuring that registered investment advisers (RIAs) uphold their stated AML policies and procedures.

Under current regulations, RIAs do not have mandatory AML duties and may choose to implement policies voluntarily. However, if an RIA opts to have AML policies, it must adhere to them consistently. Navy Capital was charged with misrepresenting its AML policies and failing to ensure accurate representation of these policies in investor materials. Despite not being required to abide by stringent AML rules, Navy Capital claimed to maintain robust AML practices aligning with the USA Patriot Act.

The SEC’s investigation, covering the period from October 2018 to January 2022 when Navy Capital was registered, revealed discrepancies in the firm’s representations of its AML protocols. Navy Capital stated in various materials that investment completion hinged on fulfilling AML requirements but approved investments contradicting its policies. For instance, Navy Capital accepted funds from accounts not owned by investors and from individuals with zero assets, deviating from its stated procedures.

Through violating Section 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8, Navy Capital misled investors regarding the risks associated with its funds. Rule 206(4)-7 necessitates investment advisers to adopt compliant compliance policies, while Rule 206(4)-8 forbids deceptive practices with investors in pooled investment vehicles. The SEC’s findings highlighted Navy Capital’s misleading conduct toward investors.

In August 2024, FinCEN expanded the scope of “financial institution” under the Bank Secrecy Act to encompass RIAs and ERAs, with exceptions. Starting on January 1, 2026, all RIAs and ERAs falling under this rule must implement or update AML programs to meet the new requirements. This initiative mandates a risk-based, well-designed AML program, report filing, record-keeping, and other obligations akin to traditional financial institutions subject to the Bank Secrecy Act.

RIAs need to differentiate between SEC and FinCEN obligations. While SEC regulations don’t mandate AML policies, RIAs must comply with their internal policies for SEC adherence. Conversely, to conform with FinCEN rules, RIAs must establish AML programs in line with the new directive. Though the new Administration intends to revoke certain SEC rules, Trump-era rules related to disclosure are likely to remain intact. ArentFox Schiff attorneys offer guidance on SEC compliance, particularly concerning investigations, AML policies, and fund formation.