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SEC Alerts Broker-Dealers to SAR Compliance Failures

Christian.Larson@cwt.com's picture
Commentary by Christian Larson

In a risk alert, the SEC Division of Examinations ("Exams") highlighted compliance deficiencies with regard to AML policies and practices, and suspicious activity monitoring and reporting by broker-dealers.

On AML, Exams staff observed failures to:

  • create reasonably designed policies to identify and report suspicious activity as required under the Bank Secrecy Act ("BSA"), including by (i) failing to include red flags in firm policies for identifying activity requiring further due diligence, (ii) failing to include red flags associated with securities transactions, (iii) not implementing automated systems to monitor and report suspicious activity in connection with large trading volumes, (iv) failing to monitor low-priced securities transactions, and (v) setting Suspicious Activity Report ("SAR") reporting thresholds above the $5,000 threshold established under BSA Rule 1023.320; and

  • reasonably implement the procedures firms had in place, including by (i) failing to file SARs consistently for similar transactions and conduct, (ii) failing to utilize available systems to detect suspicious activity, (iii) failing to follow up on red flags identified in a firm's procedures, and (iv) failing to comply with a firm's own restrictions on accepting securities transactions priced at less than one penny per share.

With regard to suspicious activity monitoring and reporting, Exams staff observed that firms failed to review and determine whether to file SARs for suspicious activity involving low-priced securities, including:

  • large deposits that were followed by near-immediate liquidations and wiring out the proceeds;

  • customers selling low-priced securities of multiple issuers in large quantities;

  • trading in thinly traded, low-priced securities that caused sudden price spikes or represented the majority of the securities' daily trading volumes;

  • trading in the stocks of shell company issuers or issuers that had been subject to trading suspensions or whose affiliates, officers or other insiders had a record of securities law violations;

  • customers with criminal or regulatory enforcement histories; and

  • trading in the stocks of issuers who had been subject to over-the-counter stock quotation system warnings.

Additionally, Exams staff observed that firms failed to:

  • sufficiently account for information that was publically available or in the firms' possession when evaluating activity in customer accounts; and
  • file accurate and complete SARs that include all key information available to the firms.

Commentary

Adding to FINRA's May 2019 SAR guidance (available here) and the SEC's November 2020 guidance on omnibus accounts and low-priced securities (available here), this risk alert provides a number of red flags that firms should consider adding to their AML policies, procedures, and controls. This risk alert also points out common pitfalls in broker-dealer AML program design and implementation.

Of particular note is the SEC's statement, "Some introducing firms inappropriately deferred to their clearing firms to identify and report suspicious transactions in customer accounts and failed to adopt their own procedures that take into account the high-risk nature of their customers' activity." Broker-dealers, and introducing firms in particular, should review whether they are appropriately relying upon other firms to conduct customer due diligence, or whether they are "inappropriately deferring" to other firms to conduct ongoing monitoring and SAR reporting.

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