10/1/18 - Promontory Currents: Securities Regulators Bring Enforcement Actions over SAR Filings
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10/1/18 - Promontory Currents: Securities Regulators Bring Enforcement Actions over SAR Filings

By Christine Livingston and Elizabeth Bethoney

Last week, the Securities and Exchange Commission fined two broker-dealers, in separate actions, for failing to file suspicious activity reports. These actions follow a recent enforcement trend: Since November 2017, the SEC has fined a number of securities firms for not complying with their obligations to file SARs.

Promontory has written before about this issue, which is by no means new. In fact, former SEC Director of Enforcement Andrew Ceresney foreshadowed this streak in 2015, when he said in a speech that the agency would begin targeting firms that file suspiciously low numbers of SARs. He also said the commission would focus on firms filing SARs that offer little or no value to law enforcement.

The SEC’s recent enforcement actions demonstrate the critical importance of securities firms’ SAR obligations. Inadequate, ineffective SAR filing can also reveal broader deficiencies in firms’ Bank Secrecy Act/anti-money-laundering programs. The SAR-related enforcement actions outlined in the table below display some common deficiencies: programs insufficiently designed to cover all broker-dealer activity or to trigger the reporting of suspicious activity; inappropriate reliance on AML programs of other parties (e.g., introducing brokers, parent companies, and affiliates); and poor communication from senior management about SARs.

Recent Enforcement Actions and Settlements

Date Firm Type Fine/Settlement SAR-related Issues

September 2018

Clearing firm

$800,000 and exit of penny-stock clearing business

Failed to file SARs on transactions involving customers introduced by another broker that raised multiple red flags.

September 2018

Retail broker-dealer

$500,000

Failed to file SARs relating to certain terminated investment advisers, due to having failed to consistently and appropriately refer terminated advisers and their potentially suspicious transactions to the firm’s AML department.

July 2018

Retail broker-dealer

$2.8 million (settlement with the SEC)

Failed to file SARs related to the activity of independent advisers who were terminated from the firm’s custodial platform, when the firm knew, suspected, or had reason to suspect the transactions required SAR filing.

May 2018

Bank-affiliated broker-dealer

$6.16 million (combined total of SEC and Financial Industry Regulatory Authority fines)

Failed to file SARs on transactions involving customers introduced by another broker-dealer; lacked an AML program that adequately covered a new product used by customers of the introducer.

March 2018

Retail broker-dealer

$1.3 million (combined total of SEC and FINRA fines)

Failed to file SARs on activity involving low-priced securities products that should have raised red flags.

December 2017

Bank-affiliated broker-dealer

$26 million (combined total of SEC and FINRA fines)

Failed to file SARs because the broker-dealer used affiliated bank’s BSA/AML monitoring systems inappropriately and excluded certain account types from monitoring, as the firm considered the accounts low-risk.

November 2017

Retail broker-dealer

$3.5 million (SEC fine)

Failed to file continuing-activity SARs on international customers in U.S., in part due to confusing and inaccurate communication from AML leadership.

Firms can gauge the appropriateness of their SAR filing by first comparing the quantity of the firm’s SAR filing against the characteristics and business practices Ceresney highlighted as more likely to cause increased filing: “the number of registered representatives associated with the firms; the number of customer accounts; whether the firm retailed microcap securities or was dually registered as an investment advisor; the number of regulatory, civil, or criminal disclosures related to the firms; and the number of times the firm was involved in transactions that the [SEC’s enforcement division] has investigated in the past.” Next, they can review a sample of SARs filed and consider how effectively they articulate the suspicious nature of the activity and whether the information provided is actionable for law enforcement. Comprehensive reviews will also determine whether the risk assessment adequately measures both longstanding and emerging risks — and whether the firm’s transaction-monitoring efforts, internal referral processes, and response to external inquiries (e.g., 314(a) and 314(b) requests, and subpoenas) drive effective SAR filing.

Firms will further benefit by reviewing the comprehensiveness and effectiveness of their program designs and considering whether they cover the types of activities regulators scrutinize — suspicious activities such as those involving microcap/penny stocks, delivery or receipt versus payment, securities-based lending, and other products mentioned in SEC and Financial Industry Regulatory Authority enforcement actions and guidance. Firms can also evaluate whether their programs comprehensively cover activity involving securities products and transactions occurring by, at, or through the firm, as well as the activity of introducing firms and their customers. Compliance teams should also ensure that any reliance on affiliates for program components is reasonable. Firms should also review the strength of their risk assessments and monitoring and escalation efforts and consider whether these efforts adequately and effectively lead to the identification and reporting of suspicious activity.

Forward-thinking firms will review the strength of training programs across lines of defense and senior leadership, confirm that line staff can identify potentially suspicious activity, and tailor training to meet the specific risks and red flags each business line faces. Risks and red flags change often, and training should evolve accordingly — particularly in response to relevant enforcement actions and government investigations.

In sum, broker-dealers’ senior leaders should understand and emphasize the importance of SAR-filing obligations, as well as the need to have programs and training that cause the identification, escalation, and reporting of suspicious activity.

Author

Christine Livingston is a principal in Promontory’s Washington office.

Elizabeth Bethoney is vice president of AML operations at Promontory Risk Review.