SEC Penalizes Broker-Dealer for Failing to File Suspicious Activity Reports

The Case

The Securities and Exchange Commission (SEC) recently penalized a broker-dealer for failing to file Suspicious Activity Reports (SARs) as required under the Bank Secrecy Act. 

The firm used an automated surveillance system that flagged over 1,800 alerts in the first half of 2021. However, the firm dedicated only five hours per month to reviewing these alerts, resulting in no investigations or SAR filings during that period.

The SEC identified several key red flags that would have been detected if the firm's compliance processes had been more effective, including:

• High volume of transactions involving thinly traded, low-priced securities.

• Sharp increases in investor demand and significant price changes in these securities.

• Suspicious trading patterns, such as manipulative, pre-arranged, or wash trading activity.

• Customers known to be involved in criminal or regulatory actions related to financial crimes or misuse of funds.

The SEC fined the firm $1.19 million and imposed additional reporting requirements. Following the enforcement action, the firm expanded its compliance team and hired an external consultant to review its Anti-Money Laundering (AML) program.

Regulatory Implications

Under the Bank Secrecy Act, broker-dealers must file SARs for transactions of $5,000 or more that exhibit certain suspicious characteristics, such as potential involvement in illegal activity or attempts to evade legal requirements. 

This action highlights the need for firms to allocate sufficient resources and adopt effective processes for monitoring and reviewing flagged transactions. Failing to do so can lead to regulatory scrutiny, financial penalties, and reputational harm.

Practical Guidance for Firms

To reduce the risk of similar enforcement actions, firms can consider the following steps:

• Strengthen Alert Review Processes: Flagged transactions should be reviewed promptly and thoroughly, with adequate staff resources dedicated to the task.
  
  

• Refine Surveillance Parameters: Review and adjust surveillance systems to capture a broad range of suspicious activities, especially in high-risk areas such as low-priced securities.
  
  

• Maintain Comprehensive Documentation: Regularly document compliance efforts, including the rationale for decisions regarding flagged transactions and any SAR filings.

InnReg provides comprehensive AML compliance solutions that help firms strengthen their surveillance systems and SAR programs.