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Vedder Thinking | Articles SEC’s Division of Examinations Issues Risk Alert Cautioning Firms to Comply with Suspicious Activity Monitoring and Reporting


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On March 29, 2021, the SEC’s Division of Examinations (formerly, the Office of Compliance Inspections and Examinations) issued a risk alert reminding broker-dealers of their anti-money laundering (AML) compliance obligations pursuant to the Bank Secrecy Act, rules of the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) and Rule 17a-8 under the Securities Exchange Act of 1934. The risk alert notes that mutual funds also may benefit from the examination observations addressed by the staff.

The risk alert primarily discusses compliance with the “AML Program Rule” and “SAR Rule,” which FinCEN adopted in 2002. Under the AML Program Rule, broker-dealers are required to establish and implement policies, procedures and internal controls reasonably designed, among other things, to identify and report suspicious transactions. Under the SAR Rule, broker-dealers are required to file with FinCEN a suspicious activity report (SAR) regarding any suspicious transaction of $5,000 or greater that could be a possible violation of law.

In issuing the risk alert, the staff seeks to remind broker-dealers of their obligations under AML rules, assist firms in reviewing and enhancing their AML programs, and provide observations of recent examinations of other broker-dealers and specific recommendations regarding compliance with the AML Program Rule and SAR Rule. FINRA has previously provided similar guidance in Notice to Members 02-21 and, more recently, in Regulatory Notice 19-18.

The risk alert provides the following specific recommendations:


Observations Related to the AML Program Rule

  • Broker-dealers must establish policies, procedures and internal controls reasonably designed to identify and report suspicious transactions. The staff observed that certain firms (i) did not list “red flags” in their procedures that would assist personnel in identifying suspicious activity (e.g., transactions in low-priced securities), (ii) failed to have automated systems to monitor large trading volumes but rather relied upon manual reviews and did not seek to identify trends or patterns across multiple accounts, (iii) failed to adequately monitor transactions in “penny stocks,” focusing on securities priced under $1 per share without evaluating securities priced between $1 and $5 per share and (iv) improperly deferred their AML obligations to their clearing firms.
  • Broker-dealers must implement these policies and procedures. The staff observed certain firms that did not conduct adequate due diligence on or report suspicious activity that would have triggered an SAR filing requirement under the firm’s procedures. In particular, firms did not follow up on red flags, such as prearranged or non-competitive trading, including wash sales or potential insider trading.

Observations Related to the SAR Rule

  • Broker-dealers must file SARs if they know, suspect or have reason to suspect that the broker-dealer was used to facilitate unlawful activity. The staff again highlighted activity in low-priced securities as an area where firms must be especially vigilant in addressing red flags conducting due diligence and filing SARs. Among other red flags, firms did not follow up on deposits and subsequent liquidations of low-priced securities, patterns of trading activity common to several customers, particularly in low-priced securities, trading in thinly traded securities and trading by customers with questionable backgrounds and subject to prior securities laws violations.
  • Broker-dealers must file accurate and complete SARs and include key details known to the firm of individual customer trades or issuers, and use the specific structured data fields on the SAR. In particular, the staff observed that firms used generic, boilerplate language, without providing detailed information making clear the true nature of the suspicious activity.

The risk alert is available here. The risk alert includes hyperlinks to a number of helpful resources from the SEC staff, FINRA, FinCEN and the G7’s Financial Action Task Force.


David W. Soden