Stay up-to-date with the latest developments in securities law through access to both news and all statutes and regulations. Find relevant corporate filings through a searchable EDGAR database. And...
By Olga Greenberg and Gregory Amoroso
Olga Greenberg is a partner and Gregory Amoroso is a Securities Litigation Consultant at Eversheds Sutherland.
Over the past 15 months, the Financial Industry Regulatory Authority (FINRA) and the US Securities and Exchange Commission (SEC) have brought numerous cases against firms involving client deposits and liquidations of millions of shares of microcap securities. Although the primary business of many of the firms is the purchase and sale of microcap securities, not all of the cases involved microcap firms. In fact, some of the largest fines were assessed against large, well-known investment banking firms and clearing firms. All it takes is one unsavory client, using a registered representative looking to make some quick, easy money, to cause a host of issues, including possible money laundering. Therefore, firms must be diligent in identifying and assessing large deposits and sales of microcap securities.
In most of the cases, the regulators charged firms and often times the supervising principals with failing to identify “red flags” associated with these types of transactions and ultimately with failing to file Suspicious Activity Reports (SARs). In settlement documents, FINRA noted certain “red flags” that it felt firms and principals failed to identify.
Much can be learned from cases where the regulators have formally charged or settled with these broker-dealers on a neither admit nor deny basis. Below is a summary of some key allegations and findings.
Case No. 1
Case No. 2
Many of the cases have resulted in regulators bringing charges not only against the firms, but also against the principals responsible for the establishment and/or implementation of the firm’s AML compliance. In the example below, a broker-dealer with AML issues filed a Form BDW to withdraw from membership. However FINRA still pursued the matter and brought an action against the firm’s AMLCO.
Case No. 3
Although FINRA has brought the majority of the AML cases involving microcap securities, the SEC has brought one notable AML action. In that case, it charged a firm with systematically failing to file SARs for securities transactions that it flagged as suspicious and, when it did file, the firm frequently omitted the very information that formed the basis for filing the SARs. See SEC Complaint 2017-112
In almost every FINRA Letter of Acceptance Waiver and Consent (AWC), FINRA referred to Notice to Members 02-21 as a source of guidance regarding the obligation of a broker-dealer to monitor for and report suspicious activity. See FINRA Notice to Members 02-21 Specifically, the Notice suggests, among other things, that firms should tailor their AML programs to fit their business, monitor their business for “red flags,” and develop a process for filing SARs when they detect “red flags.” Although the Notice is obviously aged, it is apparent that FINRA still feels it is relevant. Firms would be well-advised to review the entire Notice and determine if they are following the recommendations made in the Notice.
The SEC for its part appears to be focused on the filing of SARs in order to ensure that questionable activity is properly investigated. In its 2016 exam priorities, the SEC specifically stated that it would “focus on firms that have not filed the number of SARs that would be consistent with their business models or have filed incomplete or late SARs.” See 2016 SEC National Exam Priorities In its 2018 exam priorities, the SEC said it would continue to assess broker-dealers’ compliance with SAR requirements and the timeliness and completeness of the SARs filed. See 2018 SEC National Exam Priorities
So what is a firm to do? Based on case law and the guidance provided by the regulators, it would appear that firms should at a minimum:
The consequences for failing to supervise this activity adequately are stiff. Not only can the monetary penalties be high, but the regulators are also increasingly targeting individuals with fines and suspensions in a principal capacity. Therefore, firms should ensure that they have adequate procedures and systems in place, that they are testing those systems, that they are adequately training their people, and that they have provided adequate resources to monitor this activity.
Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)