SEC Penalties May Prompt ‘Defensive’ SARs from US Securities Firms

By Daniel Bethencourt

Recent enforcement actions disclosed by U.S. securities regulators may trigger more defensive filings of suspicious activity reports, or SARs, on advisors who use the platforms of larger brokerages to execute trades independently, sources said.

The Securities and Exchange Commission emphasized the compliance risks posed by registered investment advisors, or RIAs, in penalties against two large brokerage firms this year, citing dozens of examples of compliance staff exiting relationships with problematic RIAs without filing SARs or flagging those accounts for additional review.

In July, the SEC fined Charles Schwab & Co. $2.8 million for failing to file SARs after severing ties with 37 RIAs in 2012 and 2013 who engaged in “patterns of potentially fraudulent transactions,” conducted trades after their registrations had expired and violated internal policies at the brokerage. The advisors managed $840 million in assets across 6,500 accounts.

One RIA transferred almost $300,000 from two clients into accounts he controlled, then represented to Schwab, without evidence, that the payments were investments in private real estate, the regulator claimed in a 12-page complaint.

Schwab ended the relationship but did not submit a SAR, writing in an internal memorandum that it was unclear whether those payments constituted fraud because not only had neither client complained, each had also “verified and authorized” the transactions in recorded phone calls.

“Schwab applied too high a standard by requiring that the misuse be ‘confirmed’ or that the clients complain,” the SEC claimed, adding that the failures stemmed from a lack of “clear or consistent” policies and procedures that addressed which behaviors would trigger a report.

Schwab also did not file a SAR on an advisor who charged a client $28,000 in management fees instead of the conventional $2,000, and another who used the emails and passwords of 20 clients to log in and conduct trades without “discretionary trading authority.”

The SEC noted that the logins broke Schwab’s internal policies but did not indicate whether they constituted federal violations.

Securities firms may react to the enforcement action against Schwab by filing “defensive” SARs more often “because otherwise we’re going to be second-guessed” by regulators, Meg Zucker, a senior AML compliance officer in New York, said during a panel at the ACAMS AML & Financial Crime Conference in Las Vegas this month.

“This is the first time I’ve felt like if I was being very thoughtful, and [if] we recorded what we did … that we would be second-guessed on that judgement,” Zucker said. “It’s a very different place to be.”

The enforcement action against Schwab may also compel compliance officers to review a broader range of activity by RIAs who have triggered monitoring alerts, including transactions that appear legitimate, she said.

A lack of coordination within the compliance function helped inform the AML and SAR-related violations described in a more recent case disclosed by the SEC.

In a Sept. 24 cease-and-desist order, the regulator fined TD Ameritrade Inc. $500,000 for not filing SARs on an unspecified number of 111 RIAs who lost their accounts with the Omaha-based brokerage from 2013 to 2015.

The employee who cut ties with the RIAs worked in the risk management unit, and failed to disclose those account terminations to AML personnel under the mistaken view that only firms suspected of “intentionally committing a financial crime” warranted SARs, according to the SEC.

“The employee’s decision that no referral was needed was not subject to appropriate oversight by a supervisor,” the SEC alleged. “This practice resulted in the inconsistent referral of terminated advisors and their possibly suspicious transactions to the AML department.”

The practice also appears to contrast with a 2002 regulation issued by the Financial Crimes Enforcement Network, or FinCEN, that instructs brokerages to file SARs on transactions that do not have any clear justification or otherwise “appear unlawful for virtually any reason.”

RIAs do not currently fall under AML requirements. In August 2015, FinCEN pitched plans to direct the firms to build AML programs and report suspicious activity, but did not finalize them.

Both penalties appear to expand the scope of suspicious activity reporting to cover minor violations of internal policies, two compliance officers at large, East Coast-based brokerages told ACAMS

One of the brokerages responded to the enforcement actions against Schwab and Ameritrade by formally adopting a written policy of reviewing any terminated RIA accounts for reportable activity.

“There’s been a sense in the industry that firms are expected to file SARs on an ever-growing pool of activity,” one of the compliance officers told “I think it’s a little bit of a dangerous precedent, because there are so many things you could file a SAR on.”

An SEC spokesperson did not respond to requests for comment.

Topics : Anti-money laundering , Counterterrorist Financing , Securities
Source: U.S.: SEC
Document Date: October 24, 2018