SEC Warns Broker-Dealers to File Suspicious Activity Reports to Police Penny-Stock Trading
The SEC Division of Examinations has flagged broker-dealers for their widespread failures to properly file suspicious activity reports (SARs) pursuant to the Bank Secrecy Act. Based on examinations of broker-dealers, the Division cites firms that fail to adopt reasonable suspicious activity policies and procedures including failures to (i) include identified red flags such as activity in low-priced securities, (ii) employ automated systems to review large-volume trading, and (iii) setting incorrect monitoring thresholds. Firms also failed to implement procedures when they applied inconsistent filing criteria, ignored available information, neglected to follow up on red flags, and did not comply with its own prohibitions. Broker-dealers also filed inaccurate or incomplete SARs, oftentimes using generic, boilerplate language and omitting sufficient factual information. The Division of Examinations also faults B-Ds for failing to respond to suspicious activities such as large deposits of low-priced securities, trading in questionable issuers, and ignoring publicly available information. The Division notes that mutual funds could also benefit from the Risk Alert because they are subject to the same Anti-Money Laundering regime.
We believe that this Risk Alert speaks directly to recent concerns about market manipulation by retail investors, often using social media. By putting pressure on broker-dealers, the SEC can deputize the market plumbers to police manipulative trading activity. For broker-dealers, this Alert should not come as a surprise. The SEC has brought many cases over the years alleging SAR filing failures.
To read the full Risk Alert, click here.