01 April 2021

SEC Issues Risk Alert on Observations for Firm Compliance With Suspicious Activity Monitoring and Reporting at Broker-Dealers

On March 29, 2021, the U.S. Securities and Exchange Commission (SEC) Division of Examinations (EXAMS) issued a risk alert to remind broker-dealers of their obligations related to anti-money-laundering (AML) rules and regulations as well as to provide the staff’s observations of compliance items related to those obligations. The risk alert also is designed to assist broker-dealers with reviewing and enhancing their AML programs. The staff noted that mutual funds may benefit from the examination observations.

This is the latest EXAMS announcement of its expansion deeper into AML issues. This expansion further demonstrates that broker-dealers need to be prepared to address questions and concerns from both the SEC and the Financial Industry Regulatory Authority (FINRA) in a coordinated and efficient matter even if these overlap.

AML Policies and Procedures and Internal Controls – What Should Firms Do?

The EXAMS staff has observed that certain broker-dealers have not established reasonably designed policies and procedures and internal controls necessary to identify and report suspicious activity. The observations make clear that broker-dealers should, among other things,

  • include red flags in policies and procedures to assist in identifying activity for further due diligence
  • tailor flags in policies and procedures to address risks associated with the type of activity in which its clients regularly engage
  • automate systems to monitor and report suspicious activity associated with trading in large volumes as well as to identify trends or suspicious patterns across multiple accounts
  • include transactions in low-priced securities on an exchange into automated monitoring in addition to those traded over the counter
  • set suspicious activity report (SAR) thresholds at the appropriate $5,000 threshold in order to identify and report on potentially suspicious transactions

The EXAMS staff also indicates that broker-dealers should be reminded to implement their procedures and conduct adequate due diligence on or report suspicious activity that, per their procedures, appears to trigger SARs.

The EXAMS staff also pointed a host of observations related to broker-dealers that continue to trade in low-priced securities, namely, the lack of review of low-priced securities activities and followup, despite the existence of red flags that were reflected in 2014 EXAMS Risk Alert and FINRA Notice to Members 19-18.

Filing Inaccurate or Incomplete SARs – What Should Broker Dealers Do?

A number of the EXAMS staff observations are geared to informing broker-dealers of the need for complete and accurate information in SAR filings. Indeed, the observations mention that broker dealers should

  • not send SARs with boilerplate language, particularly when that language does not make clear the true nature of the suspicious activity and the securities involved
  • include and correctly capture key information that the broker-dealer has in its records (e.g., Social Security numbers, dollar amounts, account numbers, details related to foreign customers and subaccountholders)
  • include details known at the time of reporting regarding the method and manner of cyberintrusions and schemes to take over customer accounts; the details should include method of transferring out funds, how the account was accessed, bank account information phone/fax numbers, email addresses and IP address where available

The risk alert informs broker-dealers of current EXAM staff observations. While some of the observations seem obvious, it is apparent from the risk alert that may not always be occurring. As a result, brokerdealers should review closely the observations to align their policies, procedures, and controls with the EXAMS staff’s observations.

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