SEC And FINRA Actions Emphasize Continued Focus On Broker-Dealer AML Compliance

• Published date: 20 July 2023
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Government, Public Sector, Financial Services, Compliance, Money Laundering
• Law Firm: Arnold & Porter
• Author: Ms Veronica Callahan, David Freeman, Jr., Daniel Hawke, Jane Norberg, Kathleen Reilly, Christian D. H. Schultz, Kevin Toomey and Michael Treves

On July 11, 2023, the U.S. Securities and Exchange Commission (SEC) announced a settled action involving a registered broker-dealer and its parent company for allegedly failing to file hundreds of Suspicious Activity Reports (SARs) from 2009 to late 2019. On the same day, the Financial Industry Regulatory Authority (FINRA) announced that it too had settled an action with the broker-dealer for failing to file approximately 1,500 SARs as a result of the same compliance failures. The parallel enforcement actions highlight the continued focus of the SEC and FINRA on broker-dealers' compliance with their Bank Secrecy Act (BSA) and anti-money laundering (AML) obligations.

In the press release announcing the FINRA settlement, Christopher J. Kelly, Senior Vice President and Acting Head of FINRA's Department of Enforcement, noted that law enforcement and regulators depend on financial institutions to properly report potential fraud and other suspicious activities and called the obligation to file SARs a "basic responsibility." As discussed in a prior Advisory on the SEC's 2021 action against GWFS Equities Inc. and a prior Advisory on the SEC's 2022 action against a dually registered broker-dealer and investment adviser, the SEC has pursued at least one enforcement action against a broker-dealer related to AML program deficiencies in each of the last several years. These actions also follow the SEC's recent success at the Second Circuit, where the court affirmed the SEC's independent authority as the primary federal regulator of broker-dealers to enforce Rule 17a-8 under the Securities Exchange Act of 1934 (Exchange Act) and its requirements to comply with the BSA. ¹

Filing Obligations Imposed on Registered Broker-Dealers

Section 17(a) of the Exchange Act and Rule 17a-8 thereunder require registered broker-dealers to "comply with the reporting, recordkeeping, and record retention requirements" promulgated by the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN). As part of their AML compliance program, among other things, broker-dealers must develop risk-based procedures that allow for the identification of suspicious activity attempted or conducted by, at, or through the broker-dealer and, when such transaction meet certain dollar thresholds, reporting of that activity, through the filing of SARs, to FinCEN. For broker-dealers, the threshold is $5,000, regardless of whether the activity involves an insider at the broker-dealer or no suspect can be...