SEC settles AML allegations with broker-dealer

On July 27, 2020, the US Securities and Exchange Commission issued a cease and desist order against a registered broker-dealer, and imposed a civil monetary penalty of $125,000.  The SEC found that, in addition to violating Rule 203(b)(1) of Regulation SHO of the Securities Exchange Act of 1934 governing short sales, the company had not adequately implemented its anti-money laundering policies and procedures, and had failed to file Suspicious Activity Reports (SARs) for multiple suspicious transactions in compliance with 31 CFR § 1023(a)(2), resulting in violations of Section 17(a) of the Exchange Act and Rule 17a-8 thereunder. 

Specifically, the SEC found that thousands of “not held” orders from certain broker-dealers had been processed by the company, which sold short sales of low-priced microcap securities without “locating” the shares required to cover the short sales or documenting compliance with the “locate” obligation, as required by Rule 203(b)(1) of Regulation SHO.

According to the settlement, during the same period – July 2016 through December 2017 – the broker-dealer did not adhere to its own written supervisory procedures issued to guide compliance with the Bank Secrecy Act, resulting in the company’s failure to file SARs for transactions potentially indicative of money laundering activity.  Suspicious transactions included:

  • the liquidation of large volumes of low-priced or microcap securities;
  • transactions involving issuers with nominal assets and low operating revenue;
  • atypical trading patterns in an issuer’s securities; 
  • notification by a clearing firm of suspicious activity;
  • customer transactions involving the receipt of stock in physical form, and; 
  • a customer associated with possible criminal conduct or civil or regulatory violations.

The SEC order indicates that the company ignored the red flags raised by these transactions and did not report them by filing SARs as required.  Moreover, suspicious transactions were not adequately scrutinized even when they were flagged via the company’s written supervisory procedures.  The SEC found that this conduct violated Section 17(a) of the Exchange Act and Rule 17a-8 thereunder, as well as Rule 203(b)(1) of Regulation SHO.  The SEC order requires that the company cease and desist from committing further violations of these provisions; the order also formally censures the company, and imposes a $125,000 civil monetary penalty.

SEC Order

 

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