Failure to File Suspicious Activity Reports by a Broker-Dealer

Hypothetical: 

BestTrade, Inc. (“BestTrade”), a US company registered as a broker-dealer with the U.S. Securities and Exchange Commission (“SEC”), offers a variety of products and services to independent third-party investment advisers.  Last year, BestTrade terminated its business relationship with over 20 investment advisers for violating its internal policies on fiduciary duties to their clients. 

The advisers were suspected to have engaged in: (1) self-dealing through suspicious transfers of funds from client accounts custodied at BestTrade to other accounts affiliated with the investment adviser; (2) charging excessive advisory fees through BestTrade’s management fee system; and (3) patterns of potentially fraudulent transactions in client accounts.  BestTrade did not file any Suspicious Activity Reports (“SARs”) with the U.S. Financial Crimes Enforcement Network (“FinCEN”) as a result of the 20 terminations.

Key Considerations:

  •  As a broker-dealer, BestTrade is a “financial institution” under the Bank Secrecy Act (“BSA”).  It is regulated by both FinCEN and the SEC.  Broker-dealers should specifically tailor their compliance programs to address their riskiest customer activities, including activities of independent contractors, wire transfers, and transactions involving low-priced securities.
  • Under the Investment Advisers Act of 1940, investment advisers have a broad fiduciary duty to act in the best interests of their clients.  Advisers must avoid conflicts of interests with their clients and are prohibited from overreaching or taking unfair advantage of their clients’ trust.
  • Under the BSA, BestTrade is required to file a SAR with FinCEN to report any transaction conducted or attempted by, at, or through BestTrade that involved or aggregated funds of at least $5,000 and that BestTrade knew, suspected, or had reason to suspect that the transaction:
    • involved funds derived from illegal activity;
    • was designed to evade any requirements of the BSA or any regulations under the BSA;
    • had no business or apparent lawful purpose or was not the sort that would have been normally expected to engage; or
    • involved the use of BestTrade to facilitate criminal activity.
    • BestTrade failed to evaluate the terminated investment advisers’ activities against its SAR filing obligations, when it is likely their activities rose to the SAR reporting standards required under the BSA.
    • BestTrade should analyze any termination of a customer relationship in the context of its SAR filing obligations and be careful not to execute an overly high standard when determining whether to file a SAR.

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