SEC Charges Broker-Dealers with Filing Deficient Suspicious Activity Reports

On November 22, 2024, the Securities and Exchange Commission (SEC) announced settlements with three broker-dealers regarding deficient Suspicious Activity Reports (SARs). The SEC alleged that the SARs filed by the firms failed to meet regulatory requirements because they contained deficiencies that hindered the detection and investigation of potentially illicit financial activities.

Deficient SAR filings

The settlements noted:

• The broker-dealers allegedly failed to include critical information in SAR narratives, such as the "five essential elements" of suspicious activities of who, what, when, where, and why, over a four-year period beginning in 2018.
• The firms allegedly omitted details from the reports such as customer names, account numbers, transaction specifics, and descriptions of suspicious patterns or red flags.

The SEC found willful violations of Section 17(a) of the Securities Exchange Act and Rule 17a-8, which require broker-dealers to file complete and sufficient SARs in compliance with the Bank Secrecy Act (BSA).

The SEC emphasized the following in its press release: “Suspicious activity reports play a vital role in keeping our markets safe, and the failure of broker-dealers to include necessary information to explain suspicious transactions deprives law enforcement and regulatory agencies of valuable and timely intelligence, undermining the very purpose of the SARs.”

SAR filing requirements

The BSA mandates that financial institutions, including broker-dealers, file SARs to report transactions involving at least $5,000 that may:

• Involve illegal funds
• Be designed to evade BSA requirements
• Lack an apparent lawful purpose
• Facilitate criminal activity

SARs must provide clear, complete, and concise narratives that detail the nature of the suspicious activity and provide any supporting information. The SAR must include the following five essential elements:

• Who is conducting the suspicious activity?
• What instruments or mechanisms are being used to facilitate the suspect transaction(s)?
• When did the suspicious activity take place?
• Where did the suspicious activity take place?
• Why does the filer think the activity is suspicious?

FinCEN also recommends that firms address in the filing how the suspicious activity occurred.

FinCEN provides additional information on documenting a SAR in its publication FinCEN Guidance on Preparing A Complete & Sufficient Suspicious Activity Report Narrative.

Penalties and remedial measures

The three broker-dealers agreed to pay a combined $275,000 in civil penalties. Some of the firms committed to undergoing independent reviews of their anti-money-laundering (AML) compliance programs.

The SEC credited the broker-dealers for cooperating with the investigation and taking remedial steps to improve their AML systems and procedures.

Our guidance

This case, combined with FinCEN's new rule to bring investment advisers into the BSA's definition of a financial institution, accentuates regulatory focus on AML within the U.S.. Specifically, this case underscores the importance of regulatory compliance in SAR filings to maintain market integrity and support law enforcement efforts.

Firms should proactively assess their AML program to avoid similar regulatory scrutiny. Broker-dealers, and other financial institutions, should:

• Regularly review and update SAR policies and procedures to confirm they address relevant requirements and industry practices
• Train personnel to identify and report suspicious activities accurately and thoroughly
• Verify that SARs include complete descriptions and documentation to support the suspicious activities that have been identified

How we help

Our AML and Financial Crimes practice offers advisory services and solutions to help financial institutions meet their regulatory obligations and address evolving risks. We work with investment advisers and broker-dealers, among others, to assess risk, develop policies and procedures, and perform independent tests and gap analyses.

To fully optimize efficiency and help your firm meet its data screening, ongoing monitoring, remediation, and reporting needs, we can help you incorporate:

• Outsourced managed services - Our full-service, single vendor offering provided and supported by our team of compliance professionals, which includes Certified Anti-Money Laundering Specialists (CAMS), and other industry leading financial crimes certificates.
• ComplianceAlpha^® regulatory technology - Our platform serves as a command center that automates data screening, enables continuous risk surveillance, maintains detailed records for regulatory reporting, and helps ensure compliance with global AML standards, including OFAC, FinCEN, the USA PATRIOT Act, MLD5, FINRA, SEC, and BSA.

Reach out to your ACA consultant or contact us to find out how we can help you meet your AML requirements.

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