Spencer Edwards, Inc. – a former Securities and Exchange Commission-registered broker-dealer and former member of the Financial Industry Regulatory Authority – agreed to pay a fine of US $250,000 and pay restitution to certain customers for, among other things, failing to implement a “reasonable” anti-money laundering policy from September 2013 through August 2015.
During the relevant time, SEI’s AML procedures required the firm to monitor customer account activity for unusual volume, size, and pattern or type of transactions, taking into consideration risk factors and red flags particular to the firm’s business. Among the “dozens” of red flags enumerated in the firm’s procedures were several relating to the deposit of physical stock certificates involving penny stocks, including a customer engaging in a pattern of depositing stock in physical form, selling the position, and rapidly wiring out proceeds. The procedures further required SEI’s chief AML compliance officer to evaluate and investigate all suspicious activity, including activity regarding penny stock deposits.
However, according to FINRA, during the relevant time, no person at SEI followed these procedures to assess potentially suspicious activity. The task was formally delegated to the firm’s outside counsel whom no one at SEI supervised. Moreover, when the counsel occasionally reported a suspicious activity to management, no one at the firm followed up or considered when a suspicious activity report might have to be filed with the Financial Crimes Enforcement Network of the US Department of Treasury. As a result, charged FINRA, SEI violated its rule requiring members to put in place and maintain a written AML program reasonably designed to comply with applicable law. (Click here to access FINRA Rule 3310.)
This failure led to the firm not identifying or investigating the deposit by SEI’s customers of “billions” of shares of companies with little or no business that were “routinely” liquidated within days of deposit followed by the customers’ rapid withdrawal of proceeds.
FINRA also charged SEI with charging customers excessive commissions in violation of another of its rules (click here to access FINRA Rule 2121), as well as falsifying certain documents provided to its clearing firm.
Compliance Weeds: Policies and procedures of financial service company registrants should serve two essential functions: (1) communicate the firm’s processes to comply with applicable law and (2) lay out a road map of operations, risk management and compliance that help a company perform its daily tasks and to provide the bedrock of a strong compliance culture. Written supervisory procedures should supplement ordinary policies and procedures by setting forth how the company takes reasonable measures to help ensure that its policies and procedures, as well as applicable law, are ordinarily followed.
All policies and procedures, including WSPs, must be tailored to the specific business of a company and should be regularly reviewed and amended to reflect new or changed businesses, new or changed laws and actual practices. Generic or outdated policies and procedures and policies can be less than helpful on a day-to-day basis, and downright problematic when a regulator compares them to actual conduct when something goes wrong.