Will the examiner secondguess a decision not to file a suspicious activity report (SAR)? Securities regulators frequently hear that question in connection with examining broker-dealers’ suspicious activity reporting programs. The Staffs of the SEC and FINRA recently addressed this subject in an article published in the Financial Crimes Enforcement Network’s (FinCEN’s) 15th Issue of The SAR Activity Review – Trends, Tips & Issues.
The article states that examiners will accept a broker-dealer’s decision not to file an SAR, if the broker-dealer demonstrates that it had reasonable riskbased controls and a reasonable decision-making process, and the examiner finds that the broker-dealer’s decision not to file an SAR was reasonable under the circumstances. This standard seems to afford examiners considerable discretion to substitute their own judgment for that of the broker-dealer being examined as to the reasonableness of a particular SAR decision.
In contrast, FinCEN and federal bank regulators have articulated standards that seem to leave examiners less discretion. Too much examiner second-guessing promotes “defensive” SAR filings that are filed out of an overabundance of caution. FinCEN and the federal bank regulators have concluded that the relevant regulatory objectives are best served by having a smaller pool of SAR filings that are relatively “actionable,” rather than a larger pool of filings, many of which are primarily defensive in nature.
It is not entirely clear whether SEC and FINRA examiners are in fact exercising more discretion concerning SARs than FinCEN and the bank regulators believe is appropriate or, if so, why. Nevertheless, in anticipation of possible second-guessing by examiners, broker-dealers will want to ensure that they have an established SAR decisionmaking process that is well documented, particularly in circumstances where a decision is made not to file an SAR, and that they are following their policies and procedures.