The Securities and Exchange Commission filed an enforcement action against Alpine Securities Corporation, a registered broker-dealer, in a federal court in New York City, in connection with the firm’s filing of allegedly untimely and inadequate suspicious activity reports. According to the SEC, from at least May 17, 2011, through December 31, 2015, Alpine failed to include in 1,950 SARs filed with the United States Treasury Department’s Financial Crimes Enforcement Network “material, ‘red-flag’” information which it was required to report under its own compliance program that explained the rationale for the firm’s filing. The SEC charged that Alpine also filed SARs in approximately 1,900 circumstances in connection with clients’ deposit of a security, but not when the security was liquidated or the proceeds from such liquidations were transferred to the customer or a third party, “despite the fact that the subsequent liquidation and transfers were additional suspicious transactions.” (Alpine mostly handled microcap stock transactions for other firms, alleged the SEC.) Alpine’s deficiencies occurred, claimed the SEC, despite being advised by the Financial Industry Regulatory Authority in September 2012, following an examination, that “narratives for all SARs reviewed were substantively inadequate as they failed to describe why the activity was suspicious.” The SEC seeks an injunction and fines, among other penalties, against Alpine.
Compliance Weeds: Applicable law and FinCEN rules require broker-dealers and other covered financial institutions (banks, Commodity Futures Trading Commission-registered future commission merchants and introducing brokers and SEC-registered mutual funds) to file a SAR with FinCEN in response to transactions of at least US $5,000 which a covered entity “knows, suspects, or has reason to suspect” involve funds derived from illegal activity; have no business or apparent lawful purpose; are designed to evade applicable law; or utilize the institution for criminal activity. The Financial Industry Regulatory Authority has recently brought numerous disciplinary actions against broker-dealers and senior officers for failing to file SARs in response to allegedly suspicious transactions. (Click here for background in the article “Clearing Firm’s Failure to File Suspicious Activity Reports in Response to Red Flags Charged as Violation of FINRA Requirements” in the March 26, 2017 edition of Bridging the Week.) The SEC has also recently filed an enforcement action against a broker-dealer and its former chief compliance and chief anti-money laundering officer for such purported failures. (Click here for background int he article, "SEC Files Charges Against Broker-Dealer and Chief AML Officer for Failure to File Suspicious Activity Reports" in the January 29, 2017 edition of Bridging the Week.) This SEC action reminds covered financial institutions that not only must they abide by their obligation to file SARs in the first instance, but they must also ensure that such SARs adequately describe the basis for the filing.
Valuable Lessons Learned: In its complaint, the SEC alleged that Alpine's compliance program did not accurately represent what the firm did day-to-day. According to the SEC, "[a]s implemented in practice, Alpine's policies and procedures did not result in the filing of SARs in the manner required [by applicable law] and by Alpine's [compliance program]." As a result, the SEC charged Alpine with failing to maintain an anti-money laundering program that complied with FinCEN's requirements and thus violated the SEC's own recordkeeping rule (click here to access SEC Rule 17a-8). Recently the CFTC filed and settled an enforcement action against Advantage Futures LLC (a registered futures commission merchant), Joseph Guinan, its majority owner and chief executive officer, and William Steele, who until May 2016 was Advantage’s chief risk officer. The CFTC similarly alleged that Advantage failed to follow the firm's own risk management program (RMP) regarding the role of its credit committee; the use of risk ratings; the account opening process; and the implementation and review of risk tolerance levels. However, the CFTC went one step beyond the SEC in its complaint against Alpine. The CFTC claimed that, when Advantage submitted its RMP manual, credit and risk policies and procedures manual and chief compliance officer annual report to it on “multiple occasions” between November 2013 and May 2015 (as required by CFTC regulations), Mr Guinan and Mr. Steele “knew that the documents did not accurately represent Advantage’s actual practices” and therefore contained false or misleading statements in violation of applicable law. (Click here to access Commodity Exchange Act Section 6(c)(2), 7 USC §9(2).) In other words, the CFTC alleged that, not only were Advantage's policies and procedures inaccurate, but by filing such inaccurate documents with the CFTC, the firm made a false filing. (Click here for background regarding the CFTC's Advantage enforcement action in the article, "FCM, CEO and CRO Sued by CFTC for Failure to Supervise and Risk-Related Offenses" in the September 26, 2016 edition of Bridging the Week.) The valuable lesson learned: regulators expect that policies and procedures should be reasonably designed to assist a registrant comply with applicable regulatory requirements. However, policies and procedures must also be regularly reviewed and updated to reflect actual practices of a firm, and not just its theoretical obligations.