Charles Schwab & Co., Inc. agreed to pay a fine of US $2.8 million to the Securities and Exchange Commission to resolve charges that, in 2012 and 2013, it failed to file suspicious activity reports in connection with suspicious transactions engaged in by 37 independent investment advisors it terminated for failing to comply with its internal policies and which it believed exposed Schwab and its customers to risk. Among other circumstances, Schwab failed to file SARs in circumstances where it suspected or should have suspected that advisers were charging excessive advisory fees, had their state registrations lapse or were cherry-picking profitable trades for the advisers’ own accounts and giving customers losing transactions.
Separately, the SEC filed and settled enforcement actions against Alexander Capital L.P, a broker-dealer, and two of its managers – Philip Noto II and Barry Eisenberg – for failing to adequately supervise three registered representatives who purportedly engaged in unauthorized trading on behalf of customers, churned customers’ accounts and made unsuitable recommendations from 2012 to 2014. These three brokers were charged for these offenses by the SEC in September 2017. (Click here to access the relevant SEC complaint against William Gennity and Rocco Roveccio. And here for the SEC complaint against Laurence Torres.) The SEC claimed that Alexander Capital failed to have adequate policies and procedures to prevent and detect the brokers’ wrongdoing, and that Mr. Noto and Mr. Eisenberg failed to act on red flags indicating excessive trading by the brokers that were under their supervision. To resolve these matters, Alexander Capital agreed to pay a fine of US $193,775 and have an independent consultant review its policies and procedures, as well as to disgorge profits of US $193,775 and pay interest of US $23,437. Mr. Noto agreed to a permanent supervisory bar and a US $20,000 fine, while Mr. Eisenberg consented to a five-year supervisory bar and a US $15,000 penalty.
Finally, Cantor Fitzgerald & Co. settled SEC charges that, for more than 10 years, Joseph Ludovico and another Cantor Fitzgerald broker paid a portion of their commissions by check to Adam Mattessich, the firm’s former global co-head of equities. This practice, said the SEC, began in approximately 2002 after Mr. Mattessich requested that the firm pay him commissions on accounts he serviced; Mr. Mattessich’s supervisor denied this request, and required Mr. Mattessich to transfer the accounts to junior brokers for coverage. Instead, Mr. Mattessich transferred the accounts to Mr. Ludovico and the other broker who began remitting commission checks to Mr. Mattessich in violation of firm policy. As a result, charged the SEC, Cantor Fitzgerald maintained improper books and records related to broker compensation. Cantor Fitzgerald resolved the SEC’s charges by agreeing to pay a fine of US $1.25 million. Relatedly, the SEC filed civil charges against Mr. Mattessich and Mr. Ludovico in a US federal court in New York for aiding and abetting Cantor Fitzgerald’s violations.
Compliance Weeds: Applicable law and rules of the Financial Crimes Enforcement Network of the US Department of Treasury require broker-dealers and other covered financial institutions (banks, Commodity Futures Trading Commission-registered futures 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.
In July 2017, Electronic Transaction Clearing, Inc., a registered broker-dealer, agreed to settle charges brought by the Financial Industry Regulatory Authority that it failed to consider whether to file suspicious activity reports, as required, in response to red flags of possible suspicious conduct as well as for other violations. According to FINRA, ETC did not file such reports even after it restricted trading by certain of its customers after 30 instances where the firm identified problematic conduct, including prearranged trades or trading without an apparent economic reason. ETC agreed to pay a fine of US $250,000 to resolve FINRA’s charges. (Click here for background regarding FINRA’s charges 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.)
Covered financial institutions should continually monitor transactions they facilitate, ensure they maintain and follow written procedures to identify and evaluate red flags of suspicious activities, and file SARs with FinCEN when appropriate. (Click here for a helpful overview of anti-money laundering requirements for broker-dealers, including SAR requirements. Click here for a similarly helpful compilation of AML resources for members of the National Futures Association.)
Moreover, covered institutions should ensure that problematic transactions identified by non-AML personnel (e.g., compliance staff) that may violate legal or regulatory standards are evaluated by AML personnel to determine whether a SAR should be filed with FinCEN. Indeed, the more consolidated a ledger a firm can maintain of potential problems identified across otherwise separate surveillance functions, the more likely a firm will be able to recognize and act holistically upon material red flags.