Suspicious Activity Reports Can be A Broker’s Best Friend

Suspicious Activity Reports Can be A Broker’s Best Friend

The SEC and FINRA recently sanctioned a firm and its principals including its anti-money laundering compliance officer for failure to file Suspicious Activity Reports (SARs). The firm was fined $750,000 by the SEC and $550,000 by FINRA. Yet, if properly used filing SARs can be a shield for brokerage firms.
Financial Crimes Enforcement Network requires broker-dealers to file an SAR if conduct through that broker-dealer involves $5,000 or more and the broker knows or suspects that the transaction itself or is part of a pattern of transactions that involves either:

1. Funds derived from illegal activity or is to disguise or hide funds derived from an illegal activity;
2. Is designed to evade the Bank Secrecy Act;
3. Has no business or apparent lawful purpose or is not the sort that customer would normally be expected to engage in and the broker has no reasonable explanation for it after examining the the available facts; or
4. Involves using the broker-dealer to facilitate a crime.

How does this help the broker? All SARs that are filed are secret. The filing broker has no right to disclose to anyone other than law enforcement, the SEC and FINRA that an SAR has been filed or its contents. Further, the broker voluntarily filing an SAR is protected from liability to any person because it filed such SAR.

Often a broker is investigated by the SEC or FINRA on the grounds that it aided and abetted a violation by one of its employees or by a customer. Aiding and abetting requires knowledge and some degree of participation in the violative conduct. Filing an SAR regarding that conduct should serve as a shield to such a charge. Not only did the firm see it, but it called the conduct to the government’s or FINRA’s attention.

FINRA Rule 4530 requires member firms to notify FINRA within 30 days if the firm concludes or reasonably should have concluded that an associated person or the firm has violated any applicable law, rules or regulations or FINRA rules. FINRA enforcement’s practice is to open an investigation based upon such a filing. Filing an SAR before the 30 day period within which such a report is required should serve as a shield in the case of a FINRA investigation of a failure to file such a report.

Bottom Line. If you’re a brokerage firm and you see something that doesn’t pass the “smell” test, you could save yourself some trouble by filing an SAR reporting this activity, rather than run the risk of an SEC or FINRA exam turning it up and all that that entails.

Morris Simkin
April 2018