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Broker/Custodian Failed to File SARs for Terminated Advisers

 

The SEC fined a large broker/custodian $500,000 for failing to file Suspicious Activity Reports for terminated advisers suspected of engaging in risky activity.  The firm would only file SARs when an individual employee referred the adviser to the Anti-Money Laundering Department. According to the SEC, the firm failed to supervise employees making such referrals, which resulted in inconsistent referrals based on a misunderstanding of regulatory requirements.  The firm failed to file SARs despite knowledge of potentially unlawful activity such as improperly shifting trade error losses to clients, charging questionable fees, and making false statements.  The SEC charges the broker/custodian with failing to file SARs with respect to activity that had “no business or apparent lawful purpose.”

OUR TAKE: The SEC is again using a broad reading of the Bank Secrecy Act and the SAR filing requirement to force broker/custodians to police all potential wrongdoing by advisers using their platforms.  The SEC does not contend that the misbehaving advisers were engaging in money laundering or that the broker/custodian in any way assisted such activity.  Nevertheless, the broker/custodian must file a SAR anytime it has reason to believe that any regulatory violation has occurred.  It is also noteworthy that the broker/custodian did not get much credit for ceasing business activities with the questionable advisers.