Broker-Dealer fined $100K for ignoring Micro-Cap Red Flags

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Broker-Dealer fined $100K for ignoring Micro-Cap Red Flags

Broker-dealers and AML Regulations

Broker-dealers are among those types of financial institutions that are subject to Anti-Money Laundering (AML) regulations, which are primarily administered by the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury.

Though FinCEN is the administrator and the lead regulator of AML regulations, the Securities Exchange Commission (SEC) has broad jurisdiction over broker-dealers and enforces their compliance with the AML regulations.

Importance of Suspicious Activity Report

Chief among a broker-dealer’s obligations under the AML regulations is the requirement to report “any suspicious transaction that it believes is relevant to the possible violation of any law or regulation” through a Suspicious Activity Report (SAR).

While FinCEN’s regulations list specific types of conduct that must be reported based on dollar amount and nature of the activity, the SEC and other regulators, such as the Financial Industry Regulatory Authority (FINRA), have increasingly taken a broad view of the expansive range of activities for which broker-dealers should file SARs.

SEC fines broker-dealer $100K over SARs reporting failures

A Utah-based broker-dealer agreed to pay $100,000, hire an independent AML consultant, and be censured for allegedly failing to file SARs on certain transactions over a two-year period.

From March 2017 through May 2019, Cambria Capital “failed to properly investigate certain suspicious conduct, failed to investigate certain red flags, and ultimately failed to file SARs when required,” the Securities and Exchange Commission (SEC) said earlier this month.

During the relevant period, Cambria specialized in the liquidation of microcap securities. With many of these transactions, the pattern of liquidations often occurred in combination with red flags including “unusually large deposits, suspicious wire activity, or multiple accounts simultaneously trading in the same microcap security,” per the SEC.