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Regulatory Sanctions

Putting a $300,000 Price Tag on This Broker-Dealer’s WSPs

May 17, 2019

by Howard Haykin



A broker-dealer agreed to pay a $300,000 fine to settle SEC charges that, from at least January 2013 through July 2017, it failed to file Suspicious Activity Reports ( “SARs”) when it knew, suspected, or had reason to suspect that certain penny stock transactions it executed on behalf of its customers involved the use of its firm to facilitate fraudulent activity or had no business or apparent lawful purpose.
Under terms of the settlement, the broker-dealer (the “firm” or “B/D”) must also hire an independent AML consultant to conduct a comprehensive review of the firm’s AML compliance program. The firm would then be obligated to certify that it has implemented essentially all of the consultant’s recommendations. 



For the record, this Salt Lake City, UT-based firm, with satellite offices in Colorado, Florida, Arizona, New Jersey, New York, and California, has been a registered broker-dealer since 1968. It has approximately 7,000-8,000 active customer accounts, and approximately 32 registered reps.
And,  FYI - the firm’s primary business is the liquidation of microcap stocks and is a market-maker in approximately 50 securities.



Given the firm’s involvement with microcap stocks, the firm considered the improper sale of unregistered securities to be a primary and significant AML risk. So, to address that concern, (and to its credit) …


  • The firm created a ‘robust securities vetting program’ for verifying that physical penny stock certificates deposited at the firm are either registered or appropriately exempt from registration. Once those certificates were cleared for deposit, the firm believed that customers were free to liquidate the shares and wire funds to their own bank accounts largely without further inquiry for AML purposes.


  • The firm delegated its President/AML Officer/CCO with responsibility for vetting all stock deposits for registration (or an appropriate exemption) before any stock can be sold; additionally he was responsible for responding to regulatory requests and for conducting internal AML investigations.
  • [NOTE:  FINRA issued a $140K fine and a 1-year suspension against the President/AML Officer/CCO; however, those sanctions  are pending while the respondent appeals FINRA’s findings.]


  • The firm required all employees to promptly report to the AML Officer any known or suspected money laundering or other financial violations of AML policies as well as other suspected violations or crimes.


  • The firm’s AML policies and procedures specifically identified various red flags or risk indicators that may suggest suspicious activity, including, the following:
  • Customer transactions include a pattern of receiving stock in physical form or the incoming transfer of shares, selling the position and wiring the proceeds.





Quite simply, here’s the way that the SEC explained how the Firm Failed to Review Red Flags:


►     Although [the B/D’s] WSPs identify suspicious activity, list red flags, and describe [the B/D’s] responsibility to file SARs, [the B/D] failed to adequately conduct AML reviews and to identify, investigate, and report certain suspicious activity related to transactions or patterns of transactions in its customers’ accounts. Accordingly, [the B/D] failed to file necessary SARs.


►     [The B/D’s] primary business involves receiving stock in physical form, selling the position, and wiring out the proceeds from the transaction. Although this pattern is a red flag of potentially suspicious activity according to [the B/D’s] WSPs, [the B/D] often failed to investigate or to file SARs where necessary on these types of transactions.


►     [The B/D] failed to investigate or file SARs on numerous transactions in which [the B/D’s] customers exhibited the red flag pattern of depositing a physical certificate, liquidating shortly after the deposit, and wiring the proceeds.


►     In several instances the conduct reached such a level that [the B/D] froze or even closed the customer accounts. Even when the suspicious activity caused [the B/D] to close an account, it never filed a SAR.