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From Securities Regulation Daily, March 28, 2018

Broker to pay $1.3M to SEC, FINRA for AML reporting lapses

By Lene Powell, J.D.

In parallel enforcement actions, New York-based broker-dealer Aegis Capital agreed to pay $1.3 million to the SEC and FINRA for failing to file Suspicious Activity Reports for suspicious transactions relating to manipulation of low-priced securities. In addition to a $750,000 penalty from the SEC and a $550,000 penalty from FINRA, the firm agreed to retain a compliance expert. The firm’s CEO and anti-money laundering compliance officer agreed to pay fines of $20,000 and $40,000, and another former AML compliance officer is contesting an SEC administrative action against him (In the Matter of Aegis Capital CorporationRelease No. 34-82956, March 28, 2018).

"Given the critical importance of SARs to the regulatory and law enforcement community, brokerage firms must comply with their SAR reporting obligations," said Antonia Chion, associate director and head of the Broker-Dealer Task Force of the SEC’s Enforcement Division.

SAR reporting failures. According to the admitted findings, Aegis failed to file hundreds of Suspicious Activity Reports (SARs) from late 2012 through early 2014 for transactions it had reason to suspect involved the use of the broker-dealer to facilitate fraudulent activity or had no business or apparent lawful purpose. Internal trade review mechanisms were ineffective in identifying red flags, including daily transaction reviews by branch managers and a broader surveillance system provided by a clearing firm. Aegis also did not adequately train its employees concerning AML issues associated with low-priced securities transactions.

Although transaction alerts featuring "numerous" AML red flags were sent to senior personnel, including AML compliance officers, Aegis did not create written analyses, compile other records indicating it had considered filing SARs, or file SARs. Instead, Aegis closed some suspicious accounts without filing SARs and did not investigate why its surveillance systems failed to detect the suspicious activity.

CEO and compliance officer liability. Despite numerous warnings from the clearing firm of suspicious activity in customer accounts, in many instances senior Aegis personnel failed to follow written procedures for AML responsibilities. For example, when warned about specific AML red flags raised by a customer’s transactions, Aegis’ CEO requested extensions so the customer could continue to trade while the account was transitioned to another broker-dealer. Ultimately the account was closed in part due to suspicious activity, but no SAR was filed.

In another instance, one customer sold one billion shares of a low-priced securities through Aegis, and the customer had sold more shares in three months than the issuer had outstanding, among other red flags. Without compiling any records or creating a written analysis, an Aegis AML compliance officer closed the account and did not file a SAR.

The order found that the CEO was a cause of Aegis’ violations, and that one AML compliance officer willfully aided and abetted and caused the violations. They agreed to pay penalties of $20,000 and $40,000, respectively. An SEC administrative proceeding against a second AML compliance officer is currently in litigation.

Waiver of Rule 506 disqualification. The firm requested and received from the SEC a waiver of any disqualification that would arise under Rule 506(d)(2)(ii) of Regulation D. In support of its request, the firm noted that the violations were not scienter-based and that neither of the two compliance officers serve any longer in that capacity.

The cases are In the Matter of Aegis Capital CorporationRelease No. 34-82956In the Matter of Kevin McKenna and Robert Eide, Release No.34-82957; and In the Matter of Eugene TerraccianoRelease No. 34-82958.

MainStory: TopStory BrokerDealers Enforcement FinancialIntermediaries FraudManipulation NewYorkNews

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