Heightened Scrutiny on Broker Dealer Compliance Following Court Ruling and Regulatory Action

Last week, the U.S. Supreme Court rejected a petition for review from Alpine Securities in its bid to argue that the Securities and Exchange Commission (SEC) lacked authority to enforce the Bank Secrecy Act (BSA). The Utah-based broker dealer was fined $12 million by the SEC following repeated violations of federal securities laws by failing to comply with the BSA’s reporting requirements. Alpine had alleged that the agency does not have authority to enforce compliance with the banking law, which the high court swiftly and forcibly rejected.

Notably, the ruling was one of two significant actions that occurred on both sides of the Atlantic in the past week for an industry that has come under heightened scrutiny in recent months.

Under the BSA and Treasury’s associated AML/CFT regulations, broker dealers are required to keep records and file suspicious activity reports (SARs), which under CFR § 1023.320 explicitly states that compliance with the regulation “does not relieve a broker dealer from the responsibility of complying with any other reporting requirements imposed by the Securities and Exchange Commission or a self-regulatory organization” like the Financial Industry Regulatory Authority (FINRA). According to Bloomberg Law, under Rule 17a-8 of the Securities Exchange Act, a broker dealer’s “non-compliance with BSA/AML reporting requirements may serve as a predicate for an SEC enforcement action charging a books and records securities violation,” which was explicitly referenced by the agency in a press release earlier this summer announcing settled charges against GWFS Equities, a Colorado-based broker dealer charged with violating the federal securities laws governing the filing of SARs. Notably, Bloomberg Law goes on to further highlight that “the SEC carries a much heavier stick than Treasury,” and that “relative to Treasury, the SEC’s liability standard is easier to satisfy while available civil penalties are steeper.”

Across the pond, the Financial Conduct Authority (FCA), the United Kingdom’s financial regulator, announced last Friday that it had fined Sunrise Brokers LLP over £600,000 for “‘serious’ crime control lapses'' following an investigation that “the interdealer broker had deficient systems and controls for identifying and mitigating the risk of facilitating fraudulent trading and money laundering.” The action, the second such case handled by the regulator following Sapien Capital’s £178,000 fine earlier this summer, signals a heightened focus on the part of the FCA on an industry that has largely avoided regulatory scrutiny for quite a while. According to Thompson Reuters, the arrival of the Markets in Financial Instruments Directive II (MiFID II) in 2018 increased brokers’ “regulatory risk in a big way.” Notably, prior to its introduction, only two inter-dealer brokers had been fined by the FCA since 2013.

With last month’s publication of Regulatory Notice 21-36 by FINRA, meant to encourage  financial firms - such as broker-dealers - to begin contemplating how they will incorporate the first government-wide priorities for anti-money laundering and countering the financing of terrorism (AML/CFT) policy, there is certainly more scrutiny to come with other global authorities, including the European Union, taking “proactive steps in mitigating such lapses” throughout the industry and the wider financial sector. As a result, Sigma has released its latest guide, which highlights the key considerations broker dealers should know as they prepare for 2022, and the inevitable scrutiny that accompanies it.

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