by Michael J. Leotta, David H. Tutor, and Cindy M. Bi

The SEC recently announced AML-related charges against an individual registered representative for failing to escalate red flags of potentially suspicious activity, as well as charges against a registered investment adviser for causing mutual funds it advised to fail to adopt an AML program reasonably designed for its business. Taken together, these enforcement actions reflect the continued expansion of the SEC’s efforts to police AML compliance beyond the traditional charges against broker-dealers for failures to file Suspicious Activity Reports (“SARs”).  The SEC is not only willing to penalize a broker-dealer or its compliance personnel who fail to file timely SARs, but is also willing to charge individuals and entities that contribute to or cause AML failures.    

1. SEC Charges Individual Registered Representative for SAR Filing Failure

On September 18, 2023, the SEC announced settled charges against an individual registered representative at a registered broker-dealer.[1]  The SEC’s Order found that the individual failed to report potentially suspicious and unusual transactions in a brokerage account of his long-time customer to the AML group of the brokerage firm where he worked.[2]  According to the Order, the registered representative failed to escalate red flags related to large, unusual transactions engaged in after the acquisition announcement of the company where the customer’s close family member was an executive.[3]  This caused the registered broker-dealer to fail to timely file a SAR in violation of Section 17(a) of the Exchange Act and Rule 17a-8 thereunder.[4]  Without admitting or denying the SEC’s findings, the individual agreed to cease-and-desist from committing or causing any violations of Section 17(a) of the Exchange Act and Rule 17a-8 thereunder and to pay a civil penalty of $20,000.[5]

Although regulators have brought individual charges against compliance personnel who failed to implement reasonably designed AML programs or failed to file SARs, charges against an individual registered representative are exceedingly rare and reflect a more aggressive Division of Enforcement in the AML space.  Indeed, Commissioners Hester Peirce and Mark Uyeda took the unusual step of releasing a written dissent to this enforcement action.[6]  Their dissent, titled “Caught in a SAR Trap,” disagreed with the Order’s findings that the individual acted unreasonably by failing to escalate the purportedly suspicious transactions.  In the two Republican Commissioners’ view, the Order failed to explain why the transactions were suspicious.[7]  The dissent argues that “[h]indsight is always 20/20 and evaluating these cases with the benefit of having new information sets an impossibly high standard and could result in the Commission’s review and institution of future cases second-guessing decisions made by registered representatives based on information they knew at the time the transactions occurred.”[8]  Additionally, the dissent states: “By levying punishment on a registered representative for failing to red-flag a transaction and consequently failing to make an internal report, we are encouraging registered representatives to view all flags as various shades of red that require internal reporting.”[9]

2. SEC Charges Registered Investment Adviser for Mutual Funds’ Failure to Establish a Reasonably Designed AML Program

One week later, on September 25, 2023, the SEC announced charges against a registered investment adviser in two separate enforcement actions, one addressing its failure to develop a mutual fund AML program and another concerning misstatements regarding its Environmental, Social, and Governance (“ESG”) investment process.[10]  In the AML enforcement action, the SEC’s Order found that the investment adviser to mutual funds was “responsible for establishing AML policies and procedures for the funds.”  According to the Order, the mutual funds failed to adopt and implement a reasonably designed AML program to comply with the Bank Secrecy Act and applicable Financial Crimes Enforcement Network regulations.[11]  As a result of this failure, the mutual funds, which were not charged, violated Rule 38a-1 under the Investment Company Act.  That rule is not specific to AML but requires registered investment companies to adopt and implement written policies and procedures reasonably designed to prevent violations of the federal securities laws, including the Bank Secrecy Act.[12] 

Despite the existence of an “umbrella” AML compliance program and no allegations of untimely filed SARs, the Order nevertheless found that the adviser caused the mutual funds to violate Rule 38a-1.  In the press release announcing the settled charges, Director of Enforcement Gurbir Grewal stated that the adviser to the mutual funds “failed to ensure that the funds had an AML program tailored to their specific risks, as required by law,” and heralded the charges as an “important mutual fund AML enforcement action.”[13] Without admitting or denying the SEC’s findings, the adviser agreed to a cease-and-desist order and a $6 million penalty in the AML action.[14] 

3. A Renewed Focus on AML Enforcement

These AML enforcement actions against an individual registered representative and a registered investment adviser to mutual funds reflect a renewed and aggressive focus on AML compliance by the SEC and its Division of Enforcement. 

Although it is not uncommon for the SEC, FinCEN, or FINRA to bring charges against individual compliance officers who fail to implement a reasonably designed AML program,[15] it is much less common for a registered representative to be charged for failing to recognize or escalate the fact that specific transactions are suspicious.  The possibility of such charges suggests that broker-dealers should put renewed emphasis on the training component of their AML programs.  Such training should include a focus on identifying and escalating red flags of potentially suspicious activity. 

The SEC’s charges against a registered investment adviser for causing a mutual funds’ failure to implement a reasonably designed AML program is reminiscent of charges earlier this year against a broker-dealer’s holding company for causing the broker-dealer to fail to file SARs.[16]  In all three of these cases, the SEC is telegraphing that it will bring charges against a broad universe of respondents who cause AML failures, not merely against the broker-dealer that may have been primarily responsible for compliance.

These SEC Orders are also in line with the SEC’s Division of Examinations July 2023 Risk Alert, which emphasized EXAMS’ focus on AML program compliance.[17] In the Risk Alert, the staff observed that some registrants did not appear to devote sufficient resources, including staffing, to AML compliance given the volume and risks to their businesses.  The staff further observed that the effectiveness of policies, procedures, and internal controls was reduced when firms did not implement those measures consistently.  Similarly, the Division of Examinations noted in its 2023 Examination Priorities that the “importance of conducting examinations of AML programs of broker-dealers and certain registered investment companies has been elevated” and that EXAMS “will continue to prioritize examinations of broker-dealers and certain registered investment companies for compliance with their AML obligations in order to assess, among other things, whether firms have established appropriate customer identification programs and whether they are satisfying their SAR filing obligations, conducting ongoing due diligence on customers, complying with beneficial ownership requirements, and conducting robust and timely independent tests of their AML programs.”[18]

These SEC Orders, the Risk Alert, and the 2023 Examination Priorities reflect the continued expansion of the SEC’s efforts to police AML compliance.  Broker-dealers have long known that they are responsible for establishing and implementing reasonably designed AML programs.  These recent enforcement actions remind other securities-industry participants—whether they are individual registered representatives, registered investment advisors, holding companies, or registered investment companies—that they too risk being found liable if they cause another to fail to live up to its AML obligations.

Footnotes

[1] The Securities and Exchange Commission, SEC Charges Registered Representative with Causing Brokerage Firm’s Failure to Timely File a SAR Concerning Suspicious Wires Surrounding an Acquisition Announcement, www.sec.gov, https://www.sec.gov/enforce/34-98418-s (last visited September 25, 2023).

[2] Id.

[3] In re Pierre Economacos, Exchange Act Release No. 98418 (September 18, 2023).

[4] Id.

[5] Id.

[6]“Caught in a SAR Trap: Statement on In the Matter of Pierre Economacos,” SEC Statement by Commissioner Hester M. Peirce & Commissioner Mark T. Uyeda, www.sec.gov, https://www.sec.gov/news/statement/peirce-uyeda-statement-pierre-economacos-091823?utm_medium=email&utm_source=govdelivery (last visited September 25, 2023).

[7] Id.

[8] Id.

[9] Id.

[10] The Securities and Exchange Commission, Deutsche Bank Subsidiary DWS to Pay $25 Million for Anti-Money Laundering Violations and Misstatements Regarding ESG Investments, www.sec.gov, https://www.sec.gov/news/press-release/2023-194 (last visited September 25, 2023).

[11] In re DWS Investment Management Americas, Inc., Investment Company Act Release No. 6431 (September 25, 2023).  See also Securities and Exchange Commission, Deutsche Bank Subsidiary DWS to Pay $25 Million for Anti-Money Laundering Violations and Misstatements Regarding ESG Investments, www.sec.gov, https://www.sec.gov/news/press-release/2023-194 (last visited September 25, 2023).

[12] In re DWS Investment Management Americas, Inc., Investment Company Act Release No. 6431 (September 25, 2023). 

[13] Securities and Exchange Commission, Deutsche Bank Subsidiary DWS to Pay $25 Million for Anti-Money Laundering Violations and Misstatements Regarding ESG Investments, www.sec.gov, https://www.sec.gov/news/press-release/2023-194 (last visited September 25, 2023).

[14] Id.

[15] See, e.g., The Securities and Exchange Commission, SEC Charges Brokerage Firms and AML Officer With Anti-Money Laundering Violations, www.sec.gov, https://www.sec.gov/news/press-release/2018-87 (last visited September 25, 2023) (announcing settled charges against a broker-dealer’s AML officer for aiding and abetting the broker-dealer’s failure to report suspicious sales of penny stock shares); see also “Chief Compliance Officer Liability: Statement on In the Matter of Hamilton Investment Counsel LLC and Jeffrey Kirkpatrick,” SEC Statement by Commissioner Hester M. Peirce, www.sec.gov, https://www.sec.gov/news/statement/peirce-statement-hamilton-investment-counsel-070122 (last visited September 25, 2023) (describing the SEC’s general framework for analyzing whether to charge a chief compliance officer). 

[16] In re Merrill Lynch, Pierce, Fenner & Smith Incorporated; and BAC North America Holding Co., Exchange Act Release No. 97892 (July 11, 2023).

[17] The Risk Alert is available here: https://www.sec.gov/files/risk-alert-aml-compliance-examinations-bd-073123.pdf.

[18] The 2023 Examination Priorities are available here:  https://www.sec.gov/files/2023-exam-priorities.pdf.

Michael J. Leotta is a Partner, David H. Tutor is a Special Counsel, and Cindy M. Bi. is an associate at Wilmer Cutler Pickering Hale and Dorr LLP.

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