The Financial Industry Regulatory Authority fined Aegis Capital, a New York-based brokerage firm, $550,000 for failing to have adequate supervisory and anti-money laundering (AML) programs tailored to detect "red flags" or suspicious activity connected to its sale of low-priced securities.

FINRA found that Aegis’ supervisory system for trading in delivery versus payment (DVP) accounts was not reasonably designed to satisfy its obligation to monitor and investigate trading in DVP accounts, particularly in low-priced securities transactions. In a DVP account, customers buy and sell securities that are not held at the brokerage firm executing the trades, and the purchases and sales of those shares are then effected through the brokerage firm.

During its investigation, FINRA found that Aegis failed to adequately monitor or investigate the trading in seven DVP customer accounts that liquidated billions of shares of low-priced securities, generating millions of dollars in proceeds for its customers. Several of these customers were foreign financial institutions that effected transactions on behalf of their underlying customers, all of whom were unknown to Aegis.

The firm did not identify these trades as suspicious even after its clearing firm alerted Aegis to AML red flags and specific suspicious low-priced securities transactions. These violations were accompanied by a failure to implement an adequate AML program tailored to detect red flags associated with these sales.

“It’s critical that firms have effective AML systems in place so that they can comply with their obligations to review suspicious transactions, including those involving trading in low-priced securities,” said Susan Schroeder, FINRA’s Executive Vice President, Department of Enforcement. “The AML and supervision rules are important components of investor protection and market integrity, and member firms must have reasonably designed systems to ensure these rules are effectively implemented.”

In settling this matter, Aegis neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

In its 2018 Regulatory and Examination Priorities Letter, FINRA highlighted AML as an area of concern and noted it will assess the adequacy of firms’ AML programs and their policies and procedures to detect and report suspicious transactions. Firms can also review FINRA’s Examination Findings Report to understand FINRA’s areas of concern and observations on effective practices related to AML.

SEC action

In a separate action, the Securities and Exchange Commission announced that Aegis agreed to pay a $750,000 penalty involving AML violations by the firm. Aegis Capital admitted that it failed to file Suspicious Activity Reports (SARs) on numerous suspicious transactions.

Broker-dealers are required to file SARs for certain transactions suspected to involve fraudulent activity or have no business or apparent lawful purpose. The SEC’s order found that Aegis failed to file SARs on suspicious transactions that raised red flags indicating the transactions were potentially related to the market manipulation of low-priced securities.

“Aegis failed to meet its AML obligations to report suspicious activity, including when it was faced with specific information alerting the firm to suspicious transactions,” said Antonia Chion, Associate Director and head of the Broker-Dealer Task Force of the SEC’s Enforcement Division. “Given the critical importance of SARs to the regulatory and law enforcement community, brokerage firms must comply with their SAR reporting obligations.”

The SEC’s order found that Aegis willfully violated an SEC financial recordkeeping and reporting rule. Aegis agreed to pay a $750,000 penalty and retain a compliance expert.

In a separate settled order, Aegis’ former AML compliance officer, Kevin McKenna, was found to have aided and abetted the firm’s violations. Aegis CEO Robert Eide was found to have caused them. Without admitting or denying the SEC’s findings, Eide and McKenna agreed to pay penalties of $40,000 and $20,000, respectively.  McKenna also agreed to a prohibition from serving in a compliance or AML capacity in the securities industry with a right to reapply.     

In a litigated order, the SEC Enforcement Division alleges that another former Aegis AML compliance officer, Eugene Terracciano, failed to file SARs on behalf of Aegis.  Terracciano is alleged to have aided and abetted and caused Aegis’ violations. The matter pertaining to Terracciano will be scheduled for a public hearing before an administrative law judge, who will prepare an initial decision stating whether the Enforcement Division has proven the allegations in the order and what, if any, remedial actions are appropriate.