Charles Schwab on July 2 agreed to pay the Securities and Exchange Commission a civil penalty of $2.8 million for failing to file suspicious activity reports on questionable transactions by its investment advisers. It did not confirm or deny the SEC’s findings.
The consent agreement came in response to the SEC after the agency filed a complaint that same day in the District Court for the Northern District of California against Schwab for failing to file the SARs (suspicious activity reports). Under the Bank Secrecy Act, investment advisers must file SARs for transactions of at least $5,000 where they know or have reason to believe that the transaction (i) involves funds derived from illegal activity, (ii) was designed to evade BSA requirements, (iii) had no business or lawful purpose, or (iv) facilitated criminal activity.
The SEC alleged that in 2012 and 2013, Schwab failed to file SARs for transactions that the company suspected might be illegal or posed risks to it and its customers. Specifically, the SEC alleged that Schwab ended business relationships with 83 independently contracted investment advisers after concluding that the advisers had violated the company’s internal policies and presented a risk to the company or its customers. The terminated advisers had a combined total of $1.62 billion in assets under management and almost 18,000 subaccounts at Schwab, according to the complaint.
Additionally, according to the SEC complaint, Schwab had reason to believe that 47 of those advisers engaged in suspicious transactions, but the company filed SARs related to only 10 of them. SARs for three of those 10 were only filed after the SEC brought an enforcement action against the advisers. According to the SEC, the 37 advisers for which the company did not file SARs represented a combined total of over $840 million in assets under management and at least 6,500 subaccounts at the company.
“Schwab’s failure to file the SARs at issue resulted from its inconsistent implementation of policies and procedures for identifying and reporting suspicious transactions under the SAR Rule (31 C.F.R. § 1023.320(a)),” the complaint stated. “Although Schwab investigated and terminated the advisers, it did not have clear or consistent policies and procedures regarding the types of transactions on which SARs needed to be filed.”
A client alert from law firm Shearman & Sterling states that the case “serves as a reminder to investment advisors and broker-dealers, that anytime an employee is terminated or relationship severed over perceived suspicious activity, a thorough review must be undertaken to determine whether SAR filings are appropriate.”