A Chicago-based broker-dealer agreed to pay a $1.5 million penalty as part of a settlement with the Securities and Exchange Commission (SEC) for allegedly failing to file nearly 500 suspicious activity reports (SARs) largely related to microcap or penny stock securities transactions.
Archipelago Trading Services operates an over-the-counter (OTC) alternative trading system (ATS) for equity securities used by broker-dealers to execute trades. The SEC faulted the firm for not properly supervising high-risk securities transactions it executed daily over an eight-year span, the agency said in a press release Tuesday.
The details: Beginning in August 2012, Archipelago operated its ATS, known as Global OTC, without a reasonably designed anti-money laundering (AML) surveillance program for its transactions, according to the SEC’s order. It wasn’t until September 2020 that the firm established proper AML policies and procedures for tracking transactions.
As a result, Archipelago failed to file at least 461 SARs during the relevant period as required by the Bank Secrecy Act, the SEC found.
Compliance considerations: Archipelago’s AML department consisted of a compliance director also serving as the designated AML officer and a compliance manager. The firm’s policies dictated the two were responsible for investigating reports of suspicious trading activity, and the compliance director would file SARs.
However, the firm’s policies “had no description, discussion, or any guidance concerning red flags specific to possible manipulative trading of OTC securities, including microcap and penny stock securities,” according to the SEC’s order. The firm said it trained personnel to monitor for and report certain red flags indicative of money laundering, but the training was not reasonably tailored toward its business model, the agency found.
The SEC also faulted the firm for not having any automated surveillance or other systems reasonably designed to identify potentially suspicious trades, in addition to its manual surveillance deficiencies.
Archipelago updated its systems after receiving a deficiency letter from the SEC’s Division of Examinations in May 2020, according to the agency.
Archipelago is an indirect, wholly owned subsidiary of Intercontinental Exchange. A representative of Intercontinental Exchange said it had no comment. Archipelago settled with the SEC without admitting or denying the agency’s findings.