Enforcement News: Interactive Brokers LLC Agrees to Settle Charges It Failed To File Suspicious Activity Reports for U.S. Microcap Securities Trades

• Posted on: Aug 12 2020

On August 10, 2020, the Securities and Exchange Commission (“SEC” or the “Commission”) announced (here) that Interactive Brokers LLC (“Interactive Brokers”) agreed to pay $11.5 million to settle charges it repeatedly failed to file Suspicious Activity Reports (“SARs”) for U.S. microcap securities trades it executed on behalf of its customers. In parallel actions, the Financial Industry Regulatory Authority (“FINRA”) and the Commodity Futures Trading Commission (“CFTC”) also announced settlements with Interactive Brokers (here and here) related to anti-money laundering (“AML”) failures in which the registered broker-dealer agreed to pay penalties of $15 million and $11.5 million, respectively, for a total of $38 million in penalties paid to the three agencies.

Broker-dealers are required to file SARs for transactions suspected to involve fraud or a lack of an apparent lawful business purpose. In that regard, under Section 17(a) of the Securities Exchange Act and Rule 17a-8 promulgated thereunder, a registered broker-dealer is required to file a SAR when it knows, suspects, or has reason to suspect that certain transactions (1) involve funds derived from illegal activity, (2) involve the use of the broker-dealer to facilitate criminal activity, (3) are designed to evade any requirement of the Bank Secrecy Act (“BSA”), or (4) have no business or apparent lawful purpose.

According to the SEC’s order (here), over a one-year period, Interactive Brokers failed to file more than 150 SARs to flag potential manipulation of microcap securities in its customers’ account, some of the trading accounting for a significant portion of the daily volume in certain of the microcap issuers. The SEC found that Interactive Brokers failed to recognize red flags concerning these transactions, failed to properly investigate suspicious activity as required by its written supervisory procedures, and failed to file SARs in a timely fashion even when suspicious transactions were flagged by compliance personnel. 

The SEC further found that Interactive Brokers violated the financial recordkeeping and reporting provisions of the federal securities laws and a related SEC rule. 

“SAR filings are an essential tool in assisting regulators and law enforcement to detect potential violations of the securities laws, particularly in the microcap space,” said Marc P. Berger, Director of the SEC’s New York Regional Office.  “Today’s multi-agency settlement reflects the seriousness we place on broker-dealers complying with their SAR reporting obligations and maintaining appropriate anti-money laundering controls.”

The CFTC found that Interactive Brokers failed to ensure that its employees followed established policies and procedures with respect to supervision of customer accounts. The agency said that the firm also lacked a reasonably designed process for conducting investigations of account activity and making SAR determinations. According to the CFTC order (here), these failings contributed to the firm’s inability to maintain an adequate AML program. As a result, alleged the CFTC, Interactive Brokers employees failed to adequately investigate and identify signs of suspicious activity in accounts that, according to the firm’s own compliance procedures, should have prompted the filing of SARs with appropriate authorities.

“Our regulatory regime requires certain intermediaries to monitor and report suspicious activity. These suspicious activity reports – or SARs – serve as key tools that we, together with our regulatory partners, use to identify fraud, manipulation, and other wrongdoing in our markets – often at the earliest stages,” said CFTC Director of Enforcement James McDonald. “This case marks the first time the CFTC has charged a violation of Regulation 42.2 and shows our commitment to ensuring these requirements are met.”

FINRA found that Interactive Brokers failed to dedicate the resources necessary to meet its AML obligations. In particular, according to the Letter of Acceptance, Waiver and Consent (here), FINRA determined that Interactive Brokers failed to meet its AML obligations because of various shortcomings, such as: not reasonably surveilling customers’ wire transfers for money laundering concerns, including deposits into customers’ accounts from countries recognized as “high risk” by U.S. and international AML agencies; not reasonably investigating suspicious activity when it found it because it lacked sufficient personnel and a reasonably designed case management system; and failing to establish and implement policies, procedures, and internal controls reasonably designed to cause the reporting of suspicious transactions as required by the BSA. 

Jessica Hopper, FINRA Executive Vice President and Head of Enforcement, said, “Today’s action is a reminder that member firms must tailor their AML programs to the firms’ business model and customer base, and also dedicate resources to programs commensurate with their growth and business lines. FINRA will continue to take steps to ensure that firms comply with their obligation to monitor for, detect and report suspicious activity.”

Without admitting or denying the SEC’s findings, Interactive Brokers agreed to be censured, to cease and desist, and to pay an $11.5 million penalty. In its settlements with FINRA and the CFTC, Interactive Brokers agreed to retain an independent compliance consultant and to disgorge certain profits in addition to the penalties assessed by those agencies.