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Regulation and Compliance > Federal Regulation > SEC

Schwab to Pay SEC $2.8M for Failing to File SARs

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(Photo: AP)

Charles Schwab has become the latest broker-dealer to come under fire from the Securities and Exchange Comission for failing to file Suspicious Activity Reports.

Schwab agreed to pay $2.8 million on July 2 to settle Securities and Exchange Commission charges that it failed to file SARs regarding the conduct of dozens of terminated advisors that the securities regulator claims violated the Investment Advisers Act.

According to the SEC complaint, in 2012 and 2013, Schwab failed to file SARs on suspicious transactions by independent investment advisors that Schwab terminated from its custodial platform. Schwab terminated the advisors for engaging in activity Schwab determined violated its internal policies and presented risk to Schwab or its customers.

“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,” the SEC complaint states.

Although Schwab investigated and terminated the advisors, the broker-dealer/custodian “did not have clear or consistent policies and procedures regarding the types of transactions on which SARs needed to be filed,” the SEC states.

For instance, the complaint states that Schwab failed to file SARs in certain instances where it investigated and terminated advisors for conduct that led, or reasonably should have led, Schwab to suspect that the advisors had charged certain customers excessive advisory fees, had allowed their state registrations to lapse, or were engaged in schemes involving cherry-picking trades.

Further, “in a number of instances where Schwab investigated and terminated advisors for conduct that led, or reasonably should have led, it to suspect that the advisors misappropriated or misused client funds, Schwab applied an unreasonably high standard for determining whether to file a SAR on the suspicious transactions,” the SEC complaint said.

Schwab disclosed the settlement on July 3 but did not provide the terms. “We appreciate the SEC completing its review of this matter and look forward to putting it behind us,” a Schwab spokeswoman said in a statement.

Cipperman Compliance Services, in commenting on the SEC complaint, states that the SEC “asserts that the Bank Secrecy Act required the custodian/clearing firm to file SARs when it suspected that advisors using its platform engaged in questionable fund transfers, charged excessive management fees, operated a cherry-picking scheme, or logged in as the client.”

According to the SEC, “such unlawful activities fall within the SAR rules because they had no lawful business purpose or facilitated criminal activity,” Cipperman opines.

The SEC “is leveraging the Bank Secrecy Act, adopted to combat money laundering, to require broker/custodians to police advisors on their platforms for violations of the Advisers Act,” Cipperman states. “It’s a novel legal theory to further the regulator’s enforcement goal of requiring large securities markets participants to serve in a gatekeeping role for the industry.”

A Schwab spokesperson told ThinkAdvisor in a Tuesday statement that “the activity at the heart of this case was the result of Schwab having a robust compliance process designed to protect our customers.  To help detect potential securities law violations and other illegal activity, Schwab investigates and, when appropriate, terminates relationships with third parties who are identified as presenting higher risk to individual investors or our company.”

The SEC, Schwab said, “alleges that we failed to also file SARs on 37 third-party investment advisors who we terminated from our custodial platform. We appreciate the SEC completing its review of this matter and look forward to putting it behind us.  We have been, and remain, committed to earning our clients’ trust and working diligently to fulfill our compliance responsibilities.”


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