Securities Industry Commentator by Bill Singer Esq

BILL SINGER ANNOUNCES POSSIBLE RETIREMENT PENDING $7.5 Million Settlement

Robinhood reports more monthly trades than rivals Charles Schwab, E-Trade combined (CNBC by Kate Rooney)

Disbarred Beverly Hills Lawyer Pleads Guilty to Federal Charge that He Embezzled His Client's Money and Used It to Pay Off Debt (DOJ Release)

SDNY Says You're Gonna Have To Serve Somebody (And Email Ain't Gonna Cut it) (BrokeAndBroker.com Blog)

SEC Charges Interactive Brokers With Repeatedly Failing to File Suspicious Activity Reports / Firm Will Pay a Total of $38 Million in Penalties to Settle With Regulators (SEC Release)

CFTC Orders Interactive Brokers LLC to Pay More Than $12 Million for Anti-Money Laundering and Supervision Violations / First Case to Charge Violations of CFTC's Bank Secrecy Act Compliance Regulations (CFTC Release)

FINRA Fines Interactive Brokers $15 Million for Widespread AML Failures (FINRA Release)

FINRA Imposes Fine and Suspension On Rep Whose RIA Charged Fees Beyond Those Disclosed to BD

In the Matter of Kimberly Ann Barentsen, Respondent (FINRA AWC)

If sufficient funds remain after calculation of the aggregate initial maximum distribution of US$5.00 per Claimant, the allocation shall be recalculated on a pro rata basis up to a maximum distribution of up to US$12.00 per Claimant. For clarity, the maximum Settlement Payment to be made to any single Claimant shall not exceed US$12.00.

Robinhood saw 4.3 million daily average revenue trades, or DARTS, in June, the company told CNBC Monday. This is the first time the start-up has shared monthly totals. Robinhood's debut total was higher than all of the major incumbent brokerage firms, and more than E-Trade and Charles Schwab combined. 

TD Ameritrade saw the next highest monthly total at 3.84 million DARTs, according to the company's monthly report. Interactive Brokers saw 1.8 million DARTs in June, followed by Charles Schwab and E-Trade at 1.8 million and 1.1 million, respectively.

[B]roidy was hired to represent GRL-Mesa Investments LLC, a Phoenix-based company that filed for Chapter 11 protection in United States Bankruptcy Court in Los Angeles in December 2015.

In August 2016, the bankruptcy case was resolved and dismissed. Broidy was directed by the court to hold $2,469,926 in a client trust account - funds derived from the sale of assets belonging to GRL-Mesa's bankruptcy estate. This money was supposed to be distributed to Mesa's creditors.

Although he transferred a total of $1,937,400 of Mesa's funds to its creditors, including $975 owed to the United States Trustee, Broidy did not return the remaining $512,526 that belonged to Mesa. Instead, he stole it and used it to pay for personal expenses.

Broidy admitted that on August 16, 2016, without his client's knowledge or consent, he deposited $100,000 of Mesa's money into his personal bank account, and then transferred $75,000 of that money to the bank account in New York of one of Broidy's own creditors. Through these unauthorized transfers that were hidden from Mesa, Broidy arranged to pay one of his own expenses with Mesa's money.

In July 2019, the State Bar of California disbarred Broidy based on the facts involved in this case.

[O]ver 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 order finds 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.

[F]rom June 2014 through November 2018, Interactive Brokers failed to ensure that its employees followed established policies and procedures with respect to supervision of customer accounts. Interactive Brokers also lacked a reasonably designed process for conducting investigations of account activity and making SAR determinations. These failings contributed to its inability to maintain an adequate AML program. As a result, Interactive Brokers employees failed to adequately investigate and identify certain signs of suspicious activity in accounts that, according to its own compliance procedures, should have prompted the filing of SARs with appropriate authorities.

While Interactive Brokers maintained basic written policies, it failed to commit adequate resources to ensure that its AML program was reasonably equipped to monitor, detect, escalate, and report suspicious activity in practice. Interactive Brokers also had no mechanism to combine information generated by various reports to identify patterns and trends over time. Given the size and nature of Interactive Brokers' business, the lack of these procedures limited the ability of its analysts to recognize the full scope of an individual customer's activity. This resulted in the company overlooking red flags that indicated potentially suspicious activity. Additionally, Interactive Brokers did not put any procedures in place that required compliance personnel to document steps taken and decisions made during the investigative and SAR consideration process. As a result of all of these deficiencies, Interactive Brokers failed in its duty to detect and report instances of suspicious activity.

The order states that Interactive Brokers represented in its settlement offer that it has since engaged in substantial remedial measures, including the engagement of outside consultants to conduct various assessments, independent testing of its AML program, and the development and ongoing implementation of a new case management system. Interactive Brokers has also continued to retain an independent consultant to report on the status of its implementation of previously-made recommendations and to make any additional proposals for improvements in internal controls, policies, procedures, systems, and training.

This matter concerns registered broker-dealer IB's failure to file suspicious activity reports ("SARs") as required by Section 17(a) of the Exchange Act and Rule 17a-8 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. From at least July 1, 2016 to June 30, 2017 (the "relevant period"), IB failed to file SARs relating to suspicious activity involving certain U.S. microcap securities2 transactions it executed on behalf of its customers. 

During the relevant period, IB ignored or failed to recognize numerous red flags, failed to properly investigate certain conduct as required by its written supervisory procedures, and ultimately failed to file SARs on suspicious activity. In a number of instances, IB's customers deposited a large block of U.S. microcap securities, sold the securities into the market, and shortly thereafter withdrew the proceeds of these sales from its accounts. In other instances, the sales by IB's customer accounted for a significant portion of the daily trading volume in certain U.S. microcap securities issuers. In addition, IB failed to review at least 14 deposits of U.S. microcap securities where the security had been the subject of a Commission trading suspension. In connection with this activity, IB failed to identify red flags and, therefore, did not report this activity via SARs. In those few instances where IB personnel identified red flags concerning U.S. microcap securities trading activity during the relevant period, IB failed to file a SAR where one should have been filed. These failures were the result of IB's failure to implement a reasonable surveillance program despite the significant size of IB's U.S. microcap securities business. 

SANCTIONS CONSIDERATIONS 

In determining the appropriate sanctions in this matter, FINRA considered, among other factors, that during the course of this investigation Interactive Brokers took proactive steps, invested substantial resources, and began taking meaningful steps, to remediate its AML program. The Firm has developed and implemented new, automated surveillance reports, and a new case management system that improves the type and amount of information available to its analysts. The Firm also has hired many dozens of AML-dedicated staff, including senior personnel with regulatory and law-enforcement backgrounds. The Firm has engaged a number of consultants, including a third-party outside consultant (the "Third-Party Consultant") to conduct a nonprivileged review of its AML processes and systems. The Third-Party Consultant has provided recommendations concerning the Firm's AML program, which Interactive Brokers has adopted and is implementing. Additionally, Interactive Brokers has retained third-party vendors to assess the AML risks posed by the Firm's business and to conduct third-party testing of the Firm's AML program. 

Accordingly, the sanctions imposed on Interactive Brokers by this AWC reflect FINRA's consideration of these factors, and FINRA's determination that the Third-Party Consultant is qualified and not unacceptable to FINRA. 

Interactive Brokers LLC ("IB") submits this Statement of Corrective Action in connection with the foregoing Letter of Acceptance, Waiver, and Consent ("AWC") describing the steps it has already taken to correct and substantially reduce the risk of recurrence of the issues addressed by the AWC. As set forth in detail below, IB has invested significant resources to enhance its AML program, and those efforts continue to this day. 

Independent Consultants. IB has retained several experienced and well-respected consultants and advisors to assist the firm in improving its AML program. In 2018 IB retained Consultant I to conduct a comprehensive review of IB's AML program and identify areas of focus and improvement for IB's AML program going forward. IB has accepted all of Consultant I's recommendations and is in the process of implementing them. IB has also retained Consultant II to conduct assurance work following IB's implementation of the recommendations resulting from Consultant I's review. IB retained a third consultant to draft a risk appetite statement and conduct a formal AML risk assessment, and IB has retained an independent firm to conduct its 2019 independent testing of the AML program. 

Hiring and reorganization of AML function. IB hired new leadership and increased headcount in its AML function. Since the beginning of 2018, the firm has added approximately 80 permanent personnel to its AML and surveillance team (in addition to approximately 35 temporary staff), including many with significant industry and AML experience: 

IB also reorganized its AML program to improve its efficiency and effectiveness. Each AML unit-a QA and Training unit, a Financial Intelligence unit, a Know Your Customer ("KYC")/Enhanced Due Diligence ("EDD") unit, a Sanctions and Lists Screening unit, and an AML Risk Assessments unit-now reports to the Chief AML Officer. The Trade Surveillance unit, which reports to the Deputy Chief Regulatory Officer, also reports to the Chief AML Officer for AML purposes. 

New Case Management System and Surveillance. IB has developed and is building a customized proprietary case management system, IBKR 360, which allows compliance analysts a holistic view of customer information and activity when they conduct surveillance. The firm has enhanced many of its exception-based surveillance reports and report parameters and is migrating them to IBKR 360. IB LLC retained outside AML consultants to enhance the firm's existing cashiering surveillance reports to address potentially suspicious cashiering typologies. The consultants designed additional report parameters and tuned existing parameters based on their analysis of IB customer data, and IB is in the process of programming and testing the enhancements designed by the consultants. 

Policies and Training. IB has adopted a new AML policy, completing a risk assessment and risk appetite statement, and developing desktop procedures within each AML team to maintain uniformity in procedure and analysis. These desktop procedures will provide detail on day to day operations aligned with specific tasks, such as conducting investigations and reviewing specific reports. The firm enhanced its standard employee AML training and developed material for additional training of AML and Surveillance Analysts on SAR-filing and AML "red flags." Surveillance Analysts and key New Accounts staff of the firm are becoming CAMS (Certified Anti-Money Laundering Specialist) certified. 

Governance. Various committee and working groups meet regularly to monitor IB's progress in achieving its goals and to discuss ongoing, future enhancements. These groups include the following: 

Risk Ranking and Enhanced Due Diligence. IB has implemented a Customer Risk Ranking Program designed to capture the overall AML risk posed by individual customers considering a variety of factors. IB has also implemented an EDD program tied to the Customer Risk Ranking Algorithm that subjects certain IB customers to heightened scrutiny both at account opening and on an ongoing basis. 

Restrictions on Certain High-Risk Activity. The firm is implementing restrictions on money movement designed to mitigate higher risk cross-border and other cashiering activity. The firm has further limited the types of accounts it will accept from high risk countries. The firm also implemented significant restrictions on transfers of U.S. microcap securities in early 2018 and is conducting enhanced surveillance on U.S. microcap securities

In the fall of 2016, Barentsen created her own registered investment adviser of which she was the sole owner and employee. In seeking approval for this outside business, Barentsen told the firm in an email and in a disclosure questionnaire that her advisory business would only charge hourly fees and fixed one-time financial planning fees. First Allied approved her outside business based on these representations. 

In December 2016, Barentsen began offering a new service to her advisory clients where she would charge an annual 1.5 percent asset-management fee for managing variable annuity subaccounts. She did not disclose this new service or the associated fees to the firm. After First Allied discovered the undisclosed asset-management fees in January 2019, Barentsen ceased charging the fees and terminated her arrangement with the variable annuity provider. 

In addition, in 2017 and 2018, Barentsen made inaccurate statements in her annual compliance questionnaires to the firm. In response to questions asking whether her advisory business had assets under management and if she was compensated through a percentage of the assets under management, Barentsen incorrectly stated that she did not manage assets and only charged hourly fees.

• Securities Industry Commentator
• Bill Singer