American Portfolios Financial Services, Inc.
The findings stated that although the firm’s procedures identified red flags of suspicious activity in low-priced securities, they failed to provide guidance regarding how to detect suspicious activity and how to monitor for those red flags. The procedures also failed to provide guidance on how to conduct or document a review of an identified red flag, including whether additional investigation, customer due diligence measures, or a Suspicious Activity Report (SAR) filing might be warranted.
In addition, the firm’s AML compliance program failed to include appropriate risk-based procedures for conducting ongoing customer due diligence, including how and when to identify and report suspicious transactions in low-priced securities. In practice, to detect potentially suspicious activity concerning low-priced securities, the firm relied exclusively on an exception report prepared by its clearing firm that showed basic information concerning deposits of low-priced securities. However, the report did not show historical or aggregated information and, therefore, was not a reasonable tool to identify patterns of suspicious activity in low-priced securities. Nor did the firm conduct ongoing due diligence of customers transacting in low-priced securities.
The firm also failed to take reasonable steps to monitor and investigate transactions in low-priced securities that raised red flags in accounts held by customers. Each of these customers engaged in a suspicious pattern of depositing shares of low-priced securities, liquidating some or all of those shares, and withdrawing the funds shortly thereafter. Many of the liquidations occurred during spikes in share price and volume or during promotional campaigns.
In addition, the firm failed to reasonably investigate at least one of these customers who had disciplinary history presenting increased risk and was engaged in marketing work for issuers of low-priced securities. The findings also stated that the firm failed to establish, maintain, and enforce a supervisory system, including written procedures, reasonably designed to achieve compliance with Section 5 of the Securities Act of 1933. In practice, the firm relied primarily on a low-priced security questionnaire completed by the registered representative on the account to determine if low-priced securities deposited at the firm were freely tradeable. The questionnaire directed representatives to attach documents and information evidencing the transaction through which the customer acquired the shares. The questionnaire, however, did not specify what documentation should be collected and reviewed prior to the deposit or sale of low-priced securities or explain how to verify information provided by customers.
The firm did not have a reasonable process for documenting its review of the questionnaire or ensuring that registered representatives completed the required questionnaire. As a result, the firm failed to consistently collect and maintain all the necessary documentation to determine whether deposited securities were freely tradeable.
In addition, on multiple occasions, the firm failed to conduct independent due diligence before allowing customers to deposit and liquidate potentially restricted securities.
