SEC Bulletin: Risks Associated with Omnibus Accounts Transacting in Low-Priced Securities
The Division of Trading and Market of the Securities and Exchange Commission (“SEC”) has issued a bulletin that highlights for broker-dealers various risks arising from illicit activities associated with transactions in low-priced securities through omnibus accounts, particularly transactions effected on behalf of omnibus accounts maintained for foreign financial institutions (“FFIs”). These risks are heightened when the identities of a foreign financial institution’s underlying customer and/or the ultimate beneficial owner of the funds and securities are unknown to a broker-dealer because of the omnibus account structure. The bulletin is viewed in its entirety here.
The SEC gives the view that sufficiently discharging existing anti-money laundering (“AML”) obligations under the BSA requires broker-dealers to consider, among other things, the risks associated with the multiple layers of accounts through which transactions in these types of securities may have been routed. Specifically, in order to sufficiently manage the heightened risks that can be associated with low-priced securities transactions effected through omnibus accounts maintained for FFIs, a broker-dealer should consider whether it is appropriate to obtain information regarding the relevant characteristics of ultimate beneficial owners of the funds and securities (e.g., the registration status of the ultimate beneficial owner, or whether it is an entity or an individual), including their identities when the risk warrants such inquiry. Where the broker-dealer determines that the risks posed cannot be appropriately managed through the results of such inquiries or other risk mitigation measures, the SEC believes that broker-dealers should consider (1) refusing to open or closing the omnibus account, (2) restricting or rejecting transactions in low-priced securities effected on behalf of the customers of the foreign financial institution through such accounts, and (3) filing a Suspicious Activity Report (“SAR”) as appropriate.
Other key takeaways include:
Low-priced securities transactions in omnibus accounts maintained for foreign financial institutions can pose a particularly high risk of illicit activities, including fraud, money laundering, and unregistered securities offerings.
Nominee accounts and multiple foreign financial intermediaries can be used to obscure the identities of persons engaging in illicit activities.
Layers of anonymity and concealment can facilitate violations of the federal securities laws, such as non-exempt unregistered securities offerings, fraudulent stock promotion and manipulative trading, as well as other illicit activities.
Specific AML due diligence and reporting obligations apply to omnibus relationships with foreign financial institutions regardless of whether the ultimate beneficial owner of the funds and securities held in the account is a broker-dealer’s “customer” for customer identification programs (“CIP”) and CDD purposes or a “beneficial owner” for CDD purposes. For example, a broker-dealer must file a SAR on a suspicious transaction, whether or not the ultimate beneficial owner who requested the transaction is considered the broker-dealer’s customer.
A broker-dealer’s inability to obtain information regarding the ultimate beneficial owners of funds and securities held in an omnibus account engaging in transactions that are considered higher risk (such as low-priced securities transactions) significantly increases the AML and other legal and compliance risks of the foreign omnibus account associated with those transactions.