SEC’s Watchful Eye: Registered Representative Held Responsible for Failing to Report “Unusual” Transactions
October 4, 2023
On September 18, 2023, the SEC announced that a registered representative at a registered broker-dealer (“Firm”) agreed to settle charges stemming from his failure to report “suspicious and unusual transactions” from a long-time customer’s brokerage account to his firm’s anti-money laundering group.1 This failure allegedly caused the Firm—which was not charged by the SEC—to fail to file a Suspicious Activity Report in a timely manner in violation of Section 17(a) of the Exchange Act.
This case is unusual for the simple fact that the SEC brought an enforcement action against an individual representative stemming from his firm’s violations of the securities law and resulted in a modest $20,000 settlement—a far cry from the cases that the SEC usually pursues. Nevertheless, this case serves as a helpful reminder that registered representatives are not immune from the SEC’s watchful eye, regardless of the amount at issue, and that the SEC sees registered representatives as playing an important role in helping to identify and report suspicious activity.
The Findings of the SEC Order
Pierre Economacos had been a registered representative for 34 years with no prior disciplinary history before the SEC’s recent enforcement action against him. In 2016, he joined the Firm whose policies required its registered agents to promptly escalate “red flags” or unusual activity in customer accounts to the Firm’s anti-money laundering (“AML”) group, which would review the referred activity to determine whether to report it to the appropriate authorities.
The Firm’s AML and ethics policies emphasized that registered representatives, such as Mr. Economacos, were the “first line of defense” when it came to detecting and reporting suspicious activities in customer accounts. The Firm also provided Mr. Economacos with annual training on the firm’s AML policies and a list of potential “red flags” that could merit escalation to the firm’s AML group.
In 2019, a long-time customer (“Customer”) asked Mr. Economacos to facilitate a $50,000 loan from Customer’s brokerage account to the brokerage account of Customer’s close relative (“Relative”). Relative’s account was held at a different brokerage firm. Mr. Economacos had known Relative for more than 15 years and maintained a “close” and “friendly” relationship with him. In fact, Relative introduced Mr. Economacos to Customer and to an individual (“Executive”) who was related to the Relative. Executive also was a customer of Mr. Economacos. Mr. Economacos had previously processed similar loans from Customer’s brokerage and margin accounts to Relative’s bank account on multiple occasions. Relative had never repaid these loans, which totaled in the hundreds of thousands of dollars. Three days after processing the loan, Executive’s company announced that it would be acquired, causing his company’s stock price to increase by 30%. Over the next seven days, Relative transferred $280,000 to Customer’s brokerage account through various transactions, as partial repayment of the outstanding balance of Relative’s loans. Mr. Economacos did not report the transactions to his firm’s AML group.
The SEC concluded that Mr. Economacos acted negligently because he “knew or should have known” that he was required to inform the Firm’s AML group about the transactions between Customer and Relative based on numerous “red flags” but failed to do so. The SEC asserted that the transactions at issue “met numerous indicia of ‘red flag’ transactions” in the Firm’s AML policies. Specifically, the SEC pointed to the following facts as “red flags”: the amount of incoming wire activity was a sudden and abnormal change for Customer’s account, occurred within a short period of time in multiple large, round dollar amounts, and occurred in close proximity to the announcement of the acquisition of the company where Executive worked, triggering a large increase in the company’s stock price. The transactions were also “abnormal” because Customer did not have a history of incoming wire transfers, had never previously sent money to Relative’s brokerage account, and Relative did not have a history of repaying Customer’s loans.
Two commissioners dissented, concluding that Mr. Economacos acted reasonably.2 In so doing, they stressed the importance of context and judgment, which they believed reasonably supported an interpretation of the facts that contradicted the majority’s understanding. Specifically, the dissenters explained that Mr. Economacos “knew his customer” and understood the unique dynamic between the parties at issue—including Customer’s longstanding pattern of loaning money to Relative—because he had a long-term relationship with each of them. The purported loan was also for an alleged real estate transaction, which could have supported such large transfers in such a short amount of time. That Relative had not previously repaid any prior loans was also not inherently suspect because close family members sometimes extend loans with “generous pay-when-you-are-able-to terms.”
To the dissenters, this important context reasonably diluted the suspicious nature of the transactions, especially because Relative was not Mr. Economacos’s customer. Mr. Economacos, therefore, did not know or have reason to know anything about Relative’s account history or any potential illegal activity within Relative’s brokerage account. And while the transactions may have implicated several potential “red flag” scenarios in the Firm’s policies, those policies also acknowledged that the listed “red flags” were not themselves reportable activities but merely “indications” of potential illegal activity.
The dissenters cautioned against second-guessing a registered representative’s judgment in determining whether to file a SAR based on information that would have been unavailable to the representative at the time they decided not to do so. As the dissenters saw it, doing so would set an “impossibly high” standard and work serious harm to the SAR regime by encouraging overreporting by both representatives and firms. Such a result would impose unnecessary costs to firms and minimize the usefulness of reporting data.
Key Takeaways
The SEC’s ruling in the Economacos enforcement action illustrates some important takeaways. For individuals, it highlights that the SEC views registered representatives as playing a crucial role in monitoring their customers’ financial transactions for potential suspicious activity. Additionally, the enforcement action appears to require registered representatives to escalate “red flag” transactions regardless of whether the context surrounding the transaction might dispel a transaction’s potentially suspicious nature. Where a firm’s AML policies require the escalation of “red flags”, it appears that registered representatives—and, indeed, firm management and AML officers—should understand that not doing so exposes them to potential SEC liability.
Firms may be able to take some comfort in the fact that the Firm was not charged in this instance. The SEC highlighted the Firm’s strong policies, procedures, and guidance with respect to AML and noted that they “required registered representatives, including Economacos, to escalate ‘red flags’ or unusual account activity to the Firm’s AML group.”3 Firms may want to consider consulting with legal counsel about conducting an evaluation of the effectiveness of their AML compliance programs to ensure that they’re top of class and ensuring that those in client-facing roles are well aware of their individual responsibility.
1Order Instituting Cease-And-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (Sep. 18, 2023) (“Order”), https://www.sec.gov/files/litigation/admin/2023/34-98418.pdf.
2U.S. Securities and Exchange Commission, Caught in a SAR Trap: Statement on In the Matter of Pierre Economacos, https://www.sec.gov/news/statement/peirce-uyeda-statement-pierre-economacos-091823.
3Order at 2.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Sharon M. Bunzel, an O'Melveny partner licensed to practice law in California, Jorge deNeve, an O'Melveny partner licensed to practice law in California, Andrew J. Geist, an O'Melveny partner licensed to practice law in New York, Mia N. Gonzalez, an O'Melveny partner licensed to practice law in New York, Michele Wein Layne, an O'Melveny of counsel licensed to practice law in California, Steven J. Olson, an O'Melveny partner licensed to practice law in California, Mark A. Racanelli, an O'Melveny partner licensed to practice law in New York, AnnaLou Tirol, an O'Melveny partner licensed to practice law in California and the District of Columbia, and Gabe Castillo Laughton, an O'Melveny associate licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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