SEC Charges Charles Schwab with Failing to Report Suspicious Transactions
Litigation Release No. 24189 / July 9, 2018
Securities and Exchange Commission v. Charles Schwab & Co., Inc, Civil Action No. 18-cv-3942 (U.S. District Court for the Northern District of California July 2, 2018)
The Securities and Exchange Commission announced that Charles Schwab & Co., Inc., a registered broker-dealer, agreed to settle charges that it failed to file Suspicious Activity Reports (SARs) on the suspicious transactions of independent investment advisers that it terminated from using Schwab to custody their client accounts.
To help detect potential violations of the securities laws, the Bank Secrecy Act (BSA) requires broker-dealers to report suspicious transactions that occur through their firms. The SEC's complaint alleges that in 2012 and 2013, Schwab terminated 83 independent investment advisers for engaging in activity that Schwab determined violated its internal policies and presented risk to Schwab or its customers. The complaint further alleges that at least 47 of the terminated advisers engaged in transactions through Schwab that it knew, suspected, or had reason to suspect were suspicious and required the filing of a SAR. Schwab failed to file SARs on the suspicious transactions of 37 of these terminated advisers. Schwab failed to file SARs where it suspected or had reason to suspect that the terminated adviser had engaged in a range of suspicious transactions not involving the outright misappropriation or misuse of client funds, including: (1) transactions involving possible undisclosed self-dealing or conflicts of interest; (2) charging client accounts excessive advisory fees; (3) potentially fraudulent transactions in client accounts; (4) posing as a client to effect or confirms transactions in the client account; and (5) executing client trades and/or collecting advisory fees without being properly registered as an adviser. Moreover, Schwab failed to file SARs where it suspected or had reason to suspect that the terminated adviser had misused client funds but the client had not complained.
The SEC's complaint charges Schwab with violating Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8 thereunder. Schwab has agreed to settle the action by consenting, without admitting or denying the allegations of the complaint, to the entry of a permanent injunction and the payment of a $2.8 million civil penalty.