SEC Charges Pinnacle Capital Markets for Deficient Customer Identification Program Procedures
FOR IMMEDIATE RELEASE
“If a broker-dealer provides customers with direct access to the U.S. securities markets, it must comply with the applicable customer identification rules.”
SEC Enforcement Division
Washington, D.C., Sept. 1, 2010 — The Securities and Exchange Commission today charged Pinnacle Capital Markets LLC with failing to comply with an anti-money laundering (AML) rule that requires broker-dealers to identify and verify the identities of its customers and document its procedures for doing so. The SEC also charged Pinnacle's managing director Michael A. Paciorek with causing Pinnacle's violations.
In a parallel action also announced today, the Financial Crimes Enforcement Network (FinCEN) assessed a penalty against Pinnacle for violating the Bank Secrecy Act (BSA).
Pinnacle is a broker-dealer based in Raleigh, N.C., with more than 99 percent of its customers residing outside the United States. Pinnacle's business primarily involves order processing with direct market access (DMA) software for foreign institutions comprised mostly of banks and brokerage firms and foreign individuals.
The SEC found that Pinnacle established, documented and maintained a customer identification program (CIP) that specified it would identify and verify the identities of all of its customers. However, during a six-year period, Pinnacle failed to follow the identification and verification procedures set forth in its CIP.
"Left unchecked, Pinnacle's business model yields significant money laundering risks," said Robert Khuzami, Director of the SEC's Division of Enforcement. "If a broker-dealer provides customers with direct access to the U.S. securities markets, it must comply with the applicable customer identification rules."
Thomas Sporkin, Chief of the SEC's Office of Market Intelligence, added, "Direct market access was a big selling point to Pinnacle's customers. The sub-account holders of the omnibus accounts held at Pinnacle were permitted to place trades directly in their own accounts using the DMA software and functioned as customers. The customer identification rules require that they be treated as such."
According to the SEC's order against Pinnacle, many of the firm's foreign entity customers hold omnibus accounts at Pinnacle through which the entities carry sub-accounts for their own corporate or retail customers. Pinnacle treats the sub-account holders of the foreign entity omnibus accounts in the same manner as it does its regular account holders. The vast majority of Pinnacle's regular account holders, as well as the omnibus sub-account holders, use DMA software to enter securities trades directly and instantly through their own computers. As a result, these account holders have direct, unfiltered control over how securities transactions are effected in the accounts. The foreign entity holding the omnibus account does not intermediate these trades. The DMA software allows the omnibus sub-account holders to route their securities transactions directly to the relevant market centers without intermediation.
The SEC's order finds that Pinnacle willfully violated Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8 thereunder, which require a broker-dealer to comply with the reporting, recordkeeping and record retention requirements in regulations implemented under the BSA, including the requirements in the CIP rule applicable to broker-dealers. The CIP rule generally requires a broker-dealer to establish, document, and maintain procedures for identifying customers and verifying their identities.
The order specifically finds that from October 2003 to August 2006, Pinnacle did not verify the identities of 34 out of a sample of 55 corporate account holders. The Commission also finds that from October 2003 through November 2009, Pinnacle did not collect or verify identifying information for the vast majority of the beneficial owners of sub-accounts maintained by Pinnacle's omnibus brokerage accounts. Consequently, the order finds that Pinnacle's documented procedures differed materially from its actual procedures.
Pinnacle and Paciorek agreed to settle the SEC's enforcement action without admitting or denying the allegations, and Pinnacle will pay $25,000 in financial penalties. As part of an action taken by the Financial Industry Regulatory Authority (FINRA) in February 2010, Pinnacle also has agreed to certain undertakings, including extensive AML training for its employees, as well as the hiring of an independent consultant to review its AML compliance program.
David Smyth and Sarit Klein conducted the SEC's investigation. The SEC acknowledges the cooperation of FinCEN and FINRA in this matter.
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For more information about this enforcement action, contact:
Chief, SEC's Office of Market Intelligence