SEC Charges Archipelago Trading Services Inc. for Failure to File Suspicious Activity Reports

The U.S. Securities and Exchange Commission (SEC) has taken action against Archipelago Trading Services Inc. (ATSI), a Chicago-based broker-dealer, for failing to file Suspicious Activity Reports (SARs) related to over-the-counter (OTC) securities trades conducted on its alternative trading system, Global OTC. This failure to fulfill its obligations has led to charges against ATSI.

Neglected Filing Requirements

The SEC alleges that ATSI failed to submit at least 461 Suspicious Activity Reports (SARs) between 2012 and 2020. These reports should have been filed concerning OTC securities trades executed on the Global OTC platform. The specific focus of these unfiled SARs was on microcap and penny stock securities, both of which are considered risky investments by the SEC.

ATSI’s main business revolves around operating Global OTC, which serves as an alternative trading system for OTC stock transactions. Despite numerous daily trades involving high-risk microcap and penny stocks, ATSI did not establish an anti-money laundering surveillance program until September 2020, according to the SEC’s findings.

Violations and Settlement

The failure to file these SARs is viewed as a violation of Section 17(a) of the Securities Exchange Act and Rule 17a-8, which mandate broker-dealers to submit SARs concerning potentially questionable transactions. By failing to fulfill this requirement, ATSI allegedly overlooked and failed to report potential manipulative and suspicious trading activities, including activities such as spoofing, layering, wash trading, and pre-arranged trading.

To resolve these charges, ATSI has agreed to a settlement that involves paying a $1.5 million penalty. It’s important to note that ATSI is settling without admitting or denying the SEC’s findings.

SARs as Legal Necessity

Suspicious Activity Reports (SARs) are crucial documents used by financial institutions to alert authorities about potentially illicit transactions. In the U.S., these reports were established as part of the Bank Secrecy Act in 1970 to combat money laundering, terrorist financing, and other financial crimes.

Filing SARs is a legal requirement for financial institutions, including broker-dealers registered with the SEC. Failure to do so, as evidenced in the ATSI case, not only leads to regulatory action but also exposes investors to unnecessary risks.

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Financial institutions around the world rely on SARs to detect and prevent financial crimes. Filing a SAR does not necessarily constitute a criminal complaint; rather, it serves as a red flag for authorities to review and decide whether a full investigation is warranted.

In the U.S., SARs are submitted to the Financial Crimes Enforcement Network (FinCEN) as part of regulatory compliance measures.