Skip to Main Content

Keeping you informed

Practical Tips for Broker-Dealers After SEC Flags Compliance Issue

    Client Alerts
  • August 22, 2023

Alert Highlights

  • A review of the SEC’s July 31 risk alert targeting broker-dealers’ failure to meet anti-money laundering (AML) requirements.
  • Failures range from insufficient independent testing, outdated ongoing training materials, improperly designed Customer Identification Programs, and AML programs that don’t properly account for the 2016 Customer Due Diligence Rule.
  • Tips on how to ensure busy financial advisors understand the gravity of these risks and retain this critical information. 
  • Details on the cost of misconduct as federal regulators closely watch broker-dealers’ AML programs, showing why compliance is more important than ever.


Last month, the U.S. Securities and Exchange Commission (SEC) took a refreshed look at how broker-dealers are complying with anti-money laundering rules. What auditors discerned — as detailed in their July 31 risk alert — is a clear warning for brokerage firms to ensure their AML programs are adequate.

The agency’s Division of Examinations revealed multiple areas where some broker-dealers were failing to meet compliance measures, including not adequately verifying the identity of customers (commonly called KYC) nor devoting enough resources to AML compliance. The specific highlighted failures include:

  • Independent testing that did not meet AML compliance requirements, including testing that wasn’t done in a timely manner, no evidence of such testing, ineffective tests, and unqualified testing personnel.
  • Outdated ongoing training materials and an inability to demonstrate that ongoing training requirements were met.
  • Customer Identification Programs appeared not to be properly designed. Proper design enables broker-dealers to form a reasonable belief that they know the true identities of customers.
  • Broker-dealers had not updated their AML programs, new account forms, and procedures to account for the adoption of the 2016 Customer Due Diligence Rule.

A Grassroots Approach to Communication

There are steps leadership at broker-dealer firms should be taking to better comply with the robust set of federal rules and regulations. 

The first step: improve communication. Broker-dealer leadership should take a grassroots approach to educate their advisors and management about the rules. 

Financial advisors are a broker-dealer’s profit centers. Their primary focus is to meet with clients to drive revenue. This can create tension when it comes to time spent on compliance training, where advisors feel pulled away from generating revenue by following required regulations.

Education and ongoing training are key, but it has to be approached the right way. Advisors might unintentionally disregard a message about compliance if it is included as part of a regular barrage of do's and don'ts emails. 

Instead, these messages should be sent out in targeted, concentrated, and engaging forms so advisors can more easily digest and understand the topic. 

When it is time for a larger training effort on specific compliance measures, consider partnering with outside experts who have helped train financial advisors. Such a plan can increase the gravity of the training for the employees and facilitate retention.     

Ounce of Prevention Equals a Pound of Cure

Other steps include emphasizing the critical aspect of AML programs — to curtail the flow of illicit money to terrorist organizations, for example. The recent risk alert discussed compliance around suspicious activity monitoring and reporting. According to the SEC, any misconduct could threaten the safety of investor assets and the integrity of the financial markets. 

Importantly, there is a real cost of noncompliance. Regulators have cited larger firms with AML violations up to $17 million. Government regulators, including the Financial Industry Regulatory Authority (FINRA) routinely promulgate new rules for broker-dealers. Maintaining robust and comprehensive compliance programs — even with dedicated in-house compliance counsel — is a daunting task. Regardless, the alternative is more daunting. Better to invest in upfront compliance than become subject to fines, or worse, from regulators. 

With federal regulators closely watching broker-dealers' AML programs, it becomes all the more important to devote your time, energy, and resources to staying up to date and compliant.  

For more information, please contact us or your regular Parker Poe contact. You can also subscribe to our latest alerts and insights here.