SEC Fines Archipelago Trading $1.5 Million for Failure to Report Suspicious Transactions

Archipelago Trading Services Inc. (ATSI), a Chicago-based broker-dealer, faces substantial penalties from the Securities and Exchange Commission (SEC) for neglecting to file legally mandated Suspicious Activity Reports (SARs) related to over-the-counter (OTC) securities transactions.

The Securities and Exchange Commission (SEC) has announced that Archipelago Trading Services Inc. (ATSI) is being charged for its failure to file numerous Suspicious Activity Reports (SARs) between August 2012 and September 2020. The charges are linked to transactions involving over-the-counter (OTC) securities executed on ATSI's alternative trading system (ATS). In response to the charges, ATSI has agreed to settle and pay a fine of $1.5 million.

ATSI, a Chicago-based broker-dealer, specializes in operating an OTC equity securities ATS known as Global OTC. This platform serves as a venue for broker-dealers to execute trades involving OTC securities, particularly microcap and penny stock securities which typically carry a higher risk profile. Despite the considerable volume of transactions in these high-risk securities on a daily basis, the SEC's order revealed that ATSI failed to establish an anti-money laundering surveillance program for its transactions until September 2020.

The absence of a comprehensive surveillance program meant that ATSI neglected to monitor transactions executed on the Global OTC platform for potential indications of suspicious manipulative trading activities, including practices like spoofing, layering, wash trading, and pre-arranged trading. Consequently, the SEC's order found that ATSI failed to file a significant number of SARs, totaling at least 461 instances, with the majority involving microcap or penny stock securities.

Daniel R. Gregus, Director of the SEC's Chicago Regional Office, emphasized the critical role played by SEC-registered broker-dealers in adhering to the mandates of the Bank Secrecy Act, which includes the responsibility to file SARs. He stated, "When firms like ATSI fail to investigate red flags, especially those involving higher-risk microcap and penny stock securities, they put the investing public at risk."

The SEC's order concluded that ATSI was in violation of Section 17(a) of the Securities Exchange Act and Rule 17a-8. While ATSI neither admits nor denies the findings presented by the SEC, the company has agreed to a series of measures as part of the settlement. These include a censure, a cease-and-desist order, and the payment of a $1.5 million penalty. The settlement underscores the regulatory scrutiny faced by financial institutions and the importance of maintaining rigorous compliance with anti-money laundering regulations and reporting requirements.

As the SEC continues to safeguard the integrity of the financial markets and protect the interests of investors, the ATSI case stands as a reminder of the accountability that broker-dealers hold in their operations and the imperative to fulfill reporting obligations diligently.