Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, September 1, 2010

SEC Charges Pinnacle Capital Markets with Non-Compliance with AML Rule

The SEC 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.

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.  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.

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