A client, Mr. Henderson, informs his investment adviser representative (IAR) that he plans to use a substantial portion of his investment portfolio, managed by the IAR, to fund a new business venture selling illegal substances. Mr. Henderson explicitly states that he expects the IAR to continue managing the remaining funds and make no disclosures. Under the Uniform Securities Act (USA) and federal anti-money laundering (AML) regulations, what is the IAR's most appropriate course of action?
- AInform Mr. Henderson that the IAR must report the activity to the authorities and then terminate the relationship.
- BImmediately terminate the relationship with Mr. Henderson and file a Suspicious Activity Report (SAR).
- CContinue managing the remaining funds as requested, maintaining client confidentiality.
- DAdvise Mr. Henderson against the illegal activity but continue to manage the funds without disclosure.
Show answer & explanationAnswer & explanation
Correct answer: B. Immediately terminate the relationship with Mr. Henderson and file a Suspicious Activity Report (SAR).
Investment advisers, like many financial institutions, are subject to federal anti-money laundering (AML) regulations, which include the requirement to report suspicious activities. If an IAR becomes aware that a client is using or plans to use funds for illegal activities, the IAR has an obligation to file a Suspicious Activity Report (SAR) with FinCEN. This filing must be done confidentially, without alerting the client (known as 'tipping off'). Terminating the relationship is also prudent to avoid further complicity.
Why the other options are wrong
- A. Informing the client that a report will be filed ('tipping off') is strictly prohibited under AML regulations and could lead to severe penalties.
- C. Continuing to manage funds knowing they are linked to illegal activities would make the IAR potentially complicit in money laundering, violating AML regulations.
- D. Advising against illegal activity is good, but failing to report it (when required) is a violation of AML regulations.
AML & SAR Filing for IAs/IARs
Investment advisers and their representatives have obligations under Anti-Money Laundering (AML) regulations, including filing a Suspicious Activity Report (SAR) with FinCEN if they detect suspicious transactions or activities, without 'tipping off' the client.
- Mandatory SAR filing for suspicious activity.
- Must not 'tip off' the client about the SAR.
- Applies to IAs and IARs involved in financial transactions.
Memory trick: See Something Bad, Secretly Send It.