Firm Settles FINRA Charges for Net Capital and Reg BI Failures
A firm settled FINRA charges for operating while net capital deficient, failing to timely notify regulators of such deficiencies and other required thresholds, and for related supervisory failures.
According to the AWC, during the relevant period, the firm operated while net capital deficient "during four [separate] periods totaling 17 days." FINRA found that these deficiencies stemmed from the firm’s failure to properly apply the accrual method of accounting for legal expenses and to account for open contractual commitment charges while co-managing firm commitment underwritings. Despite requirements to provide same-day notice of net capital deficiencies, FINRA found that the firm filed notifications between 3 and 46 days late and also failed to notify regulators when its net capital fell below 120% of required levels. In addition, the firm filed 11 inaccurate FOCUS reports that misstated its net capital, excess net capital, and non-allowable assets.
FINRA found that the firm failed to establish a supervisory system, including written supervisory procedures ("WSPs"), reasonably designed to ensure compliance with net capital, recordkeeping, and the compliance obligation of Regulation Best Interest. FINRA stated that the firm’s WSPs lacked guidance on calculating net capital for underwriting activities and applying accrual accounting, and it failed to implement supervisory tools—such as alerts or exception reports—to detect potentially unsuitable recommendations. As a result, the firm did not identify recommendations involving high concentrations of structured products, inappropriate mutual fund share classes, and fund switches that caused customers to incur unnecessary sales charges.
FINRA concluded that the firm violated SEA sections 5(c)(3) ("Registration and regulation of brokers and dealers") and 17(a) ("Records and Reports"), Rules 15c3-1 ("Net capital requirements for brokers or dealers"), 17a-11 ("Notification provisions for brokers and dealers"), 17a-3 ("Records to be made by certain exchange members, brokers and dealers"), 17a-5 ("Reports to be made by certain brokers and dealers"), and 15l-1 ("Regulation Best Interest"), as well as FINRA Rules 4110 ("Capital Compliance"), 4511 ("General Requirements"), 3110 ("Supervision"), and 2010 ("Standards of Commercial Honor and Principles of Trade").
The firm agreed to a censure and a $45,000 fine.