Broker-Dealer Settles FINRA Charges for Net Capital Inaccuracies and Reporting Deficiencies
A broker-dealer settled FINRA charges for inaccurately calculating its aggregate indebtedness and net capital when participating in firm commitment securities offerings and when preparing its FOCUS reports.
FINRA found the firm used the incorrect effective date or estimated size of the offering when calculating the value of the securities and, as a result, miscalculated the open contractual commitment charges associated with its firm commitment underwriting activities. In addition, FINRA found that the firm (i) added revenues, fees and/or commissions received without taking the required offsetting deductions and (ii) added unrealized profits when calculating its aggregate indebtedness and net capital. Further, FINRA determined that the firm reduced the net capital charge associated with its firm commitment underwriting activity by multiples of $150,000, when it was permitted only one offsetting deduction, and reduced the firm’s net capital by an estimated minimum net capital requirement instead of the firm’s actual minimum requirement. As a result, the firm’s general ledger and record of its computation of its aggregate indebtedness and net capital, as well as 16 FOCUS reports filed by the firm based on those computations, over or understated the firm’s actual excess net capital in amounts ranging from approximately $5,600 to more than $1 million. The firm also failed to timely file nine FOCUS reports.
FINRA also found that the firm's WSP's were deficient in that they (i) did not specify when FOCUS reports were required to be filed pursuant to Exchange Act rules or designate any individual to verify the accuracy of the firm’s FOCUS reports; (ii) did not specify the frequency and manner in which net capital calculations should be performed, where and when to source the information needed to prepare the net capital calculations, or what to consider when assessing the firm’s net capital at the time of a firm commitment underwriting; and (iii) did not describe the steps to be taken by firm personnel after receiving or sending notification of a prospective underwriting commitment.
FINRA determined that the firm violated SEA Section 17(a) ("Records and Reports"), SEA Rules 17a-3 ("Records to Be Made by Certain Exchange Members, Brokers and Dealers") and 17a-5 ("Reports to Be Made by Certain Brokers and Dealers"), and FINRA Rules 4511 ("General Requirements"), 3110 ("Supervision") and 2010 ("Standards of Commercial Honor and Principles of Trade").
To settle the charges, the firm agreed to (i) a censure and (ii) pay at $150,000 fine.