FINRA Fines Firm for Net Capital Deficiencies (with Lofchie Comment)

FINRA censured and fined a broker-dealer $2 million for net capital deficiencies and related supervisory failures. The net capital deficiencies were the result of failures in communication between risk functions within a firm. The deficiencies occurred on three separate dates in 2014 and ranged from $287 million to $775 million.

FINRA found that on three occasions between May 15 and July 1, 2014, the broker-dealer was net-capital-deficient by up to $775 million. FINRA stated that these deficiencies arose "because on each of those dates, the firm had inflows of cash that exceeded the amounts it could invest with existing facilities." As a result, the firm "transferred $1 billion to its parent company for overnight investment." FINRA found that the firm's Treasury group approved the $1 billion transfer as an unsecured loan under a revolving loan agreement without consulting its Regulatory Reporting group as to how these transfers would impact the firm's net capital position. FINRA stated that the bank did not have procedures in place to require its Treasury group to consult with its Regulatory Reporting group regarding the potential effect of its actions on net capital, nor were the firm's supervisory systems, including its written procedures, reasonably designed to prevent the Treasury group from entering into unsecured transfers with affiliates that could result in net capital deficiencies.

Lofchie Comment: Firms should look closely at all of their transactions with affiliates. A significant portion of the violations in areas such as margin, capital, documentation, recordkeeping and the like arise because transactions with affiliates are not subjected to the same level of legal/compliance review as transactions with third parties.

See: FINRA Letter of Acceptance, Waiver and Consent; FINRA Press Release.