FINRA Fines Firm for Reserve Account Deficiencies
A firm settled FINRA charges for reserve account miscalculations, inaccurate regulatory filings, and supervisory deficiencies.
According to the AWC, the firm failed to accurately classify non-cash debits in customer and proprietary accounts of broker-dealers ("PABs"). FINRA said the non-cash debits were inaccurately classified because they were collateralized by non-qualified securities. FINRA found that the firm’s computerized system did not distinguish whether borrowed securities were backed by qualified collateral. FINRA found that the failure led to overstated debits in its reserve formula calculations and underfunding of its customer and PAB reserve accounts. FINRA found that the error resulted in 136 customer reserve deficiencies ranging from $9.7 million to $532.6 million and three PAB reserve deficiencies ranging from $3.4 million to $42.6 million. FINRA also found that the firm’s record of its computation of its Reserve Account requirement and its corresponding FOCUS reports based on those computations were inaccurate.
FINRA further determined that the firm’s supervisory system, including its written supervisory procedures ("WSPs"), was not reasonably designed because they lacked processes to ensure that borrowed securities collateralized by non-qualified securities were properly incorporated into reserve formula calculations. FINRA noted that the firm later amended its WSPs to address this deficiency.
FINRA concluded that the firm violated SEA Sections 15(c) ("Government securities brokers and dealers") and 17(a) ("Records and Reports"), and SEA Rules 15c3-3 ("Customer protection-reserves and custody of securities"), 17a-4 ("Records to be preserved by certain exchange members, brokers and dealers"), and 17a-5 ("Reports to be made by certain brokers and dealers"), as well as FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade"), 3110 ("Supervision"), and 4511 ("General Requirements").
To resolve the matter, the firm consented to a censure and a $1,000,000 fine. FINRA credited the firm’s "extraordinary cooperation," noting that it (i) self-reported and proactively engaged with FINRA, (ii) retained an independent consultant for a full look-back, (iii) corrected supervisory deficiencies promptly, and (iv) provided substantial assistance during the investigation.