FINRA Sanctions Firm for Net Capital Failures
A firm settled FINRA charges for conducting a securities business while below its minimum required net capital.
According to the AWC, the firm conducted a securities business while failing to maintain its minimum required net capital on 44 occasions. FINRA determined that the firm’s net capital deficiencies ranged from $8,511 to $1,486,435. FINRA found that these deficiencies resulted from the firm’s misclassification of certain non-allowable assets. FINRA explained that the firm classified deferred tax assets and federal tax prepayments as liabilities instead of non-allowable assets and recorded commissions receivable from registered representatives’ sales of affiliated mutual fund products as allowable assets rather than non-allowable assets. FINRA stated that these misclassifications caused the firm to miscalculate and overstate its net capital.
As a result of these misclassification errors, FINRA found that the firm prepared and maintained inaccurate general ledgers, net capital computations, and other financial records. FINRA stated that the firm (i) incorrectly recorded financial data—including assets, liabilities, expenses, and net capital—across 14 monthly FOCUS reports, and (ii) overstated the firm’s net capital by amounts up to $814,337. FINRA highlighted that the firm failed to submit required notices to FINRA and the SEC for 18 days when its net capital was below the required minimum, and for 12 additional days when it fell below 120 percent of the minimum requirement.
FINRA further found that the firm lacked clear guidance on how net capital computations should be performed and operated with weak oversight processes despite a history of deficiencies. FINRA noted that the firm’s controls for verifying the accuracy of its financial notifications were inadequate, including its failure to confirm that all instances of net capital deficiency were properly identified and reported. As a result, FINRA concluded that the firm failed to maintain an effective supervisory system.
FINRA determined that the firm violated Exchange Act Sections 15(c)(3) ("Registration and regulation of brokers and dealers"), 17(a) ("Records and Reports"), and Exchange Act Rules 15c3-1 ("Net capital requirements for brokers or 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"), 17a-11 ("Notification provisions for brokers and dealers") as well as FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade"), 3110 ("Supervision"), 4110 ("Capital Compliance"), and 4511 ("General Requirements").
To settle the charges, the firm agreed to (i) a censure, (ii) a $50,000 fine, and (iii) an undertaking requiring a senior management member, within 60 days, to certify in writing that the firm has remediated the identified issues and implemented an effective supervisory system, including written supervisory procedures.
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