Broker-Dealer Fined for Customer Protection Rule Violations

A broker-dealer settled FINRA charges for Customer Protection Rule violations by incorrectly returning borrowed shares in its fully paid securities lending program and for allowing an unregistered individual to oversee software development related to its securities finance business.

According to the AWC, the firm incorrectly calculated the number of excess shares available for return to lenders in its fully paid securities lending program. FINRA found that the firm's algorithm, used to determine whether shares could be returned to customers, mistakenly included anticipated loan returns that were not yet settled. FINRA said that this error resulted in instances where shares were returned prematurely, creating or increasing "segregation deficits" in customer securities accounts.

FINRA found that the firm did not have procedures to address how deficits caused by premature returns should be identified and resolved, nor did it have a system to detect issues that could cause such deficits. 

In addition, FINRA said the firm allowed an unregistered individual to oversee software development related to its securities finance business, including changes to the securities lending algorithm. As a result, FINRA found that the individual supervised a team, involved in developing the software used for securities lending, without the proper registration.

FINRA determined that the firm violated FINRA Rules 1210 ("Registration Requirements"), 2010 ("Standards of Commercial Honor and Principles of Trade") and 3110 ("Supervision") as well as Exchange Act Rule 15c3-3(b)(1) ("Customer protection-reserves and custody of securities"). 

To settle the charges, the broker-dealer agreed to (i) a censure and (ii) pay a $475,000 fine.