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 miscalculated its customer reserve requirements by using post–close-of-business data from foreign omnibus introducing brokers. FINRA found multiple errors in the firm’s concentrated margin debit computations, including improper netting of short sale credits, misclassification of a partnership account, and exclusion of a foreign margin account. FINRA determined that the firm miscalculated its proprietary account of broker-dealer ("PAB") reserve requirement and failed to make sufficient deposits, resulting in hindsight deficiencies totaling over $6 million. FINRA stated that these combined errors caused significant underfunding of both customer and PAB reserve accounts, with deficiencies ranging from $499,000 to $32 million.
FINRA found that the firm’s reserve miscalculations also resulted in inaccurate books and records and FOCUS reports that misstated its customer and PAB reserve obligations. FINRA stated that these deficiencies led to a failure to maintain complete and reliable financial records and reports.
As a result, FINRA determined that the firm’s supervisory system was not reasonably designed to ensure compliance with its reserve obligations. FINRA stated that the firm’s procedures failed to address how to perform accurate reserve calculations, conduct concentrated margin debit computations, or properly classify accounts within its back-office system. FINRA also found that the firm lacked a supervisory process to verify the accuracy of its reserve computations but later updated its supervisory system and procedures to address these deficiencies.
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-3 ("Records to be made by certain exchange members, brokers and dealers"), 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 settle the matter, the firm agreed to (i) a censure and (ii) a $250,000 fine.