Firm Settles FINRA Charges for Net Capital Deficiencies Regarding Backstop Agreements

A firm settled FINRA charges for failing to maintain required minimum net capital and for related supervisory failures. 

According to the AWC, between October 2023 and February 2024, the firm participated in firm commitment underwritings and relied on backstop agreements with other broker-dealers to avoid "open contractual commitment charges." However, due to "miscommunications with backstop providers and incorrect internal calculations," the agreements provided coverage "for only a portion of [the firm’s] total underwriting commitments, leaving portions uncovered." FINRA stated that because the firm lacked sufficient excess capital to absorb the resulting charges, it incurred "net capital deficiencies ranging from $157,246 to $9,087,151."

In addition, FINRA found that from October 2023 to March 2025, the firm failed to establish a supervisory system reasonably designed to ensure compliance with net capital requirements. Although the firm regularly participated in firm commitment underwritings as part of its business strategy, "its [written supervisory procedures] did not specify how to perform net capital computations in connection with [such transactions]." FINRA stated that the firm also failed to maintain written supervisory procedures "explaining how to structure backstop agreements to [ensure] compliance with net capital requirements," and "did not supervise the preparation of backstop agreements to ensure sufficient coverage." 

FINRA concluded that the firm violated Exchange Act Section 15(c)(3) ("Registration and regulation of brokers and dealers") and Exchange Act Rule 15c3-1 ("Net capital requirements for brokers or dealers"), as well as FINRA Rules 4110 ("Capital Compliance"), 3110 ("Supervision"), and 2010 ("Standards of Commercial Honor and Principles of Trade").

The firm agreed to (i) a censure and (ii) a $40,000 fine.