Failing to protect customers’ funds and securities from broker-dealer misuse caused the Financial Industry Regulatory Authority (FINRA) to censure and fine Pershing LLC $3 million for violating the Customer Protection Rule and for related supervisory failures.
The Securities and Exchange Commission (SEC) rule also requires that assets be available for distribution in the event of the broker-dealer’s insolvency, according to a news release by FINRA on Dec. 29.
“Customers’ assets were at risk because Pershing failed to establish systems to vet procedural changes with material impact to the reserve and possession and control positions,” said Brad Bennett, FINRA’s executive vice president and chief of enforcement.
The SEC Customer Protection Rule is intended to protect customers’ funds held by their broker-dealers and to prohibit broker-dealers from using customer funds and securities to finance any part of their business unrelated to servicing securities customers. The rule requires the broker-dealer that maintains custody of customer securities and cash to comply with two requirements:
- To obtain and maintain physical possession or control over customers’ fully paid and excess margin securities;
- To maintain a reserve of cash or qualified securities in an account at a bank at least equal in value to the net cash the broker-dealer owes to customers.\
FINRA investigators found that from November 2010 to August 2011, Pershing failed to maintain adequate reserves to meet its reserve deposit requirements with reserve deficiencies ranging from approximately $4 million to $220 million. From July 2010 through September 2011, Pershing also failed to promptly obtain and later maintain physical possession or control of certain customers’ fully paid and excess margin securities. During that period, the firm’s failures caused 47 new possession or control deficits, and an increase in a significant number of existing possession or control deficits. These failures exposed customer funds and securities to risk.
The firm’s supervisory systems and procedures were inadequate and it failed to implement a system to review and approve procedural changes with material impact to the requirements of the Customer Protection Rule.
In settling this matter, Pershing neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.