The Financial Industry Regulatory Authority said Monday that it had censured and fined Pershing LLC $3 million for failing to protect customers’ assets and for related supervisory failures.
FINRA says Pershing violated the Securities and Exchange Commission’s Customer Protection Rule, which protects customers’ funds and securities from broker-dealer misuse and requires that assets be available for distribution in the event of the broker-dealer’s insolvency.
FINRA found that from November 2010 to August 2011, Pershing failed to maintain adequate reserves to meet its reserve deposit requirements with shortfalls ranging from approximately $4 million to $220 million.
From July 2010 through September 2011, FINRA says, 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,” FINRA states.
In settling the matter, Pershing neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
“Clearing firms have a fundamental responsibility to protect customer assets and must ensure that their supervisory systems are compliant with the Customer Protection Rule,” Brad Bennett, FINRA’s executive vice president and chief of enforcement, said in a statement. “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.”
The rule is intended to prevent BDs from using customer funds and securities to finance any part of their business unrelated to servicing securities customers.
The rule requires the BD with 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; and 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 states that Pershing’s supervisory systems and procedures were also inadequate and the firm failed to implement a system to review and approve procedural changes with material impact to the requirements of the Customer Protection Rule. Those deficiencies resulted in inaccuracies in the firm’s FOCUS reports between July 30, 2010 and Aug. 31, 2011.
FINRA found the violations while examining the firm.
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