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Schwab Hit With $2M FINRA Fine Over Net Capital Deficiencies

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Charles Schwab was censured and fined $2 million by the Financial Industry Regulatory Authority on Monday for net capital deficiencies and related supervisory failures.

FINRA found that on three occasions between May 15 and July 1, 2014, Schwab was net capital deficient up to $775 million.

The deficiencies arose because on each of those dates, Schwab had inflows of cash that exceeded the amounts it could invest with existing facilities, so instead, Schwab transferred $1 billion to its parent company for overnight investment, according to FINRA.

Brad Bennett, FINRA’s executive vice president and chief of enforcement, said in a statement that “communication between risk functions within a firm is essential. In this case, Schwab failed to coordinate across its various business units which ultimately led to the firm’s net capital deficiencies. Maintaining adequate net capital is critical to the protection of customer assets.”

Schwab’s Treasury group approved the $1 billion transfer as an unsecured loan under a revolving loan agreement without consulting its Regulatory Reporting group as to how these transfers would impact the firm’s net capital position, FINRA states.

“Schwab did not have procedures in place requiring its Treasury group to consult with its Regulatory Reporting group regarding the potential effect of its actions on net capital, nor were Schwab’s supervisory systems, including written procedures, reasonably designed to prevent the Treasury group from entering into unsecured transfers with affiliates that could result in a net capital deficiency.”

Schwab said in a statement that while the discount brokerage firm regrets that its “procedures didn’t flag the overnight cash transfers in 2014,” Schwab “made the transfers to the parent company in an effort to mitigate the broker-dealer’s risk of overconcentrating cash at any one institution where it had overnight investing arrangements. The money transferred from the broker-dealer was safely with the corporate parent at all times.”

As cited by FINRA in the settlement, Schwab notes that it “self-identified the matter, reported it immediately to regulators, and have put in place revised procedures and processes to assure it will not happen again.”

— Check out Schwab’s Kleintop: 7 Big Developments for Advisors to Watch on ThinkAdvisor.