Wedbush Securities Inc., a full-service brokerage and self-clearing firm headquartered in Los Angeles, was fined $1.5 million by the Financial Industry Regulatory Authority for violating the Securities and Exchange Commission’s Customer Protection and Net Capital rules, and for related supervisory and books and records failures.
“Firms have a fundamental responsibility to safeguard the securities of their customers,” said Susan Schroeder, FINRA’s executive vice president, department of enforcement. “The Customer Protection and Net Capital rules are important components of investor protection, and member firms must have reasonably designed and maintained systems and supervision to ensure both that they comply with the rules’ requirements, and detect and remediate any weaknesses.”
The SEC Net Capital Rule regulates the ability of broker-dealers to meet their financial obligations to customers by requiring broker-dealers to maintain a minimum amount of net capital and to compute their net capital in accordance with specified formulas.
FINRA found that, during a five-month period in 2015 and 2016, Wedbush was net capital deficient, ranging between $10.5 million and $59.4 million. The deficiencies resulted from Wedbush’s failure to take required deductions when valuing certain certificates of deposit for purposes of computing its net capital, according to FINRA.
The SEC Customer Protection Rule creates requirements to protect customers’ funds and securities. To ensure that customers could recover their assets in the event of the broker-dealer’s insolvency, the rule requires the broker-dealer, which maintains custody of customer securities, to obtain and maintain physical possession or control over certain of those securities.
From 2009 to 2016, FINRA found that Wedbush repeatedly violated the possession or control requirement of the Customer Protection Rule by creating and/or increasing deficits in the quantity of securities it was required to keep in its possession or control, and holding customer assets in locations that were not protected from claims by third parties.
The SEC Customer Protection Rule also requires the broker-dealer to maintain a reserve of cash or qualified securities, in a bank account, that is at least equal in value to the net cash the broker-dealer owes its customers.
And FINRA found that, from 2011 to 2016, Wedbush failed to accurately calculate its customer reserve requirement on 84 occasions. According to FINRA, this caused the firm to underfund its customer reserve account 73 times, in amounts ranging from approximately $2 million to $77 million. Wedbush also included ineligible assets in its customer reserve account, causing it to underfund its reserve an additional 110 times, in amounts ranging from approximately $9 million to $375 million.
Wedbush also failed to establish and maintain supervisory systems and procedures reasonably designed to ensure compliance with the Customer Protection and Net Capital rules, which exposed customer funds and securities to risk and prevented the firm from detecting the deficiencies for nearly seven years. Their supervisory failures also caused the firm to maintain inaccurate books and records, and to file 37 inaccurate FOCUS reports.
In settling this matter, Wedbush neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
Wedbush, who has been a FINRA regulated broker-dealer since July 1955, conducts a general securities business through approximately 647 registered individuals in approximately 100 branch offices. Wedbush also provides clearing services for approximately 88 introducing/correspondent broker-dealers.
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