FINRA Fines Pershing LLC $3 Million for Customer Protection Rule Violations and Supervisory Failures
WASHINGTON — The Financial Industry Regulatory Authority (FINRA) announced today that it has censured and fined Pershing LLC $3 million for violating the Customer Protection Rule and for related supervisory failures. The Securities and Exchange Commission (SEC) rule creates requirements to protect 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.
Brad Bennett, FINRA's Executive Vice President and Chief of Enforcement, said, "Clearing firms have a fundamental responsibility to protect customer assets and must ensure that their supervisory systems are compliant with the Customer Protection Rule. 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 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; 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 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.
In addition, Pershing's supervisory systems and procedures were 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's Member Regulation Risk Oversight & Operational Regulation staff identified the Customer Protection Rule violations during an examination of the firm. The investigation was conducted by the Department of Enforcement.
In settling this matter, Pershing neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2013, members of the public used this service to conduct 16.5 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999. Investors may find copies of this disciplinary action as well as other disciplinary documents in FINRA's Disciplinary Actions Online database.
FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, and informing and educating the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers the largest dispute resolution forum for investors and firms. For more information, please visit www.finra.org.