The SEC settled charges with a broker-dealer for (i) using cash that should have been deposited in a special reserve account to fund its own business activities, and (ii) allowing several of its clearing banks to hold general liens over tens of billions of dollars in securities that should not have been subject to liens by any third party. The SEC also determined that the firm used language in severance agreements that "operated to impede employees from voluntarily providing information to the SEC."
In addition, the SEC charged the firm's Head of Regulatory Reporting with failing to disclose important information to regulators (i) in required reports and (ii) concerning the purpose and modification of leveraged conversion trades.
Had the firm failed "the liens," the SEC asserted, "the resultant uncertainty would have hindered or prevented the firm's customers from retrieving their securities and could have significantly further damaged public confidence in the U.S. brokerage and securities industries during or after the Financial Crisis."
SEC Enforcement Division Complex Financial Instruments Unit Chief Michael J. Osnato emphasized the wide-ranging significance of the SEC's action:
Simultaneous with today's action, SEC staff will begin a coordinated effort across divisions to find potential violations by other firms through a targeted sweep and by encouraging firms to self-report any potential violations of the Customer Protection Rule.
The firm publicly acknowledged the violations and agreed to pay $57 million in disgorgement and interest, as well as a $358 million penalty.
Commentary
In light of Mr. Osnato's warning, all firms should make it a priority to conduct an audit of their customer protection rule procedures, including their calculation methodology and procedures for segregating securities.
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