FINRA Fines Schwab $2 Million for Capital Deficiencies

FINRA Fines Schwab $2 Million for Capital Deficiencies

The Financial Industry Regulatory Authority levied a $2 million fine on Charles Schwab & Co. for failing to maintain sufficient levels of capital during at least three occasions last summer.

According to the regulator, Schwab ran its business while net capital deficient on three occasions between May 15, 2014, and July 1, 2014. The deficiencies ranged from $287 million to $775 million, FINRA claims.  Securities laws require brokerages to have certain levels of capital at all times to ensure a firm can meet its obligations.

The issue stemmed from inadequate communication and control procedures between Schwab’s various business units, according to FINRA’s investigation. Specifically, on the three dates in question, Schwab made $1 billion transfers to its parent company for overnight investment as part of a revolving loan agreement. These transfers arose because Schwab had “inflows of cash that exceeded the amounts it could invest with existing facilities,” according to the Wall Street regulator.

But Schwab’s treasury group, the unit in charge of making the unsecured transfers, failed to inform or consult with the regulatory reporting group; therefore, the transfers resulted in a net capital deficiency.

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

After detecting the issue, Schwab self-reported the situation to FINRA and took remedial steps to correct the problem, including ending the loan agreement and putting additional safeguards in place.

Schwab said, in a statement released Monday, that the firm regretted that its procedures didn’t flag the overnight cash transfers in 2014. "We made the transfers to the parent company in an effort to mitigate the broker/dealer’s risk of over-concentrating 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."

The firm reiterated that it has put in place "revised procedures and processes to assure it will not happen again."

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