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From Securities Regulation Daily, February 5, 2018

SEC, FINRA sanction Wedbush Securities for net capital deficiencies

By Anne Sherry, J.D.

The SEC imposed a million-dollar penalty against Wedbush Securities and required it to comply with a list of undertakings in light of net capital deficiencies; however, the agency agreed to waive bad actor disqualifications. FINRA alsofined the firm $1.5 million for the net capital deficiencies and other compliance deficiencies. Wedbush settled both actions without admitting or denying the findings (In the Matter of Wedbush Securities Inc., Release No. 34-82630, February 5, 2018).

SEC order. The SEC found that an error in Wedbush’s reserve formula meant that reverse repurchase transactions (repos) were incorrectly tagged as belonging to a particular allocation, causing underfunding in the reserve account beginning in September 2014. A FINRA examination team inquired about the growth in the allocation, prompting Wedbush to discover the calculation error. The brokerage firm reported the deficiency to the SEC and was forced to immediately deposit $133 million into the reserve account. To come up with the funds, it had to lend out customer securities, which placed it in a severe liquidity spiral that took several months to resolve. SEC and FINRA staff monitored Wedbush’s liquidity nearly daily during this time.

The agency’s order instituting proceedings notes that the compliance error was neither the first nor the last compliance deficiency Wedbush faced. In the last three years, the SEC, FINRA, and Nasdaq have collectively sanctioned the firm five times, not including the FINRA settlement concurrent with the latest SEC order. Wedbush also reported ineffective internal controls and continued to lack adequate personnel for its size and import until at least June 2016—more than a year after discovering the calculation error.

As a result, the SEC found Wedbush willfully violated Exchange Act Section 15(c)(3) and Rule 15c3-3. The agency censured the brokerage, ordered it to cease and desist from future violations, and imposed a penalty of $1 million and disgorgement of $275,000, plus interest. Wedbush also agreed to retain one or more independent consultants to review its current system of controls and procedures for compliance with all applicable regulatory requirements related to the net capital and customer protection rules; liquidity; new correspondent and prime services accounts; and internal audit and risk management.

No "bad actor" disqualification. The SEC did, however, grant Wedbush’s request for a waiver of disqualification under Rule 262(b)(2) of Regulation A and Rule 506(d)(2)(ii) of Regulation D. The agency determined that it was not necessary under the circumstances to deny reliance on those regulations by reason of the order instituting proceedings.

FINRA order. Wedbush also settled a FINRA disciplinary proceeding filed in May 2016. The regulator found that during a five-month period in 2015 and 2016, Wedbush was net capital deficient to the tune of between $10.5 million and $59.4 million. On 84 occasions from 2011 to 2016, Wedbush failed to accurately calculate its customer reserve requirement, resulting in underfunding of between $2 million and $77 million. Wedbush also violated the "possession or control" requirement of the Customer Protection Rule by creating 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 third-party claims.

Wedbush also suffered from supervisory deficiencies, which exposed customer funds and securities to risk and prevented the firm from detecting the customer protection and net capital violations for nearly seven years. The supervisory failures also caused the firm to maintain inaccurate books and records and to file 37 inaccurate FOCUS reports.

FINRA imposed a $1.5 million fine, censured the firm, and required its president to certify within 30 days of implementation of the independent consultant’s recommendations that Wedbush has policies and procedures in place to correct the violations.

The release is No. 34-82630.

Companies: Wedbush Securities Inc.

MainStory: TopStory BrokerDealers Enforcement

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