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.
