Credit Suisse Securities has been fined $9 million by the Financial Industry Regulatory Authority (“FINRA”) for failing to maintain possession or control of billions of dollars of fully paid and excess margin securities it carried for customers and for failures to accurately calculate its required customer reserve- that is the amount of cash or securities the firm was required to maintain in a special reserve bank account.

Reserve Failures

According to FINRA’s findings, the firm’s failure to remedy coding errors caused inaccurate reserve formula computations. The Firm’s data for noncash borrows were inputted into a computerized system by an automated allocation feed. However, the allocation feed failed to specify which of the firm’s non-cash borrows were collateralized by securities that did not meet the definition of qualified securities. Only non-cash borrows collateralized by qualified securities can be counted as debits in the reserve formula. This led the firm to improperly claim securities, resulting in overstatements of reserve debits. In turn, this overstatement caused the firm’s reserve account to be underfunded. Credit Suisse incurred hindsight reserve account deficiencies of between $426 million $3.9 billion.

Further, the firm understated reserve credits relating to certain tri-party loan/repurchase transactions involving another firm. The firm pledged free and available equity securities to the other firm as collateral for certain tri-party loan/repurchase transactions. Both firms assigned a loan number to each position pledge overnight, which the firm’s software attempted to reconcile by matching its loan numbers with the other firm’s loan numbers.

In some cases, however, the firm assigned a loan number for a pledge position that was different than the loan number the other firm assigned. In those cases, the firm’s software failed to reconcile the two numbers, and the firm incorrectly designated the loaned shares as free instead of pledged on the firm’s stock record, which the firm used to compute the reserve formula. These errors caused the firm’s reserve formula to omit the value of hundreds of the pledged securities on twenty occasions and understate its reserve credits by as much as $1.1 billion.

Furthermore, FINRA found that the firm maintained an inaccurate stock record. As a result of the reserve formula miscalculations, the firm filed financial and operational combined uniform single reports which inaccurately represented the amounts required to be maintained in its reserve account. FINRA found that the firm failed to store electronic records in non-rewritable, non-erasable, or worm (write once, read many) formats. The firm failed to identify which of its applications generated records were required to be retained in a worm format and therefore failed to transmit the underlying records to a worm-compliant repository.

Conflicts of Interest

In addition, from 2006 through 2017, FINRA found credit Suisse issued more than 20,000 research reports that contained inaccurate disclosures about potential conflicts of interest regarding its investment banking relationships, its non-investment banking relationships, and its market-making activities.

FINRA also found that the firm issued more than 6,000 research reports that omitted required disclosures. Credit Suisse’s disclosures omitted that the company was the subject of the research report, had a client of the firm during the prior 12 months; or that the firm expected to receive investment banking compensation from the subject company within the next three months. Additionally, FINRA found that Credit Suisse failed to preserve more than 18.6 billion records in a non-erasable and non-writable format as required.

Failure to Supervise

In addition, FINRA determined that the firm failed to establish maintain and enforce a supervisory system. The firm failed to reasonably designed to achieve compliance with federal securities laws and rules and FINRA rules. The firm failed to reasonably supervise for compliance with the segregation and customer reserve requirements of the customer protection rule and requirements to keep electronic records in worm format. In addition, the firm failed to reasonably supervise research report conflict.

Consequences

 As a result of the findings, Credit Suisse was fined $9 million and censured by FINRA. FINRA’s Executive Vice President and Head of the Department of Enforcement said “this case should serve as a reminder to member firms of their obligation to protect customer funds from improper use, and to ensure accurate disclosures of potential conflicts between research subjects and firms in research reports, both of which are critically important for investor protection.”