FINRA has fined Charles Schwab & Co., Inc. $2 million for net capital deficiencies and for failing to supervise. The net capital deficiencies happened on three different dates in 2014 and spanned from $287 million to $775 million.
FINRA’s findings indicated that in three instances between May 15, 2014 and July 1, 2014, Schwab was net capital deficient up to $775 million. The deficiencies occurred because on each of those dates, Schwab had cash coming in that exceeded the amounts it could invest with existing facilities. So Schwab gave $1 billion to its parent company for overnight investment. Schwab’s Treasury group approved the transfer as an unsecured loan under a revolving loan agreement without consulting its Regulatory Reporting group as to how these transfers would affect the firm’s net capital position.
Schwab had no procedures implemented mandating its Treasury group to consult with its Regulatory Reporting group about the impact of its actions on net capital. The firm’s supervisory systems were not reasonably designed to prevent the Treasury group from entering into unsecured transfers with affiliates that could result in a net capital deficiency.
“Communication between risk functions within a firm is essential,” said Brad Bennett, FINRA’s Executive Vice President and Chief of Enforcement. “In this case, Schwab failed to coordinate across its various business units which ultimately led to the firm’s net capital deficiencies. Maintaining adequate net capital is critical to the protection of customer assets.”
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