Firms are encouraged to self-report issues to regulators when found. These self-reported items are generally resolved more favorably to the firms than they might be if found by the regulators themselves. This obviously depends upon the item reported and the duration of the issue as seen recently by action taken by the Securities and Exchange Commission (SEC).
Net capital requirements are maintained to help ensure the protection of investors and to provide safeguards with respect to the financial responsibility of a broker-dealer (BD). The net capital rule (15c3-1 of the Exchange Act) requires different minimum amounts of net capital based on the nature of the firm’s business. Firms that hold customer funds/securities would have a higher net cap requirement than firms that use a Custodian to hold client assets. The rule is designed so that BD’s maintain sufficient liquid assets to meet all obligations to customers, counterparties, and to have adequate additional resources to wind down its business in an orderly manner without the need for a formal proceeding if the firm fails financially.
A New York based BD had not included $2 million SBA-guaranteed loans in its calculations from June 2009 to March 2015. This oversight caused net capital deficiencies for 46 of the 70 months during that timeframe. The BD was a co-borrower on both loans with its parent company and had determined in error that the loan was not an obligation of the BD which was subordinate to the parent company.
The BD offered a settlement which was accepted by the SEC that included a cease and desist order from committing further violation of Section 15(c)(3) and of the Exchange Act and Rule 15c3-1, censure, and a civil money penalty of $150,000.
About Red Oak Compliance Solutions
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