FINRA Fines Charles Schwab $2M for Supervisory Failures, Capital Deficiencies

The Financial Industry Regulatory Authority is fining Charles Schwab & Co. (SCHW) $2 million. The self-regulatory organization said that between 5/15/14 and 7/1/14, Schwab was capital deficient by up to $775M because of cash inflows that went beyond what it could invest with existing facilities on three occasions. Because of this, said FINRA, the firm moved $1 billion to its parent company for overnight investment. Under a revolving loan agreement, Schwab’s Treasury group approved the funds as an unsecured loan.

The SRO claims that Schwab lacked the procedures that would have mandated that its Treasury group consult with the company’s regulatory reporting group. It also contends that the firm’s supervisory systems were not designed in a manner reasonable enough to stop the Treasury group from going into unsecured transfers with affiliates that could lead to a net capital deficiency.

Schwab is not denying or admitting to the FINRA alelagtions. A firm representative did issue a statement expressing regret over the failure to note the overnight cash transfers.

Commenting on the censure, FINRA EVP and Enforcement Chief Brad Bennett said that it is important that a firm’s risk functions communicate with one another. He noted that Schwab neglected to coordinate among its different business units, which led to net capital deficiencies. Having enough net capital at all times is essential to protecting customer assets.

A failure to supervise at a financial firm can lead to negligence, mistakes, and the failure to identify and stop wrongdoing. Investors are among those that can sustain huge losses as a result. At The SSEK Partners Group, our securities lawyers are here to help investors recoup their investments lost because of carelessness, fraud, and other errors.

Schwab to pay $2 million for net capital violations, Reuters, August 24, 2015