The Financial Industry Regulatory Authority “FINRA” has brought charges of insufficient funds against Charles Schwab & Co., Inc. The company was accused of not maintaining the funds necessary to uphold obligations to its customers, counterparties, and creditors. Charles Schwab has submitted a letter of Acceptance, Waiver, and Consent (“AWC”) and has agreed to pay $2 million dollars for their alleged transgression.
Charles Schwab & Co., Inc. is a nationally recognized broker dealer that has been registered with FINRA or one of its predecessors since 1970. Schwab is centrally located in San Francisco, with 350 branches around the country and around 7,400 registered members.
According to FINRA, between May 15 and July 1, 2014, the firm made overnight investments to their parent company, Charles Schwab Corporation (CSC). The transfers, which happened on three separate days, allegedly led to deficient net capital, in direct violation of the SEA Rule 15c3-1(a). This rule was established to make sure that broker-dealer firms maintained sufficient net capital in order to meet obligations to customers, counterparties, and creditors. FINRA made three allegations of this conduct against Schwab:
- May 15, 2014- The Schwab Company received $2.4 billion in customer funds, near the end of the day. It could not invest all of the money in the time allotted, so the Treasury group approved the transfer of $1 billion to CSC. The Treasury group did not consult the Regulatory Reporting group at the time of the transfer. CSC invested the funds in an overnight loan in accordance with the Loan Agreement and made repayments to Schwab in the morning. These transactions left the net capital short of $612 million dollars.
- June 2, 2014- Similar to the situation listed previously, Schwab received $2.5 billion in customer funds late in the day. Unable to invest all of it, again, the Treasury group approved the overnight transfer of $1 billion to CSC. The CSC invested funds overnight and sent money back to Schwab in the morning in repayment loans. Not consulting the Regulatory Report group, the company had a net capital deficiency of $775 million.
- July 1, 2014- Schwab obtained $2.8 billion in customer funds near the end of the day. In a bid to invest all the money in a timely manner, the Treasury group agreed to transfer $1 billion to CSC. CSC invested the money overnight and repaid the loans to Schwab in the morning. By not checking in with the Regulatory Reporting group, the firm was short $287 million in net capital.
On July 2, 2014, the Treasury group questioned the transactions and wondered if they were in violation of the SEA rules. Upon investigating, the firm found that it was in violation of SEA Rule 15c3-1(a) and reported themselves to the Securities and Exchange Commission the same day. Schwab has agreed to be censured and pay a fine of $2 million, along with submitting the AWC.
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