The U.S. Financial Industry Regulatory Authority (FINRA) announced on Monday that has censured and fined Charles Schwab & Co. Inc. US$2 million for three capital deficiencies that occurred last year and for related supervisory failures that allowed those deficiencies to occur.
Although the firm agreed to settle the allegations, neither admitting nor denying the charges, it consented to FINRA’s findings. The self-regulatory organization reports that its investigation found that on three occasions between May 15, 2014 and July 1, 2014, Charles Schwab was net capital deficient by amounts of up to US$775 million.
“The deficiencies arose because on each of those dates, Schwab had inflows of cash that exceeded the amounts it could invest with existing facilities, so, instead, Schwab transferred $1 billion to its parent company for overnight investment,” FINRA’s announcement notes. “[Charles] Schwab’s treasury group approved the $1 billion transfer as an unsecured loan under a revolving loan agreement without consulting its regulatory reporting group as to how these transfers would impact the firm’s net capital position.”
Charles Schwab did not have procedures in place that would require its treasury department to consult with its regulatory reporting group regarding the potential effect of the moves on its capital position, FINRA’s announcement says, nor were the firm’s supervisory systems designed to prevent the sorts of transfers with affiliates that could result in a net capital deficiency.
“Communication between risk functions within a firm is essential,” says Brad Bennett, executive vice president and chief of enforcement at FINRA, in a statement. “In this case, [Charles] Schwab failed to co-ordinate 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.”