Pershing LLC—a registered broker-dealer—was fined US $3 million by the Financial Industry Regulatory Authority for not complying with Securities and Exchange Commission rules and its own rule related to the protection of customer assets. Specifically, the firm was charged with failing to maintain adequate funds segregated from its own operations to meet its reserve deposit requirement for the benefit of its customers from November 30, 2010, to August 5, 2011. The amounts of Pershing’s deficiency ranged from US $4 million to US $220 million. The firm’s failure came about because it mistakenly included in its reserve formula calculation certain items as debits, thus reducing the excess of customer credits over debits that the firm was required to deposit in a reserve bank account. The firm was also charged with failing to maintain as required physical possession or control of all its customers’ fully paid and excess margin securities in certain accounts from July 2010 to September 2011. This problem arose because Pershing incorrectly reflected three clearance accounts it maintained to facilitate the settlement of transactions with one European broker-dealer client as good control locations; this is not permitted under the applicable SEC rule. FINRA charged that these failures resulted from Pershing’s failure to have an adequate supervisory system addressing its customer protection requirements. FINRA also charged Pershing with financial reporting violations related to these matters. Pershing did not admit or deny any of FINRA’s findings. Pershing is a wholly-owned indirect subsidiary of The Bank of New York Mellon Corporation.
My View: One of the unfortunate consequences of the US failing to have a single overseer of financial markets and products, is that there is a material dichotomy between the customer assets protection regimes of futures commission merchants—regulated by the Commodity Futures Trading Commission— and broker-dealers—regulated by the SEC. This is even the case for combined FCMs and BDs. For those entities there could be as many as five different ways to protect customer assets with many material and subtle differences. This may have been quaint once upon a time, but not any longer. The CFTC and SEC should work together to derive a more common approach to customer funds protection and seek legislative change, where necessary.