Jefferies LLC has agreed to pay a fine of $1 million as a part of a settlement with the Financial Industry Regulatory Authority (FINRA).

Between September 2009 and July 2022, Jefferies did not identify certain non-cash borrows collateralized by non-qualified securities related to short sales by institutional customers, which caused Jefferies to overstate the debits in its 15c3-3 customer and proprietary accounts of broker-dealers (PAB) reserve formulas and underfund its customer and PAB Reserve Accounts 136 times.

In the course of its business, Jefferies borrowed securities to cover both institutional customer and firm short sale transactions, and it pledged cash or securities for the securities it borrowed. To perform its Reserve Formula calculations, the firm used a computerized system that obtained data from various sources.

Between September 2009 and July 2022, the system did not distinguish whether a borrowed security was collateralized by securities that met the definition of qualified securities under Rule 15c3-3(a)(6). Because only non-cash borrows collateralized by qualified securities or other acceptable collateral can be counted as debits in the Reserve Formula, Jefferies improperly represented as debits its non-cash borrows collateralized by non-qualified securities, resulting in overstatements of reserve debits that caused the firm’s Reserve Accounts to be underfunded.

As a result, the firm incurred 136 customer reserve hindsight deficiencies of between $9,697,733 to $532,610,055, and three PAB reserve hindsight deficiencies ranging from $3.4 million to $42,552,620.

Therefore, Jefferies violated Exchange Act § 15(c), Exchange Act Rule 15c3-3(e), and FINRA Rule 2010.

Further, between September 2009 and July 2022, Jefferies inaccurately classified as debit items in its reserve formula computation non-cash borrows collateralized by securities that did not meet the definition of qualified securities under Rule 15c3-3(a)(6). As a result, the firm’s record of its computation of its Reserve Account requirement and 135 FOCUS reports filed by the firm based on those computations were inaccurate.

Therefore, Jefferies violated Exchange Act § 17(a), Exchange Act Rules 17a-4(b)(5) and 17a-5(a), NASD Rule 3110, and FINRA Rules 4511 and 2010.

Finally, between September 2009 and July 2022, Jefferies’ supervisory system, including its written supervisory procedures (WSPs), was not reasonably designed to achieve compliance with Exchange Act Rule 15c3-3(e). The firm’s system had no specific process or procedures to verify that borrowed securities collateralized by non-qualified securities were accurately incorporated into its customer and PAB Reserve Formula calculations.

In July 2022, Jefferies amended its WSPs and implemented a process to verify that borrowed securities collateralized by non-qualified securities are accurately incorporated into its customer and PAB Reserve Formula calculations.

Therefore, Jefferies violated NASD Rule 3010 and FINRA Rules 3110 and 2010.

In resolving this matter, FINRA has recognized Jefferies’ extraordinary cooperation for having: (1) self-reported its violative conduct, including proactively meeting with FINRA to discuss its hindsight deficiencies; (2) engaged an independent consultant to conduct a look-back analysis covering the entire period of its violation; (3) corrected its supervisory deficiencies in a timely manner; and (4) provided substantial assistance to FINRA in its investigation.

In addition to the $1 million fine, Jefferies has agreed to a censure.