The United States Financial Industry Regulatory Authority (FINRA) today accepted an offer of settlement by CF Secured. As a part of the settlement, CF Secured, which provides financing to prime brokerage clients, agrees to pay a $125,000 fine.

Between April 2018 and January 2019, CF Secured failed to accurately calculate its required customer reserve on three separate occasions, resulting in nine hindsight deficiencies ranging from approximately $4 million to $29.8 million and totaling approximately $126 million. The firm’s failure to accurately calculate its customer reserve obligations caused the firm to maintain inaccurate books and records and to make two FOCUS filings inaccurately reporting its customer reserve.

In general, the reserve formula requires a broker-dealer to calculate any amounts it owes customers, called credits, and compare the credits to any amounts customers owe it, called debits. If credits exceed debits, the broker-dealer must deposit the difference in the reserve account. A hindsight deficiency occurs when a broker-dealer discovers that it previously failed to make a sufficient deposit in its reserve account.

Between April 2018 and January 2019, CF Secured failed to make sufficient deposits into its reserve account on three separate occasions, resulting in nine hindsight deficiencies totaling approximately $126 million.

Six of the hindsight deficiencies resulted from inaccurate pricing from a third-party industry pricing source for Treasury Inflation-Protected Securities (TIPS), which were used as collateral in the margin account of a firm customer. Because the value of the pledged collateral was understated due to the mispriced TIPS, the credit applied by the firm when calculating its reserve formula was also understated, resulting in six hindsight deficiencies that totaled approximately $64.5 million and ranged from approximately $4 million to $16.8 million.

Two of the hindsight deficiencies occurred in April 2018 due to an overdraft in a foreign bank account the firm erroneously excluded from its reserve formula computation. The two deficiencies were approximately $17.7 million and $15.9 million.

The ninth hindsight deficiency in the amount of approximately $29.8 million occurred in October 2018 and resulted from the firm’s inadvertent deposit of securities not eligible for use as collateral into its reserve account.

CF Secured failed to properly calculate its customer reserve requirement on nine different occasions between April 2018 and January 2019. As a result, CF Secured created and maintained inaccurate books and records in violation of Exchange Act § 17(a), Exchange Act Rule 17a-3, and FINRA Rules 4511 and 2010.

Furthermore, CF Secured’s failure to accurately calculate its reserve account requirement caused the firm to file FOCUS reports for the months-ending October 31, 2018 and November 30, 2018 that inaccurately reflected the firm’s customer reserve obligation. By virtue of the foregoing, the firm also violated Exchange Act § 17(a), Exchange Act Rule 17a-5(a)(2), and FINRA Rule 2010.

Finally, during the relevant period, CF Secured failed to establish and maintain a supervisory system, including written supervisory procedures (WSPs), reasonably designed to ensure its compliance with Exchange Act Rule 15c3-3 and its customer reserve requirements. CF Secured had no supervisory system or WSPs designed to ensure that TIPS pricing was accurate or that any errors in TIPS pricing would be escalated to allow the firm to investigate and assess the impact on its business activities.

CF Secured also had no supervisory system or WSPs designed to ensure that overdrawn bank balances were identified and captured for the purposes of its customer reserve calculation or that only eligible securities were used as collateral for purposes of satisfying its customer reserve requirement. Starting in November 2018, the firm took prompt remedial steps to improve its supervisory systems and WSPs in response to the hindsight deficiencies.

On top of the fine, the firm agrees to a censure.