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Charles Schwab Fined $2 Million for Significant Net Capital and Supervisory Deficiencies

FINRA fined Charles Schwab & Co., Inc. $2 million for multiple net capital deficiencies which occurred in 2014, and for failing to have procedures in place for interdepartmental communications. FINRA also cited Schwab for inadequate supervisory systems relating to unsecured transfers that could, and did, result in net capital deficiencies.

FINRA Chief of Enforcement Brad Bennett noted that, "Maintaining adequate net capital is critical to the protection of customer assets" and that communication between two firm groups designed to mitigate risk is "essential." Bennett concluded that Schwab's failure to coordinate across its group "ultimately led to the firm's net capital deficiencies."

FINRA AWC #20140428736 / News Release

According to the investigation, Schwab failed to maintain sufficient net capital in accordance with federal securities laws on three separate occasions in May, June and July of 2014, resulting in net capital deficiencies of $612 million, $775 million and $287 million. Investigators concluded that these violations occurred because Schwab failed to implement and enforce an adequate supervisory system designed to prevent unsecured transfers that could adversely impact net capital.

The report states that on each of these three occasions, Schwab's Treasury group approved $1 billion transfers as unsecured loans from Schwab to its parent corporation, called CSC. FINRA found that on each of these occasions, the Treasury group did not communicate with Schwab's Regulatory Reporting group to consider if and how the loans would impact Schwab's net capital position.

Without considering this impact, FINRA claims, Schwab's inadequate systems and procedures allowed for net capital deficiencies. The findings state that the Treasury group ultimately did contact the Regulatory Reporting group, but only a day after executing the final of the three transactions: it was too late and the deficiencies had already occurred.

FINRA also noted that Schwab miscoded several broker-dealer proprietary accounts known as PAB Reserve Bank Accounts, which similarly caused insufficient funds in contravention of federal rules: Investigators found the PAB Reserve account was underfunded by at least $800,000.

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