Pershing LLC Fined $3 Million for Supervisory, Customer Protection Violations

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FINRA fined clearing firm Pershing LLC $3 million for violating the SEC Customer Protection Rule that establishes requirements in the interest of safeguarding customer funds and securities from broker-dealer misuse, abuse or insolvency.

FINRA Case #2012032772701

At the crux of the matter, FINRA charged Pershing with failing to obtain and maintain adequate levels of funding for customer holding amounts, which subjected customer funds and securities to undue risk.

Investigators found that from November 2010 to August 2011, Pershing failed to maintain a minimum level of reserves to meet deposit requirements, and at times was short by nearly $220 million.

Further analysis of Pershing's systems allowed FINRA to conclude that the firm's supervisory systems and procedures were inadequate, and that that Pershing was not in compliance with the SEC Customer Protection Rule, which in turn produced inaccuracies in various firm reports in 2010 and 2011.

A subsidiary of BNY Mellon, Pershing LLC is a clearing firm, meaning it handles trades, settlements and stock/security deliveries or otherwise conducts business with broker-dealers who work with directly investors. To find out if your broker or investment firm uses Pershing LLC as its clearing firm, contact your broker or visit the brokerage's website. For instance, Investors Capital Corporation identifies Pershing LLC as its clearing firm on its FAQ webpage.

Small brokerage firms often are at the center of high-risk trading strategies and sometimes downright fraudulent activities such as pump-and-dump schemes, short-squeezes, or Ponzi schemes. When the music stops and the losses mount, the small firms go out of business leaving investors with massive losses. In those situations, the only recourse an investor may have is to pursue the clearing firm which provided the back-office support, and often knew or should have known of the fraudulent activities. Such cases are factually complex and often hinge on successfully demonstrating what the employees and officers of the clearing firm knew about the correspondent firm.