FINRA fines Electronic Transaction Clearing for failure to satisfy customer protection requirements

Maria Nikolova

The firm has agreed to pay a fine of $450,000 for rule violations committed during the period of April 1, 2015 through June 30, 2017.

Electronic Transaction Clearing, Inc. (ETC), a provider of high volume execution and clearing services to broker-dealers and non-broker dealers, has agreed to pay a fine of $450,000 as a part of a settlement with the United States Financial Industry Regulatory Authority (FINRA).

According to the findings, during the period of April 1, 2015 through June 30, 2017, ETC failed to satisfy its customer protection requirements for its customer and proprietary business, including hindsight deficiencies in two instances; adhere to capital withdrawal rules specific to clearing firms in two instances; and, comply with its recordkeeping and supervision requirements.

Specifically, when calculating reserves in customer and proprietary accounts of broker-dealers (PAB), ETC failed to make required reductions to certain debit balances. This led to the firm’s customer and PAB reserve accounts to be underfunded, resulting in hindsight deficiencies of $19.3 million and $23 million in the customer reserve account and $46.8 million and $12.8 million in the PAB reserve account, as of March 31, 2016 and August 26, 2016, respectively.

In addition, ETC failed to timely notify the SEC and FINRA of these deficiencies.

Also, from February 2016 to April 2017, the firm improperly overstated debits in its customer reserve calculations when it included an amount that was doubtful of collection. Due to this, ETC violated Rule 15c3-3 of the Securities Exchange Act of 1934 (Exchange Act) and FINRA Rule 2010.

According to the findings, in November and December 2016, ETC made unsecured advances to its parent company that exceeded 10% of the firm’s excess net capital for that period, without obtaining written permission from FINRA prior to doing so. As a result, the firm violated FINRA Rule 4110 and FINRA Rule 2010.

Furthermore, in 2016-2017, ETC failed to comply with recordkeeping rules requiring the creation and maintenance of certain business records. Between January and June 2017, the firm did not maintain an index of electronic records, store electronic records in the proper format, maintain an audit system for electronic records, or provide required notices and undertakings regarding its electronic records. Separately, throughout 2016, the firm did not comply with recordkeeping requirements regarding payments made to its affiliated entities. Due to this, the firm violated Exchange Act Rule 17a-3 and 17a-4, and FINRA Rules 4511 and 2010.

During the period April 1, 2015 through June 30, 2017, ETC relied on proprietary electronic systems to help it calculate reserves, track margin calls, generate customer statements, and maintain position reconciliations. Although the firm was aware of deficiencies in its electronic systems, it failed to replace or improve them. The firm, as part of its supervisory system, at times developed back-up manual processes in an attempt to satisfy its obligations but these manual processes did not result in accurate calculations and records, given the volume of trading and number of accounts at the firm, and the firm failed to reasonably monitor these manual processes to ensure that they complied with regulatory requirements.

Finally, ETC was found to have failed to reasonably supervise its affiliate that was operating the firm’s electronic storage systems and failed to reasonably supervise intercompany transfers between the firm and its affiliates. It also failed to reasonably address deficiencies with respect to its margin model. Accordingly, the firm was found to have failed to establish and maintain a supervisory system reasonably designed to achieve compliance with the securities laws and FINRA rules in violation of FINRA Rules 3110(a) and 2010.

On top of the fine, the firm agrees to a censure. Also, within 60 days of Notice of Acceptance of the AWC, ETC will have to certify to FINRA that the firm has established and implemented policies, procedures, and internal controls reasonably designed to address and remediate the issues identified in the settlement.

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