Wedbush to Pay $2.5 Million Fine (in Installments) for Capital Deficiencies
(Corrects fifth paragraph to say Wedbush Securities has $149 million of excess net capital, not $280 million.)
Wedbush Securities, which has reached five regulatory settlements of more than $600,000 in the last year, was fined $2.5 million in new cases alleging net capital and customer-protection violations, the Securities and Exchange Commission and the Financial Industry Regulatory Authority said on Monday.
For the second time in five months, the Los Angeles-based firm negotiated a multi-year payment plan to fulfill settlement orders. In September, the Los Angeles-based retail brokerage firm and investment bank arranged to pay $470,000 for trade reporting in four annual installments.
The new fines, along with almost $300,000 in disgorgement and interest payments that the SEC ordered Wedbush to make to the U.S. Treasury within ten days, will be paid over three years, according to the settlements.
The delayed-payment plans do not indicate capital issues for the firm, said Wedbush senior vice president Natalie Svider.
Wedbush Securities, which remains managed by its octogenarian founder and president Edward Wedbush and his family, had $149 million in excess net capital as of November 30, 2017, above its $180 million requirement. lt also has $280 million in equity, the spokeswoman said.
“If you had the opportunity to pay in installments rather than in one bulk sum, you’d probably be happy, too,” said Svider. “We’re pretty thrilled to have that opportunity, and we’re pleased that the matters have been put to rest.”
Finra’s $1.5 million fine was imposed for alleged violations of customer protection and net capital rules, and related supervisory and books-and-records failures, that were created to ensure that broker-dealers can meet cash and other obligations to customers and counterparties.
Wedbush failed to accurately calculate its customer reserve requirements 84 times between 2011 and 2016, causing to underfund its reserve account by $2 million to $77 million on 73 occasions, Finra said. It exacerbated the underfunding by counting ineligible assets in its customer reserve over 100 times, understating the quantity of securities it was required to have in its possession and improperly calculating bank loans collateralized by customer securities in the reserve formula.
Wedbush also treated two joint accounts held by a “principal officer”and his wife as non-customer accounts when the wife’s account should have been included in calculating the reserve formula, Finra said, without identifying the officer.
The broker-dealer also incorrectly treated an account owned by its parent company as a non-customer account, causing it to understate its reserve requirements by as much as $16.5 million. And it failed to deduct the value of illiquid certificates of deposit from its net capital and to haircut large numbers of CDs it owned from single bank issuers, according to the Finra settlement.
The SEC, which fined Wedbush $1.0 excluding disgorgement and interest, said the firm was a systems-error recidivist, noting that coding errors led to its omission of certain repo transactions in its reserve calculation and created a deficiency of over $130 million.
“The Calculation Error is not the first significant compliance issue Wedbush has faced, and even after the discovery of the Calculation Error, it has continued to have compliance deficiencies,” the SEC wrote in its settlement order. “In the last three years alone, Wedbush has been sanctioned collectively by the Commission, FINRA, and Nasdaq five times.
”Despite its repeated violations, Wedbush continued to lack adequate personnel for a regulated entity of its size and import until at least June 2016, which was more than a year after the discovery of the Calculation Error.”
The SEC in 2016 announced an industrywide sweep of customer-protection compliance rules after fining Merrill Lynch $415 million for errors in segregating customer funds, saying it would give firms that proactively report potential violations “cooperation credit and favorable settlement terms.”
Neither the SEC nor Finra mentioned such cooperation in their Wedbush settlement orders.
Ed Wedbush has been fighting a 2015 enforcement finding from Finra that called for him to be suspended from acting as a principal for 31 days and to pay $50,000 for supervisory reporting failures (while the firm was fined $300,000). Both a Finra appeals body and the SEC upheld the decision in 2016, but Wedbush has appealed further to the U.S. Court of Appeals Ninth Circuit in San Francisco.
Separately, the Trump administration’s Department of Labor last March sued Ed Wedbush,his son Gary and the company for fee- and commission-related fiduciary violations in administering two company retirement plans. In October a federal court denied the Wedbush defendants’ motion to dismiss the case.
Wedbush consented to its settlements with the SEC and Finra on Monday without admitting or denying the allegations in their complaints.