Jefferies Fined $1M by FINRA for Customer Protection Rule Violations
Investment banking and brokerage firm Jefferies LLC has been censured and fined $1 million by the Financial Industry Regulatory Authority for failing to accurately calculate and maintain balances in its customer and proprietary accounts of broker-dealers, or PAB, reserve accounts. The violations, which occurred between September 2009 and July 2022, led to the firm underfunding these critical accounts on 139 separate occasions.
The action was initiated after Jefferies itself discovered and reported the issue to FINRA.
The settlement, detailed in a letter of acceptance, waiver, and consent found that Jefferies violated multiple rules, including the U.S. Securities and Exchange Commission’s Customer Protection Rule (Exchange Act Rule 15c3-3). This rule requires broker-dealers to maintain a special reserve account to protect customer funds from being used for the firm’s business operations and to ensure funds are available in the event of insolvency.
According to FINRA’s findings, a flaw in Jefferies’ computerized system caused the firm to overstate its reserve debits. The system failed to distinguish between borrowed securities collateralized by “qualified” versus “non-qualified” securities. This misclassification resulted in the firm counting certain non-cash borrows as debits in its reserve formula, which is only permitted if the collateral is a qualified security.
This error led to 136 customer reserve hindsight deficiencies ranging from approximately $9.7 million to $532.6 million. It also resulted in three PAB reserve hindsight deficiencies between $3.4 million and $42.6 million.
As a result, Jefferies also filed 135 inaccurate FOCUS reports with the SEC and maintained inaccurate books and records.
FINRA’s investigation also concluded that Jefferies’ supervisory system and written supervisory procedures were not reasonably designed to ensure compliance with the Customer Protection Rule. The firm’s internal controls lacked a specific process to verify that borrowed securities collateralized by non-qualified securities were properly accounted for in its reserve calculations.
In July 2022, after self-reporting the issue, Jefferies amended its procedures and implemented a new process to correct the problem.
While the violations were significant and occurred over an extended period, FINRA acknowledged Jefferies’ “extraordinary cooperation” in resolving the matter. The firm was given credit for: self-reporting the violations, proactively meeting with FINRA to discuss the issues, engaging an independent consultant to conduct a full look-back analysis, timely correcting its supervisory deficiencies, and providing substantial assistance to FINRA throughout the investigation.
Jefferies consented to the sanctions without admitting or denying the findings. The firm has agreed to pay the $1 million fine and will be formally censured.
Jefferies has been a FINRA member since March 1963. Headquartered in New York City, the firm has approximately 2,400 registered representatives and 35 branch offices.
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