Stifel, Nicolaus & Co. Inc., a St. Louis-based broker-dealer, has been fined $750,000 by Finra for not properly accounting for customer assets in a reserve fund as well as assets held in a proprietary trading account.
Stifel, which has approximately 4,400 registered representatives, used customer assets as collateral for bank loans it procured over 1999-2012, which is permissible for certain assets under current rules. However,
Stifel didn't appropriately account for such use of customer assets in a reserve fund meant to back up this collateral, according to a disciplinary action
document signed April 8 by the
Financial Industry Regulatory Authority Inc.'s Department of Enforcement.
Separately, over an eight-month period in 2013, Stifel made mistakes in calculating how much money it needed on hand for its Proprietary Accounts of Introducing Brokers and Dealers (PAIB), a reserve account for broker-dealer assets, Finra alleges.
“We are pleased to have reached a mutually acceptable agreement with Finra. We fully cooperated throughout the process and have modified our compliance policies to correct the situation,” Stifel CEO Ron Kruszewski said in an e-mailed statement.
Under current securities law, broker-dealers using customer money as collateral for a loan must maintain a customer reserve account, which helps ensure funds are available to pay investors in the event of a firm's liquidation. Brokerages must compute the amount to go into the account on the last business day of the week and month.
However, prior to computing reserves for the customer reserve account, Stifel swapped the loans for other loans secured with firm assets, which meant the firm didn't have to compute necessary reserves for the customer reserve account, according to Finra.
If loans were again required the following week or month, the firm would collateralize the loans again with customer assets and repeat the practice, which is prohibited under current rules, the disciplinary action states.
Such a practice potentially reduces the amount Stifel would need to keep in reserves to cover customer collateral, Finra says. The Department of Enforcement monitored Stifel's activity in this regard over a five-week period in 2012, and found in one instance that “had the substitution of customer securities not occurred, an additional deposit of approximately $36 million would have been required to fund the customer reserve account.”
Separately, from March 2013 to November 2013, Stifel incorrectly calculated requirements for its PAIB, which led to eight “hindsight deficiencies,” meaning the firm didn't have enough money in its reserve deposit account, a violation of securities law, according to Finra. The hindsight deficiencies ranged from $825,000 to $18 million.
