Finra slapped Pershing with a $1.4 million fine for distributing over one million account statements and trade confirmations containing inaccurate interest rate information on variable rate securities.
The discrepancies persisted for more than a decade, from January 2010 to December 2022, and also extended to the firm’s online access portals for customers and registered representatives, according to the regulator.
Pershing, a member of Finra since 1973, offers clearing services to more than 450 introducing firms and carries accounts on both fully disclosed and omnibus bases.
In an AWC document published Wednesday, Finra said Pershing's failure to ensure accurate interest rate information led to violations of multiple regulations, including Exchange Act Rule 17a-3(a)(8), NASD Rule 2340 (for conduct prior to May 2019), and Finra Rules 2231 (for conduct from May 2019), 4511, and 2010.
These inaccuracies affected account statements, trade confirmations, and information provided through online portals.
The issues stemmed from two primary sources. Firstly, from January 2016 to September 2022, a third-party vendor failed to update interest rate information for at least 13,000 foreign variable rate securities.
“As a result, for each such security, Pershing’s security master system continued to reflect the initial interest rate, even after the security’s interest rate had changed,” Finra explained.
Secondly, from 2010 to 2022, Pershing's system had coding that often blocked the listing of zero percent interest rates for certain variable-rate domestic bonds. This caused the system to retain the most recent non-zero interest rate instead. For example, in 2019 and 2020, this resulted in approximately 2,900 domestic bonds being inaccurately represented in its security master system.
“Pershing uses the interest rate listed in its security master system when populating certain information on customer account statements and transaction confirmations,” Finra said. “Pershing also uses the rate listed in its security master system when making certain information available on its online access portals [for customers and registered representatives].”
The upshot, Finra said, was inaccurate information for certain variable rate securities in roughly one million customer account statements, inaccurate “current coupon” rates being listed for certain variable rate securities in at least 200,000 trade confirmations, and incorrect information being reported for the impacted securities through online access portals.
“The inaccuracies outlined above did not affect the actual market yield paid to customers,” the document noted, though it noted that Pershing had not maintained an adequate supervisory system to ensure the accuracy of interest rate information.
And while the firm did respond to customers reporting inaccurate information on their statements, it only went as far as correcting the rates in question in its security master system. It didn’t look into the root causes of the inaccuracies, or whether those issues were more systemic, Finra said.
"Pershing performed various technical checks to verify that the interest rate information it received from third-party vendors matched the data in its security master system and on customer-facing documents," Finra noted. However, these checks were not sufficient to catch all errors.
Finra's disciplinary action included a censure and a $1.4 million fine. Pershing has agreed to pay the fine promptly.
The firm has also made efforts to rectify the issues by updating its account statement disclosures, revising written supervisory procedures, and enhancing processes for verifying vendor-sourced information.
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