Prime Broker to Pay $6.5 Million Fine for Poor Recordkeeping
FINRA fined a large prime broker $6.5 Million because its books did not properly segregate certain customer transactions from proprietary trading. The prime broker had a program whereby an affiliate made loans to certain hedge fund clients. However, the broker’s books aggregated the loan amounts owed to the affiliate with proprietary assets. As a consequence, the firm, FINRA alleged, could not properly supervise customer account activity. FINRA also charged the firm with inaccurate capital and reserve calculations.
OUR TAKE: This is really a burden of proof case. FINRA couldn’t prove that the prime broker did not adequately supervise the customer accounts, so it charged the firm with poor recordkeeping. Unlike criminal prosecutions, in regulatory actions the burden of proof falls on the registrant to prove that it did things properly. That is why firms must keep accurate written records.