24 April 2014

Finra fines Deutsche Bank Securities $6.5 million for operational failings

19 December 2013  |  914 views  |  0 Source: Finra

The Financial Industry Regulatory Authority (FINRA) today announced that it has fined Deutsche Bank Securities, Inc. (DBSI) $6.5 million and censured the firm for serious financial and operational deficiencies primarily related to its enhanced lending program.

The violations, which were originally identified during a 2009 examination, included lack of transparency in the firm's financial records and inaccurate calculations resulting in overstated capitalization and inadequate customer reserves.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, "First and foremost, a brokerage firm must ensure that its customer assets are protected. DBSI's financial accounting lacked the transparency and accuracy necessary to enable FINRA to oversee the firm and to protect customer assets."

Under DBSI's enhanced lending program, which involves mostly hedge fund customers, the firm arranges for its London affiliate, Deutsche Bank AG London (DBL), to lend cash and securities to DBSI's customers. FINRA's 2009 examination of the firm uncovered a number of serious problems in connection with this program. For example, the firm's books reflected that it owed $9.4 billion to its affiliate, but neither the firm nor FINRA examiners could readily determine which portions of that debt were attributable to the customers' enhanced lending activity, and which were attributable to DBL's own proprietary trading. The lack of transparency in DBSI's books and records meant the firm was unable to readily monitor the accounts originating out of the enhanced lending business.

FINRA also found that there were instances where DBSI made inaccurate calculations that resulted in the firm overstating its capital or failing to set aside enough funds in its customer reserve account to appropriately protect customer securities. For example, DBSI incorrectly classified certain enhanced lending stock loans; when it reclassified them in April 2010, DBL was obligated to pay a margin call of $3.1 billion. DBSI improperly computed its payable balance, thus reducing the firm's reported liabilities and inaccurately overstating the firm's net capital. Separately, in March 2010, the firm incorrectly computed its customer reserve formula. As a result, the firm's customer reserve fund was deficient by $700 million to $1.6 billion during March 2010.

In settling this matter, DBSI neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

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