FINRA Fines Jefferies $1 Million for Reserve Account Violations

Key Takeaways

• $1 Million Fine and Censure: Jefferies agreed to pay $1 million and accept a censure from FINRA to settle long-running violations tied to customer and broker-dealer reserve accounts.
• Decade of Miscalculations: Between 2009 and 2022, the firm’s systems misclassified certain securities, leading to 136 customer reserve shortfalls and three PAB reserve shortfalls, with deficiencies reaching over $500 million at times.
• Inaccurate Filings: The errors carried through to Jefferies’ books and records, resulting in 135 inaccurate FOCUS reports filed with regulators.
• Supervisory Gaps: Jefferies lacked adequate supervisory procedures to catch the errors until mid-2022, when it finally updated its policies.

Deep Dive

When a firm holds customer money, regulators expect those funds to be walled off, safe, and untouchable. For thirteen years, Jefferies’ calculations said they were. In reality, they weren’t, and FINRA has now fined the firm $1 million for failing one of the industry’s most basic safeguards.

FINRA announced that Jefferies has agreed to a $1 million fine and a formal censure, closing the book on violations tied to its handling of customer and broker-dealer reserve accounts between 2009 and 2022. The settlement, filed through a Letter of Acceptance, Waiver, and Consent (AWC), means Jefferies won’t contest the findings, though, as is typical, it hasn’t admitted or denied them either.

At the heart of the case is a simple but critical rule, i.e., firms holding customer funds and securities must keep enough in reserve to protect clients if the firm stumbles. Jefferies’ systems, however, were misclassifying certain securities it borrowed to cover short sales. Instead of recognizing that some of these collateral arrangements didn’t meet the SEC’s definition of “qualified securities,” the firm treated them as if they did.

The result? The firm consistently overstated its reserve debits, which meant its customer and proprietary accounts of broker-dealers (PAB) reserve accounts were chronically underfunded. According to FINRA, the missteps added up to 136 deficiencies in customer reserves, with shortfalls ranging from $9.6 million to more than half a billion dollars, plus three PAB reserve deficiencies topping out at $42.5 million.

And because the errors rippled through Jefferies’ books and filings, the firm also ended up submitting 135 inaccurate FOCUS reports over the years.

A Supervisory Blind Spot

The issue wasn’t just bad math, it was bad oversight. For more than a decade, Jefferies’ supervisory framework didn’t include procedures to make sure its reserve calculations were accurate. Only in mid-2022, after the problems were brought to light, did the firm update its policies and put in place processes to prevent the same mistakes.

To Jefferies’ credit, it didn’t try to sweep the problem under the rug. The firm self-reported the deficiencies, hired an independent consultant to dig into the entire period of misconduct, and cooperated fully with FINRA’s investigation. That cooperation factored into the regulator’s decision to cap the fine at $1 million, a relatively modest penalty given the size and duration of the violations.

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