The regulator is charging Electronic Transaction Clearing (ETC) with risking customers’ securities to fund its own operations.
The SEC reports that a Los Angeles-based broker-dealer, privately held Electronic Transaction Clearing (ETC), is settling charges that it “illegally placed more than $25 million of customers’ securities at risk in order to fund its own operations.”
As part of the settlement, ETC, which is regarded as a carrying broker-dealer because it “maintains custody of its customers’ securities and cash” and provides “high volume execution and clearing services to customers,” has agreed to pay $80,000 to the commission, the SEC notes.
The SEC finds that ETC violated the customer protection rule, “intended to safeguard customers’ cash and securities so that they can be promptly returned if a broker-dealer fails.”
The customer protection rule “requires broker-dealers to maintain physical possession or control of customers’ fully paid and excess margin securities,” but, according to the SEC, ETC “put customer securities at risk numerous times in 2015.”
Specifically, the commission says, ETC “improperly transferred almost $8 million of fully paid securities belonging to cash customers to an account at another clearing firm to meet margin requirements on borrowed funds, and the firm used more than $17 million of securities of two customers to borrow funds without consent. The order also finds that ETC improperly commingled customers’ securities and allowed a customer’s excess margin securities to be loaned out by the other clearing firm.”
The customer protection rule specifically “seeks to avoid, in the event of a broker-dealer failure, a delay in returning the customer’s securities or worse, a shortfall where the customers are not made whole. It accomplishes this by requiring broker-dealers to safeguard the cash and securities of their customers, and by requiring a broker-dealer to maintain physical possession or control of its customers’ fully paid and excess margin securities. Physical possession or control generally means that the broker-dealer must hold these securities in a location specified by the rule and that the securities be free of any liens or other interest that a third-party could exercise to secure an obligation of the broker-dealer.”
A related rule, “generally provides that a broker-dealer may not, without prior customer consent, hypothecate or pledge as collateral a customer’s securities in a way that would allow the securities to be commingled with other customers’ securities.”
Using the familiar formulation, ETC, which has been registered with the commission as a broker-dealer since June 2008, neither admits nor denies guilt. However, in addition to paying $80,000 and agreeing to be censured, the firm also has agreed to “cease and desist from committing or causing any similar violations in the future.”
In July 2017, however, ETC was also censured and fined $250,000 by self-regulatory organization (SRO) the Financial Industry Regulatory Authority (FINRA) for failing to “implement anti-money laundering policies, procedures, and internal controls reasonably expected to detect and cause the reporting of suspicious transactions and reasonably designed to achieve compliance with the Bank Secrecy Act.”
FINRA found that the firm “identified approximately 30 situations in which traders given direct market access by the firm participated in activities it deemed sufficiently suspicious so as to cause it to restrict or prohibit the trader’s trading activity, including potential prearranged trading and trading without an apparent economic purpose.”
Significantly, in the situations identified by FINRA, the firm “did not take any further investigative steps to assess whether filing a suspicious activity report (SAR) was warranted, not withstanding having been notified a short time before that FINRA intended to bring charges for an earlier identical violation.”
In that instance, as well as in several others in 2018, 2017 and earlier that drew much smaller fines, ETC neither admitted nor denied the charges.
In the present 2018 case, ETC also “cooperated with the SEC’s investigation and has taken remedial steps to prevent future violations,” the commission notes.
“As this case shows, no broker-dealer is allowed to use its customers’ securities to fund its own operations,” Michele W. Layne, director of the SEC’s Los Angeles regional office, says in a statement.
FTF News contacted ETC for comment, asking specifically why ETC has paid so many fines, both large and small, over the years of its operation, both to FINRA and to the SEC:
Does the firm regard these multiple fines as simply the cost of doing business, or is there some other reason why ETC is so often charged with violating various securities rules?
There was no response.
Need a Reprint?