Customer Reserve Shortfall, Monthly Computations, and a PAB Hole
Corrigan Clearing computes its customer reserve as of Friday's close. Credits include $1,850,000 of customer free credit balances and $310,000 of net funds from customer securities sold but not yet settled. Debits include $1,400,000 of debit balances in customer margin accounts and $260,000 of securities borrowed to cover customer short positions. The special reserve bank account holds $0. The firm owns $200,000 of Treasury bills in its proprietary account. The operations principal has been computing the reserve monthly because the resulting number was small. On Monday the firm delivered 4,000 shares out of a possession-or-control account, and the quarterly Rule 17a-13 count showed 1,200 shares of a customer-position security missing from the PAB.
1. Compute the reserve requirement and state what must be on deposit, where, and by when.
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Credits: $1,850,000 + $310,000 = $2,160,000 Debits: $1,400,000 + $260,000 = $1,660,000 Required reserve: $2,160,000 - $1,660,000 = $500,000
That amount must be held in the special reserve bank account for the exclusive benefit of customers, in cash or qualified securities. The Treasury bills in the proprietary account do not count until they are actually deposited into the special reserve account, and securities deposits are valued for reserve purposes below face, so cash is the cleaner funding method.
Timing: Rule 15c3-3 requires the computation at least weekly as of the close of the last business day of the week, with the deposit made no later than 10:00 a.m. on the second business day after the computation date (Tuesday for a Friday computation). Computing monthly because the number seemed small is not permitted. The firm has been unfunded and must deposit the full $500,000 plus any amounts owed for prior weeks.
2. What are the consequences of the 1,200-share PAB shortage and the Monday delivery out of the PAB account?
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Both are possession-or-control failures under Rule 15c3-3(b).
- The 1,200 shares must be made good promptly - buy them in, or deposit cash equal to their market value into the special reserve account until they are replaced.
- Delivering 4,000 shares out of a PAB account to satisfy a customer delivery means the firm used customer-attributable securities it did not have. The reserve deposit must be increased to cover the deficiency; the firm cannot treat the delivery as self-curing.
- The deficiency and the corrective action must be documented, the quarterly 17a-13 count must be completed for all PAB accounts, and the matter should be self-reported to FINRA with the dollar amount and dates.
A pattern of unfunded reserve balances plus a PAB short is the fact pattern that supports customer-protection charges, not just a bookkeeping exception.
3. How should the firm remediate its computation process, and what does it owe FINRA?
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Process fixes:
- Move to weekly computations as of each Friday close, with a documented calendar; where the requirement is large or volatile, run daily.
- Recompute prior weeks, fund the shortfall, and keep the worksheets - the computations are themselves records that must be preserved and produced on request.
- Separate the duties of computing and funding, with a second reviewer signing off.
What is owed to FINRA: a self-report describing the period of underfunding, the amounts, the PAB deficiency, the root cause (monthly computation, no funding discipline) and the remediation; the corrected reserve computations; and prompt correction of the PAB. The financial and operations principal should assume supervisory responsibility for the failure and document the escalation to senior management and counsel.