According to FINRA, Jefferies LLC was censured and fined $1,000,000 for inaccurately calculating its customer and proprietary accounts of broker-dealers (PAB) reserve formula computations.

The New York-based firm failed to properly identify certain non-cash borrows collateralized by non-qualified securities related to short sales by institutional customers. This error caused the firm to overstate the debits in its customer and PAB reserve formulas, resulting in underfunding of its customer and PAB reserve accounts.

The magnitude of these errors was substantial. The firm incurred customer reserve hindsight deficiencies ranging from $9,697,733 to $532,610,055, and PAB reserve hindsight deficiencies ranging from $3.4 million to $42,552,620. The computerized system that the firm used to perform its reserve formula calculations did not distinguish whether a borrowed security was collateralized by securities that met the definition of qualified securities.

As a result of these calculation errors, the firm's records of its reserve account requirement and its FOCUS (Financial and Operational Combined Uniform Single) reports filed with regulators were inaccurate. The firm had no specific process or procedures to verify that borrowed securities collateralized by non-qualified securities were accurately incorporated into its reserve formula calculations.

FINRA found that Jefferies failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures, reasonably designed to achieve compliance with the Securities Exchange Act of 1934's customer reserve and PAB reserve requirements.

The firm has since amended its written supervisory procedures and implemented a process to verify that borrowed securities collateralized by non-qualified securities are accurately incorporated into its customer and PAB reserve formula calculations.

This case underscores the critical importance of accurate reserve calculations in protecting customer assets. The customer reserve requirement ensures that broker-dealers maintain sufficient funds to cover customer obligations, serving as a fundamental protection for investors.