The Financial Industry Regulatory Authority (FINRA) recently fined J.P. Morgan Securities $2.8 million for violating the Securities and Exchange Commission (SEC) Customer Protection Rule and for related supervisory failures. The SEC rule creates requirements to protect customers’ funds and securities. The rule requires a broker-dealer, which maintains custody of customer securities, to obtain and maintain physical possession or control over certain of those securities. They must be segregated in a “control location” and be free of liens or any other encumbrance that could prevent customers from taking possession of their securities. A firm cannot use segregated securities for its own purposes. From 2008 until June 2016, “J.P. Morgan Clearing Corp allegedly did not have reasonable processes in place to ensure that its possession or control systems were operating properly. By failing to move and maintain securities in good control locations, the firm created deficits in foreign and domestic securities valued at hundreds of millions of dollars. For example, J.P. Morgan failed to move Italian securities to a good control location for nearly two years, and on one sample day, created a deficit in 81 Italian securities worth approximately $146 million.”
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