Credit Suisse Securities ordered to pay $9M for conflict of interest, customer protection violations

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Credit Suisse Securities will pay $9 million to settle claims that it violated multiple laws and rules related to customer protection, conflict of interest disclosures and preservation of client records.

FINRA announced the sanctions Thursday, stating that Credit Suisse violated the SEC Customer Protection Rule by failing to maintain control of billions of dollars in fully paid and excess margin securities it carried for customers; and failing to accurately calculate its required customer reserve.

The wealth manager ran afoul of FINRA rules requiring firms to disclose potential conflicts of interest from 2006 through 2017, according to the regulator.

FINRA found that during that period, Credit Suisse issued more than 20,000 research reports that contained inaccurate disclosures about potential conflicts of interest and issued more than 6,000 research reports that omitted required disclosures.

Additionally, FINRA determined that 18.6 billion Credit Suisse records were not preserved in the required non-erasable and non-writable format.

In settling the case without admitting or denying the charges, Credit Suisse was also ordered to certify that it has implemented supervisory systems and procedures “reasonably designed to comply with the Customer Protection Rule and other requirements.”

“The Customer Protection Rule is intended to protect customers’ securities by prohibiting firms from using those securities for their own purposes and to ensure the prompt return of customer securities in the event of broker-dealer insolvency,” FINRA Executive Vice President Jessica Hopper said in a statement. “This case should serve as a reminder to member firms of their obligation to protect customer funds from improper use and to ensure accurate disclosures of potential conflicts between research subjects and firms in research reports, both of which are critically important for investor protection.”

In a statement, Credit Suisse officials said they are “pleased to have settled this matter.”

“The bank has fully cooperated with FINRA and has remediated the underlying issues, which primarily concern coding errors in Credit Suisse systems,” the firm said in a statement.

University of Nevada, Las Vegas law professor Ben Edwards said one of the most striking things about the case is Credit Suisse’s failure to test whether or not the systems in place related to record preservation and account maintenance were working properly.

He said one of the critical challenges with moving to digital records is preserving the integrity of information. If there's a dispute, the non-erasable and non-writable format allows everyone involved to operate with the confidence that the system hasn't been hacked, records haven't been tainted and no edits have been made.

“This is a more than 20-year failure by Credit Suisse. The (letter of acceptance, waiver and consent) says from 1997 through 2020, electronic brokerage records were not kept in the proper format, so now you have to wonder how reliable those records are,” Edwards said. “These are the kind of things that could put the financial system at risk. It creates significant risk of defaults if they're not maintaining accurate reserves, and getting these systems to work properly is absolutely of critical importance.”

Edwards added that the fine itself may also fall short of the significance of the company’s failings, noting that the only one who comes out of this situation looking good is the attorney who represented Credit Suisse in the matter.

“Nine million dollars is not a small amount of money, but it may be a small amount of money to Credit Suisse for violations of this scale and going on this long. It's really a rounding error for the firm,” he said. “You have to view this as an enormous win for Credit Suisse because the situation doesn't give you a whole lot of confidence in how robust regulatory supervision has been for all this time. My concern is that a $9 million fine in this context, at this scale, doesn't really send a message that it is something that needs to be addressed.”

The Credit Suisse case reminded Edwards of record sanctions handed down to Robinhood in summer 2021. He said while both could be considered “coding errors” on some level, claims that Robinhood was misleading customers and had poor technological oversight resulted in a much larger $70 million fine.

“There are two differences I would submit, and it's hard to disentangle them. One is that Robinhood was approving margin accounts in really dubious ways,” Edwards said. “The other difference between them is Robinhood is a new entrant into the brokerage firm space, where Credit Suisse has been around for a very long time and likely has deep relationships with FINRA. So they, as an industry self-regulator, may not be as willing to drop the hammer.”

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