SEC Upholds DTCC Subsidiaries' Cease-to-Act Orders Against Broker-Dealer but Vacates Fines
The SEC ruled that two DTCC subsidiaries properly ceased to act for a broker-dealer and that one of them, the National Securities Clearing Corporation ("NSCC"), properly capped the firm's unsettled clearing activity at $400 million, but the Commission set aside $120,000 in fines and reduced a hearing-cost award.
The dispute arose after a 2021 rule change increased margin requirements for microcap and illiquid securities, which made up a significant portion of the firm's business. The firm's required fund deposits at NSCC repeatedly spiked above $60 million while it lost more than $80 million in bank financing. The Commission found the firm's liquidity position presented an unacceptable settlement risk and that its alternative funding strategy, an undocumented promissory-note arrangement with its parent company, was not a reliable substitute for bank financing. The SEC added that the firm's Chief Executive told the hearing panel, during the appeal itself, that FINRA's concerns about the note program had been alleviated, a claim FINRA staff contradicted by affidavit.
As an independent basis for the cease-to-act determinations, the Commission found that the firm engaged in a pattern of incomplete and misleading disclosures to DTCC, failed to proactively disclose the loss of its bank financing, and falsely stated that its credit facilities had not changed. The SEC held that these findings independently justified the access prohibitions under NSCC and Depository Trust Company rules.
The Commission dismissed the firm's application for review of the two cease-to-act determinations and the activity cap. The SEC nonetheless set aside the censures and fines, concluding that NSCC never explained why it chose the maximum $20,000 fine for each of the firm's six activity-cap violations and that the DTCC hearing panel affirmed those sanctions without independently assessing or explaining them. The SEC also cut the hearing-cost award from $383,449.14 to $34,883.74, finding that the clearing agencies' rules, which allow a panel to charge "the cost associated with the hearing" without defining it, did not give the firm sufficient notice that costs could include attorneys' fees for outside counsel retained by the hearing panel.