Investors often ask whether a clearing firm can be liable for losses sustained in their accounts. The answer is “yes.” Traditionally, clearing firms, also known as clearing houses, are financial institutions established to handle the confirmation, settlement, and delivery of transactions. To ensure its clients’ transactions are made in a prompt and efficient manner, the clearing firm acts as a middle-man and is essentially the buyer and seller in the transactions. To attract business and compete with other clearing firms, clearing firms offer an ever-expanding suite of services that go beyond mere routine clearing functions, which often brings them to be actively and directly involved in the actions of brokerage firms and their brokers. Courts have held that clearing firms that extend services beyond “mere ministerial or routine functions” can be liable to an investor for a broker-dealer or broker’s misdeeds.
On behalf of several investor clients, Malecki Law’s FINRA arbitration attorneys are currently investigating cases involving claims against Pershing, LLC, a clearing house, and its introducing brokerage firm client, Insight Securities, Inc. The claims involve an SEC-censured entity, Biscayne Capital. Our clients sustained losses in their accounts due, in part, to Pershing’s alleged negligent supervision of transactions through its shared platform with Insight.
In relationships like this, the introducing firm and clearing firm have a clearing agreement, usually giving the clearing firm discretion to terminate any account, the responsibility to notify the introducing broker of suspicious activity, and to provide training or trained employees to look out for misconduct. Usually the clearing firm has the responsibility to conduct regulatory monitoring of SEC Financial Responsibility Rules and to be directly involved in Anti-Money Laundering oversight. Thus, with these heightened responsibilities, a clearing firm can move beyond its ministerial and routine clearing functions.