SEC fines MUFGʼs UK broker $9.8m for not substituting compliance

The US Securities and Exchange Commission (SEC) has fined MUFG Securities EMEA $9.8 million for failing to apply substituted compliance to its US operations over almost three years, and making “untrue statements” about the readiness and completeness of its compliance policies and procedures.

The SEC’s substituted compliance framework allows some UK firms to operate in the US by being in compliance with their home regime and to comply with any obligations arising from the Exchange Act not covered by UK requirements. In October 2021, shortly after the SEC introduced the substituted compliance framework, MUFG’s UK securities-based swap dealer (SBSD) informed the SEC it intended to use it.

An SEC probe, launched in July 2024 after staff repeatedly asked for reports and other records, discovered the failings. The SEC found MUFG Securities EMEA had not complied with the Exchange Act obligations either.

Many failures

MUFG Securities EMEA’s failings included failures in capital recordkeeping, financial reporting, compliance, internal supervision, and internal risk management requirements.

For example, it was required to keep quarterly records of net liquid assets, but did not do so over the three-year period, the SEC said. When the firm finally delivered the report to the SEC in January 2024, it was inaccurate due to a calculation error that overstated its liquid assets by approximately 80%, added the regulator.

The SEC found MUFG Securities EMEA failed to apply substituted compliance for financial reporting, which required it to send the SEC its UK annual audited financial reports at the same time as it sent them to the Prudential Regulation Authority (PRA). The firm did not send reports, or in some instances, sent them 15 months late.

The firm was required to file complete monthly financial and operational combined uniform single (FOCUS) reports with its full net capital computations. “Instead, in an effort to satisfy a condition to apply substituted compliance, MUFG Securities EMEA filed simplified FOCUS reports presenting capital metrics only pursuant to its UK capital requirements,” the SEC said.

The firm further failed to publish certain financial statements on its website in accordance with SEC rules.

Late to report

It also failed to provide, or was months late providing, compliance reports summarising reasonable steps taken to address non-compliance issues. Once the SEC received the reports it found they neglected to mention all the problems the firm had complying with its US obligations.

“One such report, dated November 29, 2023, stated generally, under ‘areas for improvementʼ, that the firm’s SBSD manual needed to be reviewed and updated “where necessary”, but it identified no needed updates and described no weaknesses in the design or implementation of the substituted compliance policies and procedures,” the SEC said.

The firm also stated that no material non-compliance matters had been identified from January 1, 2023 to November 22, 2023, despite it being aware at that time of material non-compliance issues, the SEC said.

The regulator found further deficiencies in MUFG Securities EMEAʼs internal supervision and risk management.

Untrue statements

In its 2021 application for substituted compliance, the firm told the SEC it had policies and procedures to satisfy applicable provisions of the Exchange Act. The SEC found that to be untrue. MUFG Securities EMEAʼs SBSD registration process lacked comprehensive, verified policies to ensure compliance with federal securities laws. It relied on oral attestations without independent verification. No system was established to ensure ongoing compliance with SEC requirements, resulting in incomplete or missing procedures and a failure to meet regulatory conditions, the SEC said.

UK fines

MUFG Securities EMEA is regulated in the UK by the PRA and the Financial Conduct Authority (FCA). The firm and its parent, Bank of Tokyo Mitsubishi UFJ Ltd, were both fined by the PRA in 2017 for internal controls deficiencies.

Both the PRA and the FCA declined to comment on the SEC fine.