The Securities and Exchange Commission has sent U.S. broker-dealers a stern message — Depository Trust & Clearing Corp. (DTCC) can cause you to shut down if you are financially unsound and it thinks you won’t be able to fulfill your margin requirements.
The U.S. regulatory agency has just upheld DTCC’s 2022 decision that it could deny Lek Securities (LSC), a New York-based defunct executing broker-dealer and self-clearing broker, the ability to clear its trades at National Securities Clearing Corp. (NSCC) and to settle its transactions at Depository Trust Company (DTC). NSCC and DTC are owned by DTCC. Self-clearing brokers clear trades only for their own customers.
On August 19, 2026, the SEC ruled that DTCC had adequately proven that LSC was floundering, its backup plan was inadequate, and its chief executive officer lied about the firm’s finances. However, the U.S. regulatory agency granted LSC two small concessions. It decided that NSCC could not fine LSC USD120,000 for violating the clearinghouse’s trading cap six times in November 2021 nor could DTCC require the broker-dealer to pay DTCC’s total legal expenses of USD383,449 during LSC’s appeal of DTCC’s decision. The trading cap was designed to limit the value of daily aggregated unsettled transactions in low-priced and highly volatile securities between October 16, 2021 and July 19, 2022.
The SEC ruled that LSC only has to pay USD35,000 of the USD383,444 representing DTCC’s out-of-pocket court expenses. That is because the U.S. regulatory agency decided that additional punitive fees would be excessive; it was simply enough for DTCC to shut LSC out of its services. In addition, NSCC and DTC’s rules did not give DTCC the authority to impose the full legal costs it incurred while defending its decision during LSC’s appeals process. DTCC was represented by the law firm of Proskauer Rose while LSC was represented by Norton Rose Fulbright, which did not respond to e-mails seeking comment for this article. DTCC declined to comment.
Founded in 1990 by Samuel Lek, LSC was forced to shut down on November 28, 2022 after NSCC refused to service it as of July 27,2022 and DTC refused as of September 20, 2022. LSC appealed those decisions to the SEC by disputing NSCC’s allegations that LSC was financially too weak to meet its margin requirements. What makes the high-profile case involving LSC unique is that it appears to be the first time the SEC has denied a DTCC participant’s appeal of a “cease-to-act” decision. (FinOps Report’s search of public records could find no other instance). In August 2025, the SEC granted Alpine Securities‘ request for a freeze on DTCC’s “cease to act” decision made back in November 2023 and affirmed by DTCC’s hearing panel in April 2024. At issue is whether Alpine should have USD10million in excess net capital as a broker-dealer clearing for others or USD5million as a self-clearing broker. Excess net capital reflects the additional amount of financial cushion a broker-dealer member of NSCC must hold above the regulatory requirement to remain a member of the clearinghouse.
Alpine Securities changed its status from clearing for others to self-clearing on October 24, 2023. That is the day before the broker-dealer would have needed USD10 million instead. Alpine claimed it was entitled to fulfill the lower excess net capital requirement because it altered its designation and DTCC should have put the change into effect at once. However, DTCC countered that it was not given sufficient time to evaluate the change and Alpine surprisingly did an immediately about-face claiming it wanted to return to its original designation. As FinOps Report went to press, the SEC’s freeze on DTCC’s cease to act remained in force. Maranda Fritz, Alpine Securities’ New York-based attorney, did not respond to e-mails seeking comment.
Although the LSC won two minimal victories from the SEC, DTCC ended up being vindicated. Therefore, it stands to reason it will be almost impossible for a broker-dealer to counter DTCC’s right to shut it out of its clearance and settlement services. Once that happens, a firm can no longer remain in business because it cannot process the trades it executes. The DTCC, according to the SEC, needs to ensure a firm is financially sound enough to clear and settle its transactions because of contagion risk — the possibility that if it defaults or goes bankrupt other DTCC participants will be harmed. NSCC and DTC don’t have to wait until a participant fails financially before refusing to service it. “The clearing agencies [NSCC and DTC] must act before issues occur,” wrote the SEC in its August 2026 ruling. “DTCC had ample basis to conclude that the danger that LSC would be unable to continue meeting its margin requirements presented an unacceptable risk to [the entire ecosystem].”
DTCC’s saga with LSC didn’t start in 2022 nor is DTCC the only self-regulatory agency LSC has battled. LSC is appealing a separate case involving the SEC’s decision about the New York Stock Exchange’s fine to the U.S. Court of Appeals for the District of Columbia Circuit. LSC is challenging disciplinary penalties, including a US$575,000 fine originally imposed by the NYSE in 2015, which was upheld by the SEC ten years later. LSC argues that the SEC’s decade-long delay in ruling on the administrative appeal of the NYSE’s penalties violated the company’s constitutional rights. The SEC’s Rule 900 calls for a review of a self-regulatory agency’s decision within either eight months for most cases or 10 months for complex ones, yet the SEC has historically taken far longer — over 1000 days in many cases.
The Arlington, Virginia-based nonprofit public interest law firm New Civil Liberties Alliance (NCLA) has backed LSC on the grounds that the SEC’s delays punish firms by inflicting ongoing financial and reputational harm. Therefore, said the NCLA, the D.C. appeals court should rescind the SEC’s decision. In a blog, Braeden Anderson, a partner who heads up the securities enforcement and investigations law practice at Gesmer Updegrove in Boston, wrote that although the D.C. Circuit Court is unlikely to vacate the NYSE’s sanctions against Lek Securities solely because the SEC moved too slowly, the court could call the delay problematic. The Administrative Procedure Act (APA) requires regulatory agencies to conclude matters presented to them within a reasonable time, he noted. “Rule 900’s eight and ten-month benchmarks are not emtpy window dressing. They are the Commission’s own public representation of what ordinary timelines should look like,” he added.
LSC’s Financial Woes
The NSCC put LSC on its Watch List in 2006 and under enhanced surveillance in 2013. However, it was LSC’s loss of funding options in 2021 and its inadequacy of a backup plan, in DTCC’s judgement, that led to NSCC and DTC’s decisions. In 2021, LSC’s margin requirements at NSCC increased exponentially after the SEC required the clearinghouse to raise its margin requirements for trades in microcap and illiquid securities. Those securities represented up to 20 percent of LSC’s business that year. As a result, between February 2021, when the higher margin requirement was adopted and October 2021 LSC’s required deposit — aka margin — at NSCC to meet its clearing obligations exceeded USD60 million at times and even spiked to USD84.8 million at one point. Meanwhile, because LSC had lost substantial bank financing it was left with only USD10 million in accessible cash to cover its margin requirements at NSCC.
Poor Backup Plan
LSC’s Chief Executive Charles Lek tried to spin a plausible tale about how his firm would address DTCC’s concerns. He told DTCC that LSC had implemented the Lek Holdings Note Program to serve as a new source of margin funding. It was supposed to work as follows: customers of Lek Securities whose trades would trigger large margin requirements would loan Lek Holdings, LSC’s parent firm, the amount of money needed to cover the amount of margin needed to cover their trades plus an extra buffer. Lek Holdings, in turn, would lend that money to LSC. However, what sounded like a great idea ended up being unsubstantiated. The SEC agreed with DTCC that there was no proof that LSC’s customers were legally obligated to lend Lek Holdings money or that Lek Holdings had to lend the money to LSC. In addition, LSC could never explain how it would calculate the amount of money customers owed Lek Holdings or when their loans would be triggered. Although LSC claimed it had an electronic pre-trade risk controls process that set limits on customer trading before the loan requirement was to kick in, it could not come up with the necessary documentation to prove the process existed.
Dishonest Disclosures
If LSC’s financial woes and ill-crafted backup plans weren’t enough to torpedo its chances with DTCC, its new chief executive’s lack of honesty sealed its fate. Charles Lek, son of LSC’s founder Samuel Lek, took over the reins in December 2019 after the broker-dealer watchdog Financial Industry Regulatory Authority (FINRA), the NYSE, and Nasdaq banned Samuel from the securities industry permanently. Samuel Lek was previously forced to pay the SEC USD$420,000 for his role in facilitating manipulative trading in the U.S. markets by Ukranian-based trading firm Avalon FA while LSC had to pay USD1.5 million in penalties, which included disgorgement of profits made in the transactions.
Charles Lek did not tell DTCC that Texas Capital Bank had terminated its financing — a $25 million credit line– until May 13, 2021 even though he knew about it in October 2020. Lek also never told DTCC that Bank of Montreal-Harris had completely terminated its relationship with LSC in July 2021 after reducing it over several months. Even worse, Lek tried to mislead the DTCC into thinking that FINRA had no issues with LSC’s note program. However, in an affidavit to DTCC, FINRA’s senior director of risk monitoring Brian Kowalski disputed Lek’s claim. Kowalski’s stance was backed by FINRA’s senior vice president of member supervision Ornella Bergeron who leads the regulatory agency’s risk monitoring efforts. Lek himself recorded her as saying she was “not comfortable” with LSC’s note program.
Lek’s relationship with FINRA is tumultuous. He has appealed FINRA’s March 2024 ruling barring him from associating with any FINRA member and fining him USD100,000 for failing to follow FINRA’s previous order to close its business in low-priced securities (those under USD5 in value) and for failing to follow some recommendations of an independent consultant to improve the firm’s anti-money laundering program. LSC was separately fined USD1,130,000 for those infractions. Until FINRA makes a final decision, Lek must abide by the limited interim restrictions FINRA imposed in May 2024. Those are that he not have any role at a FINRA member firm involving low-priced securities and that he not take on any role involving AML policies. (LSC’s fine is also on appeal). As FinOps Report went to press its search of FINRA’s BrokerCheck system showed that Lek was not registered with any broker-dealer. Tannenbaum Helpern Syracuse & Hirschtritt, the law firm representing Lek and Lek Securities, declined to comment for this article.
Regardless of how Lek himself fares, self-clearing broker-dealers should learn three critical lessons from the SEC’s ruling on LSC. The first is that they must be able to prove they can meet margin requirements on a continual basis, not just once. LSC obviously couldn’t do that. The second is that any program to address financial deficiencies must be enforceable. Again, LSC failed to prove that. “To avoid systemic risks in clearing trades, NSCC and DTC seek a measure of certainty to meet margin requirements,” said Kurt Gottschall, a Denver-based partner in the law firm of Haynes Boone. “The SEC agreed with NSCC and DTC that Lek’s planned reliance on its own customers to lend money to its parent with the parent, in turn, lending money to the broker-dealer carried too much uncertainty and risk.” The reason: the Lek Holdings Note Program lacked binding obligations from the customers to Lek Holdings and from Lek Holdings to LSC.
The third lesson broker-dealers need to learn is the need to be candid about a financial crisis at hand. LSC also failed the honesty test. “Banks are incentivized to maintain lending relationships with their clients, but one of LSC’s lenders cited a loss of confidence in its management as one of the reasons for pulling back credit,” explained Gottschall who heads up Haynes Boone’s SEC Enforcement Defense Practice Group. “The SEC also found that LSC’s disclosures to NSCC and DTC folllowed a consistent pattern: withhold adverse information, provide misleading partial disclosures when presssed, and ultimately disclose the full facts only when directly and sometimes repeatedly asked.”
LSC will face an uphill battle should it decide to appeal the SEC’s ruling to the D.C. Court of Appeals. Under Section 25(a) of the Securities Exchange Act of 1934, the SEC’s findings of fact will be considered conclusive if they are supported by substantial evidence. “The Court of Appeals will affirm the SEC’s decision unless it is found to be arbitrary, capricious, an abuse of discretion, not in accordance with the law, or otherwise in violation of LSC’s constitutional rights,” asserted Gottschall.
Chris Kentouris
New York City
kentourisc@gmail.com
917.510.3226
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