FINRA issues US$475,000 fine to Interactive Brokers
24 October 2024 US
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The Financial Industry Regulatory Authority (FINRA) has fined Interactive Brokers US$475,000 and issued a censure following lapses in the firm’s securities lending programme.
According to the Acceptance, Waiver, And Consent (AWC) form, Interactive Brokers violated Exchange Act 15(c) and Exchange Act Rule 15c3-3(b)(l) when it returned shares to customers and thereby created or increased segregation deficits.
Between June and December 2021, the firm “incorrectly calculated the number of excess shares of stocks listed on European exchanges it had available to return to customers” from whom it had borrowed them as part of the firm's fully paid securities lending programme.
As a result, more than 800 instances occurred where the firm returned borrowed shares when it should not have, says FINRA, which caused the firm to create or increase deficits for the relevant securities.
Exchange Act Rule 15c3-3, also known as the Customer Protection Rule, is intended to protect customer assets from improper use by a broker-dealer, and to ensure the prompt return of customer securities in the event of broker-dealer insolvency.
While Exchange Act Rule 15c3-3(b)(l) requires a broker-dealer to promptly obtain and maintain physical possession or control of fully paid and excess margin securities carried for customer accounts.
The AWC form also indicates that the company failed to establish and maintain a supervisory system, including written supervisory procedures, “reasonably designed to comply with its possession and control obligations”.
Furthermore, the firm allowed “an unregistered person” to oversee changes made to the securities lending algorithm in violation of FINRA Rule 1210.
Between January 2021 and December 2023, Interactive Brokers allowed an unregistered associated person to lead and oversee some software development efforts concerning the firm’s securities finance business, including the firm’s securities lending programme.
As securities lending is a covered function, that person was required to have been registered with FINRA as an operations professional.
Interactive Brokers engages in securities lending, including a fully paid lending programme. In connection with that programme, the firm uses an algorithm to identify securities for which the firm possesses an excess and are therefore available to be returned to customers from whom it borrowed shares.
According to the Acceptance, Waiver, And Consent (AWC) form, Interactive Brokers violated Exchange Act 15(c) and Exchange Act Rule 15c3-3(b)(l) when it returned shares to customers and thereby created or increased segregation deficits.
Between June and December 2021, the firm “incorrectly calculated the number of excess shares of stocks listed on European exchanges it had available to return to customers” from whom it had borrowed them as part of the firm's fully paid securities lending programme.
As a result, more than 800 instances occurred where the firm returned borrowed shares when it should not have, says FINRA, which caused the firm to create or increase deficits for the relevant securities.
Exchange Act Rule 15c3-3, also known as the Customer Protection Rule, is intended to protect customer assets from improper use by a broker-dealer, and to ensure the prompt return of customer securities in the event of broker-dealer insolvency.
While Exchange Act Rule 15c3-3(b)(l) requires a broker-dealer to promptly obtain and maintain physical possession or control of fully paid and excess margin securities carried for customer accounts.
The AWC form also indicates that the company failed to establish and maintain a supervisory system, including written supervisory procedures, “reasonably designed to comply with its possession and control obligations”.
Furthermore, the firm allowed “an unregistered person” to oversee changes made to the securities lending algorithm in violation of FINRA Rule 1210.
Between January 2021 and December 2023, Interactive Brokers allowed an unregistered associated person to lead and oversee some software development efforts concerning the firm’s securities finance business, including the firm’s securities lending programme.
As securities lending is a covered function, that person was required to have been registered with FINRA as an operations professional.
Interactive Brokers engages in securities lending, including a fully paid lending programme. In connection with that programme, the firm uses an algorithm to identify securities for which the firm possesses an excess and are therefore available to be returned to customers from whom it borrowed shares.
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