FINRA orders four firms to pay US$2.6 million for fully paid securities lending violations
07 December 2023 US
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The Financial Industry Regulatory Authority (FINRA) has sanctioned M1 Finance, Open to the Public Investing, SoFi Securities and SogoTrade a combined US$2.6 million for violations relating to fully paid securities lending.
The total amount includes US$1 million in restitution to retail customers enrolled in fully paid securities lending programmes and fines of US$1.6 million for the firms’ related supervisory and advertising violations.
Fully paid securities lending is a practice through which a clearing firm borrows a customer’s fully paid or excess margin securities and lends them to a third party in exchange for a daily borrowing fee.
According to FINRA, the four broker-dealer firms failed to establish, maintain and enforce a supervisory system, including written supervisory procedures, “reasonably designed to supervise their fully paid securities lending offerings”.
Although each firm contractually agreed with their clearing firm to determine which customers were appropriate for participation in fully paid securities lending, the firms did not establish any criteria for customer participation, or take steps to make “appropriateness determinations” prior to enrolling their customers in fully paid securities lending.
Instead, M1 Finance LLC, Open to the Public Investing, Inc., SoFi Securities LLC, and SogoTrade, Inc enrolled all new customers in fully paid securities lending at account opening.
The firms also provided customers with disclosure documents that “contained misrepresentations that customers would receive compensation for the lending of their securities”, including in the form of a ‘loan fee’.
FINRA affirms that the customers did not receive any compensation.
The more than US$1 million in restitution compensates customers whose securities were lent out over a dividend date and who therefore “potentially suffered adverse tax consequences as a result of their participation in the fully paid securities lending programmes”, the Authority adds.
In settling these matters, all four firms consented to the entry of FINRA’s findings without admitting or denying the charges.
Commenting on the news, Bill St. Louis, executive vice president and head of enforcement at FINRA, says: “It is imperative that FINRA member firms offering fully paid securities lending programmes exercise particular care in supervising them.
“FINRA will continue to fulfil its mission of investor protection by enforcing the applicable rules and working to ensure that harmed customers receive restitution.”
The total amount includes US$1 million in restitution to retail customers enrolled in fully paid securities lending programmes and fines of US$1.6 million for the firms’ related supervisory and advertising violations.
Fully paid securities lending is a practice through which a clearing firm borrows a customer’s fully paid or excess margin securities and lends them to a third party in exchange for a daily borrowing fee.
According to FINRA, the four broker-dealer firms failed to establish, maintain and enforce a supervisory system, including written supervisory procedures, “reasonably designed to supervise their fully paid securities lending offerings”.
Although each firm contractually agreed with their clearing firm to determine which customers were appropriate for participation in fully paid securities lending, the firms did not establish any criteria for customer participation, or take steps to make “appropriateness determinations” prior to enrolling their customers in fully paid securities lending.
Instead, M1 Finance LLC, Open to the Public Investing, Inc., SoFi Securities LLC, and SogoTrade, Inc enrolled all new customers in fully paid securities lending at account opening.
The firms also provided customers with disclosure documents that “contained misrepresentations that customers would receive compensation for the lending of their securities”, including in the form of a ‘loan fee’.
FINRA affirms that the customers did not receive any compensation.
The more than US$1 million in restitution compensates customers whose securities were lent out over a dividend date and who therefore “potentially suffered adverse tax consequences as a result of their participation in the fully paid securities lending programmes”, the Authority adds.
In settling these matters, all four firms consented to the entry of FINRA’s findings without admitting or denying the charges.
Commenting on the news, Bill St. Louis, executive vice president and head of enforcement at FINRA, says: “It is imperative that FINRA member firms offering fully paid securities lending programmes exercise particular care in supervising them.
“FINRA will continue to fulfil its mission of investor protection by enforcing the applicable rules and working to ensure that harmed customers receive restitution.”
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