The Financial Industry Regulatory Authority has penalized four broker-dealer firms for violations related to fully paid securities lending, Investment News reports.
The firms, M1 Finance LLC, Open to the Public Investing, Inc., SoFi Securities LLC, and SogoTrade, Inc., were ordered to pay a combined $2.6 million. The sum included over $1 million in restitution to retail customers enrolled in fully paid securities lending programs and fines of $1.6 million for the firms’ related supervisory and advertising violations. The firms did not admit or deny the charges, but consented to the entry of FINRA’s findings.
FINRA noted that fully paid securities lending is a practice in 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. If a customer is enrolled in the program, the clearing firm will determine which securities to borrow and when. The daily borrowing fee that the clearing firm collects is generally shared among the clearing firm, the introducing broker-dealer, and the customer who owns the borrowed security. When shares are borrowed over a dividend date, instead of dividend payments, customers receive payments in lieu of dividends, which typically are subject to a higher tax rate than qualified dividends.
“It is imperative that FINRA member firms offering fully paid securities lending programs exercise particular care in supervising them. FINRA will continue to fulfill its mission of investor protection by enforcing the applicable rules and working to ensure that harmed customers receive restitution,” said Bill St. Louis, Executive Vice President and Head of Enforcement, FINRA.
The four sanctioned firms failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures, reasonably designed to supervise their fully paid securities lending offerings, FINRA said.
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 they enrolled all new customers in fully paid securities lending when they opened their accounts.
SogoTrade Inc., the only one of the firms to comment for the report, said it was ““glad to cooperate with Finra in its inquiry regarding the securities lending program and is pleased to have that matter resolved and behind it with the letter issued today. SogoTrade has already enhanced its compliance with respect to this program.”
The attorneys at Hyman Cotter PC understand the complexities that come with being the subject of a regulatory inquiry by the SEC, FINRA, and other self-regulatory organizations, and we have the experience to guide and advise you through any type of regulatory investigation. If you are the subject of a regulatory proceeding, contact us at 312-291-4600 or through our online contact form for a free consultation.
