The Financial Industry Regulatory Authority announced an enforcement action against Apex Clearing Corporation for violations involving its fully paid securities lending program.
Fully paid securities lending is a practice through which a broker-dealer borrows a customer’s fully paid or excess margin securities and typically lends them to a third party in exchange for a daily borrowing fee. FINRA found that Apex misled customers by failing to deliver loan fees as promised and not fully disclosing the risks involved in securities lending, violating FINRA Rule 4330.
A letter of acceptance, waiver and consent stated that Apex did not admit or deny the charges but consented to a $3.2 million fine and the entry of FINRA’s findings. The firm also agreed to certify that it has remediated the issues identified by FINRA.
It marked the first time FINRA has charged a firm with violating FINRA Rule 4330, which establishes permissible use of customers’ securities to ensure customer protection.
“Member firms must have reasonable grounds to believe that a fully paid securities lending program is appropriate for customers who participate. It is unreasonable to expect a customer to take on risks and the potential financial consequences of securities lending with no financial upside,” said Bill St. Louis, Executive Vice President and Head of Enforcement at FINRA. “In addition to obtaining restitution for harmed investors from the introducing firms, we must hold accountable the clearing firm that designed, facilitated and benefitted from this program.”
FINRA determined that between January 2019 and June 2023, Apex entered into securities loans with some customers but did not have reasonable grounds to believe those loans were appropriate for them because they didn’t receive a loan fee for lending their shares. Furthermore, Apex did not provide customers in the securities lending program with all of the written disclosures required under Rule 4330, FINRA alleged. The regulation requires disclosures about customers’ rights, the risks and financial impacts related to the securities loans.
Apex operated a fully paid securities lending program for introducing firms, which in turn offered their customers the opportunity to participate. FINRA previously ordered four introducing firms whose customers participated in Apex’s program to pay a combined $2.6 million, including over $1 million in restitution to harmed customers, for supervisory and advertising violations related to the program. But the authority said it was Apex that entered into the lending agreements with customers and borrowed customer securities. These matters originated from a FINRA examination of firms offering fully paid securities lending to retail customers.
The attorneys at Lewitas Hyman include former senior attorneys at the SEC whose legal experience and industry knowledge make them uniquely qualified to provide counsel on securities regulatory, compliance and enforcement matters. Our attorneys fully understand the regulatory scrutiny financial professionals and their firms face from the various regulators that oversee the financial services industry. If your firm is facing an investigation from a regulatory agency, please contact Lewitas Hyman at (888) 655-6002 or through our online contact form.
