The Financial Industry Regulatory Authority said Tuesday that it has fined Apex Clearing Corp. $3.2 million for violations related to its fully paid securities lending program.
This is the first time FINRA has charged a firm with violating FINRA Rule 4330, the customer protection rule.
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 it was Apex that entered into the lending agreements with customers and borrowed customer securities.
A FINRA examination of firms offering fully paid securities lending to retail customers led to these actions.
“Member firms must have reasonable grounds to believe that a fully paid securities lending program is appropriate for customers who participate." said Bill St. Louis, FINRA's head of enforcement, in a statement. "It is unreasonable to expect a customer to take on risks and the potential financial consequences of securities lending with no financial upside."
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,” St. Louis added.
Securities Lending Infractions
As FINRA explains, 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.
"If a customer chooses to enroll in a fully paid lending program, the clearing firm determines which securities to borrow, when, and on what terms," FINRA states.
"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."
In the Apex case, "customers were exposed to risks but did not receive any of the borrowing fee," according to FINRA.
Those risks included potentially higher taxation for payments received in lieu of dividends, loss of Securities Investor Protection Corp. protection on the securities for the duration of the loan and loss of voting rights, FINRA said.
From March 2021 through April 2023, the firm failed to provide many customers enrolled in its fully paid securities lending program with all of the written disclosures regarding the customers’ rights with respect to the loaned securities and the risks and financial impacts associated with the customers’ loans of securities required under FINRA Rule 4330, the order states.
From January 2019 through June 2023, "Apex distributed to certain of its introducing broker-dealers documents that were sent to more than 5 million retail investors containing misrepresentations about the compensation that those investors would receive for loans under the fully paid securities lending program. Four of those introducing broker-dealers enrolled approximately 5 million investors, approximately 17% of which had securities borrowed by Apex," the order states.
Also, since at least January 2019, "Apex has failed to establish, maintain and enforce a supervisory system, including written supervisory procedures, for its program reasonably designed to achieve compliance with FINRA Rule 4330," FINRA said.
In settling the matter, Apex consented to the entry of FINRA’s findings without admitting or denying the charges. The firm also agreed to certify that it has remediated the issues identified by FINRA.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.