Four firms have been sanctioned by FINRA for failing to establish, maintain, and enforce a supervisory system, including written supervisory procedures, reasonably designed to supervise their fully paid securities lending offerings.
The four firms – M1 Finance LLC, Open to the Public Investing, Inc., SoFi Securities LLC, and SogoTrade, Inc. – were ordered to pay a combined $2.6m, including over $1m in restitution to retail customers enrolled in fully paid securities lending programs, and fines of $1.6m for the firms’ related to these supervisory and advertising violations.
Each of these firms provides commission-free, self-directed trading to retail investors through their mobile applications and website; meaning, they are online securities platforms and robo-advisors.
“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, FINRA’s Executive Vice President and Head of Enforcement.
Fully paid lending program failures
When shares are borrowed, customers typically receive payments in lieu of dividends, and these payments are typically subject to a higher tax rate. But the investors in this case were never alerted that their securities were being lent, nor were they compensated, FINRA said in the settlement.
FINRA rules require that 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. 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.
“It is imperative that FINRA member firms offering fully paid securities lending programs exercise particular care in supervising them.”
Bill St. Louis, Executive Vice President and Head of Enforcement, FINRA
In this case, although each of the four businesses agreed in contracts with their respective clearing firms to determine which of its customers were appropriate for participation in fully paid securities lending, the businesses did not establish any criteria for customer participation.
Nor did they take any 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 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.” In fact, the customers never received any compensation.
$1m restitution
The over $1m in restitution compensates customers whose securities were lent out over a dividend date and who thereby potentially suffered adverse tax consequences as a result of their participation in the fully paid securities lending programs.
All four firms settled the charges without admitting or denying the self-regulatory agency’s findings, according to the settlements.
