US broker-dealer regulator FINRA announced that it has sanctioned four companies – M1 Finance LLC, Open to the Public Investing, Inc., SoFi Securities LLC and SogoTrade, Inc. – a total of $2.6 million, including over $1 million in restitution to retail customers enrolled in fully paid securities lending programs and $1.6 million in fines for the companies’ related supervisory and advertising violations.
“It is imperative that FINRA member firms that offer fully paid securities lending programs exercise particular care in their supervision. FINRA will continue to fulfill its mission to protect investors by enforcing the applicable rules and working to ensure that clients who have suffered losses receive compensation,” said Bill St. Louis, FINRA’s Executive Vice President and Chief Enforcement Officer.
Fully paid-up securities lending is a practice whereby a clearing firm borrows fully paid-up or excess margin securities from a customer and lends them to a third party in exchange for a daily lending fee. If a customer chooses to enroll in a fully paid-up lending program, the clearinghouse determines which securities to borrow, when, and on what terms. The daily borrowing fee collected by the clearing firm is generally shared between the clearing firm, the introducing broker-dealer, and the customer holding the loaned security. When shares are borrowed on a dividend date, instead of dividend payments, customers receive payments in lieu of dividends, which are usually subject to a higher tax rate than recognized dividends.
The four broker-dealer firms sanctioned by FINRA failed to establish, maintain and enforce a system of supervision, including written supervisory procedures, reasonably designed to supervise their fully paid securities lending offerings. Although each firm agreed in contracts with its clearinghouse to determine which of its customers were eligible for participation in fully paid securities lending, the firms did not establish any criteria for customer participation or take steps to make eligibility determinations before from enrolling their customers in fully paid securities lending. Instead, they enrolled all new customers in fully paid securities lending at account opening. The companies also provided customers with disclosure documents that contained false statements that customers would receive compensation for lending their securities, including a “loan fee.” In fact, the customers did not receive any compensation.
The over $1 million indemnity compensates customers whose securities were loaned on the dividend date and therefore potentially suffered adverse tax consequences as a result of their participation in the fully paid securities lending programs.
In settling these matters, M1 Finance, Open to the Public Investing, Inc., SoFi Securities and SogoTrade consented to the entry of FINRA’s findings without admitting or denying charges.
FINRA publishes disciplinary complaints, decisions and other information in its online disciplinary actions database and publishes on its Monthly Disciplinary Actions page a summary of disciplinary actions against firms and individuals for violations of FINRA rules. federal securities laws, rules and regulations; and the Municipal Board of Securities Regulations.
About FINRA
FINRA is a non-profit organization dedicated to investor protection and market integrity. Regulates a critical part of the securities industry — publicly traded brokerage firms in the US FINRA, overseen by the SEC, makes rules, reviews and enforces compliance with FINRA rules and federal securities laws, registers the broker-dealer staff and offers education and training and informs the investing public. In addition, FINRA provides oversight and other regulatory services for stock and options markets, as well as trade reporting and other industry utility services. FINRA also operates a dispute resolution forum for investors and brokerage firms and their registered employees.