Includes Over $1 Million in Restitution to Impacted Customers
FINRA announced today that it has sanctioned four firms—M1 Finance LLC, Open to the Public Investing, Inc., SoFi Securities LLC, and SogoTrade, Inc.—a combined $2.6 million, including 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.
“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.
Fully paid securities lending is a practice through 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 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. 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.
The four broker-dealer firms that FINRA has sanctioned failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures, reasonably designed to supervise their fully paid securities lending offerings. Although each firm agreed in contracts with their clearing firm to determine which of its customers were appropriate for participation in fully paid securities lending, the firms did not establish any criteria for customer participation or 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 did not receive any compensation.
The over $1 million in restitution compensates customers whose securities were lent out over a dividend date and who 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 the charges.
FINRA publishes disciplinary complaints, decisions and other information on its Disciplinary Actions Online 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 rules of the Municipal Securities Rulemaking Board.
About FINRA
FINRA is a not-for-profit organization dedicated to investor protection and market integrity. It regulates one critical part of the securities industry—brokerage firms doing business with the public in the U.S. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.
View source version on businesswire.com: https://www.businesswire.com/news/home/20231206554912/en/
