On Feb. 4, FINRA fined Apex Clearing over securities lending violations
FINRA fined Apex Clearing for violations regarding fully paid securities lending program
Background
Apex Clearing operated a fully paid securities lending program for introducing firms.
Fully paid securities lending is a practice in which broker-dealer borrows customer’s fully paid or excess margin securities and lends them out in exchange for a daily fee.
If customer chooses to enroll in program, clearing firm determines securities, terms.
Daily borrowing fee that clearing firm collects is generally shared among the clearing firm, the introducing broker-dealer and the customer who owns the borrowed security.
Customers were exposed to risks but did not receive any of borrowing fee, risks included included potentially higher taxation for payments received in lieu of dividends.
Also loss of SIPC protection on securities for duration of the loan, loss of voting rights.
Allegations
From Jan. 2019 until Jun. 2023, Apex entered into securities loans with introduced customers without having reasonable grounds to believe that loans were appropriate.
Certain introduced customers did not receive the loan fees for lending their shares.
Firm failed to provide many customers with all written disclosures regarding customer rights with respect to loaned securities and the risks and associated financial impacts.
Apex distributed to certain of its introducing broker-dealers documents that were sent to over 5 million retail investors containing misrepresentations about compensation.
4 introducing broker-dealers enrolled 5 million investors, 17% had securities borrowed.
The firm also failed to establish, maintain and enforce supervisory system, including written supervisory procedures, designed to achieve compliance with FINRA Rule 4330.
Apex consented to a censure, a $3.2 million fine, remediating issues and implementing a supervisory system to achieve compliance with FINRA Rule 4330 within 180 days.
