In a FINRA First, Apex Clearing Fined $3.2M for Violating Fully Paid Securities Lending Program
The Financial Industry Regulatory Authority has fined Apex Clearing Corporation, a Dallas-based clearing firm, $3.2 million for violations related to the firm’s fully paid securities lending program. According to FINRA, this is the first time the agency has charged a firm with violating FINRA Rule 4330, which establishes permissible use of customer securities to ensure customer protection.
Fully paid securities lending involves a broker-dealer borrowing fully paid or excess margin securities from a customer and lending them to a third party in exchange for a daily borrowing fee. Typically, this fee is shared among the clearing firm, the introducing broker-dealer, and the customer who owns the borrowed security.
However, in Apex’s case, customers were exposed to risks associated with securities lending, such as potential tax implications and loss of investor protection, without receiving any portion of the borrowing fee. Additionally, Apex failed to provide customers with the required written disclosures about their rights, risks and financial impacts related to the loans.
FINRA said that, 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. Finally, since at least January 2019, FINRA reported that 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 had previously ordered the 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.
“Member firms must have reasonable grounds to believe that a fully paid securities lending program is appropriate for customers who participate. It is unreasonable to expect a customer to take on risks and the potential financial consequences of securities lending with no financial upside,” said Bill St. Louis, executive vice president and head of enforcement at FINRA. “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.”
FINRA Rule 4330 requires member firms that borrow customers’ securities to have reasonable grounds to believe the loans are appropriate for the customers and to provide customers with specific notices and disclosures in writing.
FINRA stated that Apex failed on all accounts: it lacked reasonable grounds to think the program was appropriate for participating customers who did not receive a loan fee for their loans, distributed documents that misrepresented that customers would receive compensation when they did not receive compensation and failed to provide certain customers with required written disclosures.
Additionally, FINRA stated that the firm violated several other rules, including 2210, which covers communications with the public; 3110, which covers supervision; and 2010, which pertains to standards of commercial honor and principles of trade.
In settling this 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. These matters originated from a FINRA examination of firms offering fully paid securities lending to retail customers.
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