Apex Clearing Corp. will pay $3.2 million in fines to the Financial Industry Regulatory Authority for violations related to its securities lending program. This is FINRA’s first enforcement action for violations of Rule 4330, which established requirements for the borrowing of customers’ fully paid or excess margin securities.
Between January 2019 and June 2023, Apex entered into securities loans with some customers but did not have “reasonable grounds” to believe those loans were appropriate for them because they didn’t receive a loan fee for lending their shares, FINRA claims. Between March 2021 and April 2023, Apex did not provide customers in the securities lending program with all of the written disclosures required under Rule 4330, which went into effect in 2014. That rule requires disclosures about customers’ rights, the risks and financial impacts related to the securities loans.
In addition, during that same timeframe, Apex distributed documents to its introducing broker/dealers that misrepresented the compensation investors would receive for the loans, according to FINRA. Four of those b/ds enrolled 5 million investors, 17% of which had securities borrowed by Apex.
Those four firms, which included SoFi Securities, SogoTrade, M1 Finance and Open to the Public Investing, were fined a combined $2.6 million in December for poor supervision of Apex’s fully paid securities lending program.
“But it was Apex that entered into the lending agreements with customers and borrowed customer securities,” FINRA said in a statement. “These matters originated from a FINRA examination of firms offering fully paid securities lending to retail customers.”
FINRA also found that since January 2019, Apex failed to establish, maintain and enforce a supervisory system, including written procedures, for its securities lending program.
“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,” said Bill St. Louis, executive vice president and head of enforcement at FINRA, in a statement.
A spokeswoman for Apex said the firm cooperated with FINRA through the enforcement process and “takes its commitment to transparency and compliance seriously.”
“Apex began enhancing its disclosure practices in 2023, addressing the areas identified by FINRA. Over the next six months, we will work closely with our introducing broker/dealer clients to ensure all remaining gaps are fully resolved, reaffirming our commitment to compliance and clear communication,” she said. “We remain dedicated to providing secure, innovative financial solutions and will continue collaborating with our partners and regulators to uphold industry standards.”
In a securities lending program, 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 fee. If a customer is enrolled in the program, the clearing firm will determine which securities to borrow and when.
Once the clearing firm settles on a security in an enrolled client’s account, it removes it and replaces it with collateral (cash or cash equivalents) in a bank account managed by a trustee with the enrolled client as a beneficiary, according to FINRA. Notably, clearing firms must obtain customer consent before engaging in these kinds of practices.
