FINRA has fined Apex Clearing Corporation $3.2 million for violations related to its fully paid securities lending program. This marks the first enforcement action under FINRA Rule 4330, which governs the permissible use of customer securities.
Apex operated a fully paid securities lending program for introducing firms, allowing their customers to participate. FINRA had previously ordered four introducing firms that offered Apex’s program to pay a combined $2.6 million, including over $1 million in restitution, for supervisory and advertising violations. The regulator found that Apex entered into lending agreements with customers and borrowed customer securities without proper disclosures.
“Unreasonable to expect a customer to take on risks”
Bill St. Louis, Executive Vice President and Head of Enforcement at FINRA, said: “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. 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.”
Fully paid securities lending allows a broker-dealer to borrow a customer’s fully paid or excess margin securities and lend them to a third party in exchange for a daily borrowing fee. Apex determined which securities to borrow, when, and on what terms, but the firm’s customers received no compensation for their loans.
FINRA Rule 4330 requires firms to have reasonable grounds to believe that such programs are suitable for customers and to provide clear written disclosures. FINRA found that Apex:
Lacked reasonable grounds to believe the program was appropriate for customers who did not receive a loan fee.
Misrepresented compensation in documents sent to more than 5 million retail investors via introducing broker-dealers.
Failed to provide required written disclosures to many customers between March 2021 and April 2023.
Did not establish adequate supervisory procedures to ensure compliance with FINRA Rule 4330.
Between January 2019 and June 2023, Apex entered into securities loans without confirming their suitability for customers. Since at least 2019, the firm failed to maintain and enforce a supervisory system designed to comply with customer protection rules.
In settling the matter, Apex consented to FINRA’s findings without admitting or denying the charges. The firm also agreed to certify that it has remediated the identified issues.
