Securities Lending Oversight Lapses Lead to FINRA Sanctions
From the desk of Jim Eccleston at Eccleston Law
The Financial Industry Regulatory Authority Inc. (FINRA) recently concluded settlements totaling $2.6 million in fines and restitution with four mobile apps and online broker-dealers. The settlements pertained to non-compliance with rules related to securities lending programs, communications, and advertising. The implicated firms include M1 Finance, Open to the Public Investing Inc., SoFi Securities, and SogoTrade Inc.
Securities lending, a common and lucrative practice, involves clearing firms borrowing fully paid or excess margin securities from customers and lending them to third parties for a daily fee. Sandy Ressler, Managing Director of Essential Edge Compliance Outsourcing Services, attributes such compliance lapses at broker-dealers to rapid growth.
FINRA outlines that in a fully paid lending program, the clearing firm determines the securities to borrow, the timing, and the borrowing terms. The daily borrowing fee collected is typically distributed among the clearing firm, the introducing broker-dealer, and the customer who owns the borrowed security.
As reported by InvestmentNews, FINRA found that the four broker-dealers it sanctioned, namely M1 Finance, Open to the Public Investing Inc., SoFi Securities, and SogoTrade Inc., "failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures, reasonably designed to supervise their fully paid securities lending offerings." This failure to implement effective supervisory measures led to the regulatory action taken by FINRA.
Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.
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