Sign on the building of Financial Industry Regulatory Authority, or Finra, in Manhattan NYC lower financial district downtown, businessman man walking stock photo
iStock/ablokhin

The U.S. Financial Industry Regulatory Authority (FINRA) is sanctioning the clearing firm behind an earlier enforcement action against brokerage firms that didn’t adequately protect investors in their securities lending programs.

Back in December 2023, the self-regulatory organization fined a group of four introducing brokers a combined US$1.6 million, and ordered US$1 million in restitution, for failing to oversee their securities lending programs. The brokers, FINRA said, enrolled all of their clients in these programs without assessing suitability, and failed to compensate investors for borrowing their securities.

Now, FINRA has also sanctioned the brokers’ clearing firm, Apex Clearing Corp., for its role in the firms’ securities lending failings.

In its first case alleging violations of the rules that set out permitted uses of investors’ securities, the SRO fined the firm US$3.2 million, saying that, while the brokers committed supervisory violations, it was the clearing firm that “entered into the lending agreements with customers and borrowed customer securities.”

According to FINRA’s order, between January 2019 and June 2023, “Apex entered into securities loans with certain introduced customers without having reasonable grounds to believe that the loans were appropriate for those customers because those customers did not receive a loan fee for lending their shares.”

Apex consented to the entry of FINRA’s findings without admitting or denying the charges.

In addition to the financial sanctions, the firm also agreed to fix the issues flagged by FINRA.

The cases arose from a compliance review of firms’ retail securities lending programs, which found that investors were exposed to certain risks, including tax and investor protection risks, but did not receive any share of the fees charged to borrowers.

“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 a release.

“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,” he added.