Firm Settles FINRA Charges for Securities Lending Program Misrepresentations

A firm settled FINRA charges for providing customers with misleading information about participation in the firm's securities lending program and for related supervisory failures.

In the AWC, FINRA explained that fully paid securities lending is a practice through which 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 borrowing fee. FINRA said the firm participated in a program offered by its clearing firm and was responsible for determining customer eligibility and compensation even though the firm did not custody or lend the securities itself.

FINRA stated that the firm "received more than $600,000 in revenue" from lending its customers’ shares. FINRA found that the firm "distributed documents to customers that contained misrepresentations regarding compensation" for participating in the fully paid securities lending program. FINRA found that the disclosure documents and agreements provided to customers indicated they would receive a loan fee or other compensation for lending their shares. FINRA found that participating customers received no compensation, lost SIPC protection and voting rights during the loan period, and some received payments in lieu of dividends that could result in adverse tax consequences.

FINRA found that the firm failed to establish a reasonably designed supervisory system for its fully paid securities lending program. FINRA stated that the firm’s written supervisory procedures did not address fully paid securities lending and prescribed no supervisory steps related to the program, including customer enrollment. FINRA also found that although the firm represented it would conduct due diligence to ensure the program was appropriate for participating customers, it failed to take any steps to do so.

FINRA concluded that the firm violated FINRA Rules 3110 ("Supervision"), 2210 ("Communications with the Public"), and 2010 ("Standards of Commercial Honor and Principles of Trade").

The firm agreed to (i) a censure, (ii) a $150,000 fine, and (iii) restitution of $142,851.22 plus interest.