Firms Fined for Misrepresentations on Fully Paid Lending Programs

FINRA settled charges with four firms for misrepresentations and supervision failures on their "fully paid securities lending" programs.

In separate Letters of Acceptance, Waiver, and Consent (see Firm 1, Firm 2, Firm 3 and Firm 4), FINRA found that the firms failed to establish, maintain and enforce a supervisory system for their fully paid securities lending offerings. FINRA also found that the firms failed to set criteria for customer participation or make appropriateness determinations before enrolling customers in fully paid securities lending. FINRA found that new customers were automatically enrolled at account opening and that the firms provided customers with misleading disclosure documents, some telling customers that they would be paid for the lending of their securities, when no compensation was actually paid. Further, FINRA said that the lenders may have suffered adverse tax consequences as a result of lending out their securities over a dividend period.

FINRA determined that the firms violated FINRA Rule 3110 ("Supervision"), Rule 2010 ("Standards of Commercial Honor and Principles of Trade") and Rule 2210 ("Communications with the Public").

In settling the matters, each of the four firms consented to FINRA's findings without admitting or denying the charges. As part of the settlements, the firms were censured, and individually (i) Firm 1 agreed to a $500,000 fine and $736,917.86 restitution plus interest, (ii) Firm 2 agreed to a $500,000 fine and restitution of $28,123.75 plus interest, (iii) Firm 3 agreed to a $500,000 and restitution of $198,282.39 plus interest and (iv) Firm 4 agreed to a $100,000 fine and $104,767.25 restitution plus interest.