FINRA Fines Apex Clearing $3.2M Over Securities Lending Violations
America ı By Rihem Akkouche
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Broker-dealer Apex Clearing Corp. has agreed to pay a $3.2 million fine to the Financial Industry Regulatory Authority (FINRA) to settle first-of-its-kind allegations that the firm violated customer protection rules in its fully paid securities lending program (FPLP). The violations included misrepresenting compensation details and exposing certain customers to unintended tax liabilities, FINRA announced Tuesday.
In its letter of acceptance, waiver, and consent, FINRA stated that Apex was censured and has been given six months to remediate compliance deficiencies within its securities lending program. The firm had already disbursed nearly $18 million in cash payments to affected customers. However, those payments—typically taxed at a higher rate than qualified dividends—potentially resulted in greater financial consequences for participants.
Misleading Disclosures and Compliance Failures
FINRA's landmark enforcement action accuses Apex of failing to meet the requirements of Rule 4330, which mandates that firms borrowing customer securities must ensure the arrangement is suitable. The organization highlighted that Apex did not have reasonable grounds to believe its securities lending program was appropriate, especially for customers who received no loan fees for their participation.
"Apex failed on all of those counts — it lacked reasonable grounds to think the program was appropriate for participating customers who did not receive a loan fee for their loans, distributed documents that misrepresented that customers would receive compensation (they did not), and failed to provide certain customers with required written disclosures," FINRA stated.
Additionally, between January 2019 and June 2023, Apex failed to deliver all necessary written disclosures outlining customers’ rights as program participants. The firm also lacked the written policies and procedures necessary to ensure compliance with regulatory requirements, according to FINRA.
Wider Regulatory Scrutiny of Securities Lending Practices
The enforcement action against Apex Clearing follows FINRA’s prior crackdown on four introducing broker-dealers—M1 Finance LLC, Open to the Public Investing Inc., SoFi Securities LLC, and SogoTrade Inc.—for supervisory and advertising violations tied to Apex’s securities lending program. In that matter, the firms agreed to a combined $2.6 million in sanctions, which included $1 million in restitution to affected retail customers.
FINRA emphasized that its investigation into securities lending programs is ongoing, and Apex’s case was particularly significant because the firm itself entered into lending agreements and borrowed customer securities.
Compliance and Investor Protection at the Forefront
The FINRA fine against Apex Clearing underscores the regulatory body’s commitment to protecting investors and enforcing transparency in securities lending practices. With customer protection and regulatory compliance under increasing scrutiny, firms engaged in securities lending must ensure clear disclosures, appropriate suitability determinations, and adherence to FINRA rules to avoid facing similar penalties.
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