Online brokers misstep in securities lending: Finra

investmentnews.com:

Fast-growing technology platforms that specialize in whiz-bang online trading at times fall short of securities industry rules. The most notable recent example was Robinhood, the mobile brokerage app and brokerage thatagreed in 2021 to pay a total of $70 million in fines and restitution to settle claims it harmed customers as a result of false or misleading information, system outages and approval of trade options that were not appropriate. 

The Financial Industry Regulatory Authority Inc. settled that matter with Robinhood. On Tuesday, Finra reached settlements totaling $2.6 million in fines and restitution with four mobile apps and online broker-dealers for falling short in compliance with rules related to securities lending programs, as well as rules regarding communications and advertising.

The four firms were M1 Finance, Open to the Public Investing Inc., SoFi Securities and SogoTrade Inc.

Securities lending is the common and lucrative practice in 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.

Such shortcomings in compliance at broker-dealers can happen when firms grow too quickly, said Sandy Ressler, managing director of Essential Edge Compliance Outsourcing Services.

“The problem is, these firms had securities lending programs, and none of the money went to the customers,” Ressler said. “That’s an internal audit or financial control type problem. The firms are retaining capital that doesn’t belong to them.

“These are securities that are wholly owned by the client, and the broker-dealer is not paying the customers any of the revenue,” he added. “Who were the accountants? Lending securities can be lucrative.