The clearing arm of Apex Fintech Solutions has agreed to pay more than $3 million to resolve FINRA allegations that it failed to ensure customers received fees it generated by lending out their securities.
Apex Clearing, a clearing brokerage and a subsidiary of the software company Apex Fintech, will pay $3.2 million over charges related to its "paid securities lending program." The program lets Apex Clearing borrow securities from clients brought to it by retail broker-dealers and lend them out for a fee. The money generated by those loans is usually shared among the clearing firm, the retail broker and the clients whose securities were borrowed.
But Apex Clearing never ensured clients were actually receiving those fees. That omission, according to the Financial Industry Regulatory Authority,
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From January 2019 to June 2023, according to FINRA, Apex Clearing distributed to its introducing broker-dealers documents that misleadingly stated clients would receive fees in return for lending out securities. Four of those brokerage firms enrolled roughly 5 million clients in the securities lending program, and 17% of those clients' securities were eventually borrowed by Apex, according to FINRA.
Not appropriate for clients — and guarantees were lost, FINRA says
The industry self-regulator also said Apex had no reasonable grounds for believing the lending program was appropriate for the participating clients and that it failed to provide customers with required disclosures about the program.
FINRA charged that clients who lent out their securities were exposed to additional risks without receiving any compensation. Participating customers, for instance, received cash payments in lieu of the dividends they normally would have got from their securities, and cash is often taxed at a higher rate than qualified dividends, according to FINRA.
Also, clients who allowed their securities to be borrowed lost guarantees from the Securities Investor Protection Corporation, which guarantees up to $500,000 held at brokerage firms. The allegations are the first FINRA has brought under the 2013 rule, technically called Rule 4330.
"Member firms must have reasonable grounds to believe that a fully paid securities lending program is appropriate for customers who participate,"
In agreeing to the settlement, Apex neither admitted to nor denied the allegations. A spokesperson for the firm said, "Apex fully cooperated with FINRA throughout this process and takes its commitment to transparency and compliance seriously.
"Apex began enhancing its disclosure practices in 2023, addressing the areas identified by FINRA. Over the next six months, we will work closely with our introducing broker-dealer clients to ensure all remaining gaps are fully resolved, reaffirming our commitment to compliance and clear communication."
Other settlements on securities lending violations
FINRA previously reached $2.6 million in total settlements with four introducing broker-dealers also accused of mishandling borrowed securities. The firms — M1Finance, Open to the Public Investing, SoFi Securities and SoGoTrade — agreed to pay $1 million in restitution to customers and $1.6 million in fines for alleged supervisory and advertising violations.
Among other things, the firms were accused of not taking steps to distinguish which of their clients might be best suited to the securities lending program. They instead automatically enrolled customers when they opened accounts.
"The firms also provided customers with disclosure documents that contained misrepresentations that customers would receive compensation for the lending of their securities, including in the form of a 'loan fee,'" according to FINRA. "In fact, the customers did not receive any compensation."
