M1 Finance Faces FINRA Penalty $2.6M for Securities Lending Violations
M1 Finance Faces FINRA Penalty along with three other brokerage firms, named as Open to the Public Investing, Inc., SoFi Securities LLC, and SogoTrade, Inc. totaling $2.6 million due to securities lending violations. The penalties include over $1 million in restitution to retail customers who participated in fully paid securities lending programs and an additional $1.6 million in fines for supervisory and advertising violations.
FINRA found that M1 Finance, despite contractual agreements with clearing firms, failed to establish and enforce a supervisory system for fully paid securities lending. The firm neglected to set criteria or evaluate the appropriateness of customers before automatically enrolling them in the program at account opening. This failure led to misleading disclosure documents that falsely claimed customers would receive compensation, including a “loan fee,” for lending their securities, when, in reality, customers received no compensation.
The restitution of over $1 million is intended to compensate customers whose securities were lent out over a dividend date, potentially resulting in adverse tax consequences. M1 Finance, along with the other firms involved, has agreed to FINRA’s findings as part of the settlement without admitting or denying the charges.
OVERVIEW
Between January 2019 and June 2023, M1 Finance neglected to establish an effective supervisory system, including written supervisory procedures (WSPs), for its fully paid securities lending business. This failure resulted in a violation of FINRA Rules 3110 and 2010.
Throughout January 2019 to February 2023, M1 Finance distributed documents to over 1.5 million retail investors, containing misleading information about the compensation these investors could expect from participating in fully paid securities lending. By providing inaccurate details to customers, M1 Finance breached FINRA Rule 2010. Additionally, these misrepresentations contravened the content standards outlined in FINRA’s advertising rule, leading to violations of FINRA Rules 2210(d) and 2010.
What M1 Finance Faces FINRA Penalty Means to You
For investors and the broader industry, this enforcement action underscores the importance of broker-dealers complying with FINRA Rules related to fully paid and excess margin securities lending. M1 Finance, in particular, is highlighted as failing to establish a robust supervisory system and provide transparent communications regarding program terms and conditions.
The key takeaway is that firms like M1 Finance must have stringent procedures in place to assess each customer’s suitability for fully paid lending before enrollment. Autoenrollment practices may come under scrutiny, and accurate disclosure of the customer’s share in fees generated from loaned shares is imperative. Transparency in communications and adherence to program terms and conditions, especially regarding compensation for securities loans, are crucial aspects that FINRA will focus on during examinations and risk monitoring.
What is exactly M1 Finance ?
M1 Finance, established in 2015, is an American financial services company that presents a comprehensive robo-advisory investment platform featuring brokerage accounts, digital checking accounts, and lines of credit.
The platform encompasses a range of services and products:
- Brokerage accounts: M1 Finance provides an electronic trading platform for stocks, preferred stocks, fractional-share ownership, and exchange-traded funds (ETFs).
- Digital checking accounts: M1 Spend is a fully functional, FDIC-insured checking account with no monthly fees or minimum balance requirements. M1 Plus members enjoy 1% APY and 1% cash back on all purchases.
- Lines of credit: M1 Finance offers M1 Margin Loans, allowing users to borrow against 40% of their portfolio’s value with one of the lowest rates on the market, all without paperwork hassles.
- Investment tools: The platform boasts a selection of over 6,000 stocks and ETFs, model portfolios, and one-click rebalancing services.
- Account protection: M1 Finance ensures account protection through the Securities Investor Protection Corporation (SIPC) and provides FDIC insurance for High-Yield Savings Accounts up to $5 million.
Catering to sophisticated investors seeking a cost-effective robo-advisor that seamlessly integrates investing, banking, and borrowing, M1 Finance has garnered over 1,000,000 users and manages $7 billion in client assets as of August 2023.
