SoFi Securities Faces FINRA Fines: $2.6M for Securities Lending Violations

SoFi Securities Faces FINRA Fines, along with three other broker-dealer firms, has recently incurred penalties totaling $2.6 million from FINRA for violations related to fully paid securities lending programs. The fines include over $1 million designated for restitution to retail customers participating in these programs, along with $1.6 million for supervisory and advertising violations.

In fully paid securities lending, a clearing firm borrows securities from customers for a fee. Despite contractual agreements with clearing firms to assess customer suitability, SoFi Securities and the other implicated firms failed to establish criteria or evaluate appropriateness before automatically enrolling all new customers at account opening.

Furthermore, the firms provided customers with misleading disclosure documents, falsely claiming compensation, including a “loan fee,” for lending their securities. The restitution aims to compensate customers whose securities were lent out over a dividend date, potentially resulting in adverse tax consequences.

SoFi Securities, M1 Finance, Open to the Public Investing, Inc., and SogoTrade have agreed to the settlement without admitting or denying the charges. Bill St. Louis, FINRA’s Executive Vice President and Head of Enforcement, underscores the importance of careful supervision in fully paid securities lending programs to safeguard investors and provide restitution for harmed customers.

This regulatory action serves as a reminder to broker-dealer firms, including SoFi Securities, of the need for a robust supervisory system and transparent communication regarding fully paid lending programs. In particular, firms must ensure accurate disclosure of program terms, customer suitability assessment, and transparent communication of the fees customers can expect to receive. FINRA emphasizes its commitment to enforcing rules and protecting investors in the realm of fully paid securities lending.

SoFi Securities Faces FINRA Fines

SoFi Securities, among firms like Open to the Public Investing, agrees to FINRA settlement, emphasizing the importance of robust supervisory systems and transparent communication for fully paid securities lending compliance.

FACTS AND VIOLATIVE CONDUCT

During a recent FINRA examination of firms providing fully paid securities lending to retail customers, SoFi Securities LLC came under scrutiny. Fully paid securities lending involves a clearing firm borrowing a customer’s fully paid or excess margin securities and lending them to a third party, earning a daily borrowing fee. The crucial factor is obtaining customer consent before engaging in such transactions.

SoFi Securities LLC, much like other clearing firms, operates fully paid lending programs where they decide which securities to borrow, when, and under what terms for enrolled customers. The firm removes the identified security from the customer’s account, deposits collateral with a trustee, and lends the security to a third party, earning a daily borrowing fee that varies based on market conditions.

Customers who participate in fully paid securities lending programs temporarily lose SIPC protection and voting rights for the borrowed shares. Additionally, if the securities are borrowed over a dividend date, customers receive a cash payment instead of the dividend, which may be taxed as regular income at a potentially higher rate than qualified dividends.

A notable incident involving SoFi Securities LLC occurred during the period between May 2020 and September 2022. The firm, among the four fined by FINRA, failed in its supervisory obligations for fully paid securities lending. At account opening, customers had consented to a Master Securities Lending Agreement (MSLA) allowing the clearing firm to borrow their securities. SoFi Securities LLC, however, automatically enrolled all new customers in the Fully Paid Lending Program (FPLP) during this period, violating FINRA rules.

Over 1.5 million customers were auto-enrolled, generating $2.5 million for SoFi Securities LLC. Unfortunately, customers received no share, resulting in the loss of SIPC protection and voting rights. Some customers also faced adverse tax consequences from cash payments in lieu of dividends. It wasn’t until December 2022 that SoFi Securities LLC allowed opt-out during account opening.

In response to these issues, SoFi Securities LLC implemented enhanced appropriateness criteria in September 2022 and established written supervisory procedures by June 2023, addressing previous failures. The fines imposed by FINRA, totaling $2.6 million, aim at restitution and penalizing supervisory and advertising violations. This enforcement underscores FINRA’s commitment to safeguarding investors and ensuring compliance in fully paid securities lending programs, with SoFi Securities LLC being a focal point of the regulatory actions.