FINRA Penalizes Interactive Brokers for Stock Lending Program Missteps

FINRA fined Interactive Brokers $475K for lapses in its stock lending program, including share miscalculations and unregistered oversight.

Key Points:

• Interactive Brokers was fined $475,000 for incorrectly returning borrowed shares in over 800 instances due to miscalculations in its stock lending program.
• The company allowed an unregistered person to oversee software development for its securities finance business, violating regulatory requirements.
• The brokerage has faced prior regulatory scrutiny in Australia and is bidding to acquire Danish brokerage Saxo Bank.

The Financial Industry Regulatory Authority (FINRA) has issued a censure order and a penalty of $475,000 against Interactive Brokers (Nasdaq: IBKR) due to significant lapses in its stock lending program. The Connecticut-based brokerage has settled the case with the regulator.

Calculation Lapses

According to FINRA’s “Acceptance, Waiver, and Consent (AWC)” letter, Interactive Brokers inaccurately calculated the number of excess shares available for return to customers from borrowed stocks listed on European exchanges between June and December 2021. This miscalculation led the brokerage to return borrowed shares in over 800 instances when it should not have. This error resulted in the company’s creation or increased securities deficits.

The regulator noted that Interactive Brokers failed to establish, maintain, and enforce an adequate supervisory system, including written supervisory procedures (WSPs) designed to comply with its possession and control obligations.

FINRA Penalizes Interactive Brokers for Stock Lending Program Missteps

Unregistered Oversight

In addition to the calculation errors, FINRA revealed that Interactive Brokers permitted an unregistered associated person to oversee software development efforts related to its securities finance business, including the stock lending program. This oversight spanned from January 2021 to December 2023. FINRA emphasized that individuals in such roles must be registered to ensure compliance with regulatory standards.

While Interactive Brokers accepted the penalty and the actions mandated by FINRA, the regulator has stated that it “will not bring any future actions against [the broker] alleging violations based on the same factual findings.”

Past Scrutiny and Future Prospects

This is not the first time Interactive Brokers has faced scrutiny regarding its stock lending program. Last year, the Australian financial market regulator flagged similar compliance issues within the regional brokerage’s operations. Brokerage’s stock lending program, Interactive Brokers, allows shareholders of select companies to lend their stocks to other traders, facilitating short-selling activities.

Furthermore, In related news, a recent Bloomberg report indicated that Interactive Brokers is among the bidders vying to acquire Danish brokerage giant Saxo Bank. Other competitors in the bidding process include Altor Equity Partners and Centerbridge Partners.

As Interactive Brokers navigates regulatory challenges and explores potential acquisitions, the upcoming developments will reveal their impact on the company’s operations and reputation in the financial services industry.

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