Interactive Brokers Hit with $475K Penalty for Stock Lending Errors

Interactive Brokers faces a $475K penalty from FINRA for miscalculating share returns in its stock lending program and allowing unregistered oversight.

Key Points:

• Interactive Brokers faced a fine for incorrectly returning shares in its stock lending program over 800 times between June and December 2021.
• The company failed to maintain proper supervisory systems and allowed an unregistered person to oversee software development for its securities finance business.
• The brokerage is also bidding to acquire Danish brokerage Saxo Bank, following scrutiny from Australian regulators on similar compliance issues.

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

The official “Acceptance, Waiver, and Consent (AWC)” letter from FINRA outlines that Interactive Brokers made incorrect calculations concerning the number of excess shares of stocks listed on European exchanges available for return to its customers from whom the brokerage had borrowed. Between June and December 2021, this miscalculation led to the return of borrowed shares in over 800 instances when it should not have, resulting in increased securities deficits within the firm.

Milan Galik, CEO, President, and Director at Interactive Brokers, acknowledged the oversight, stating, “We take compliance seriously and are committed to improving our processes to prevent such occurrences in the future.”

FINRA’s investigation revealed that the Connecticut-based brokerage failed to establish, maintain, and enforce a supervisory system that included written supervisory procedures (WSPs) reasonably designed to meet its possession and control obligations.

Interactive Brokers Hit with $475K Penalty for Stock Lending Errors

Adding to the compliance issues, the regulator highlighted that an unregistered associated person was allowed to lead and oversee key software development efforts related to the securities finance business, including the stock lending program. Despite regulations that require individuals to register with FINRA, the company allowed an unregistered associated person to oversee key software development efforts from January 2021 to December 2023.

FINRA stated that as Interactive Brokers accepted the penalty despite these violations, it would not pursue any future actions against the firm based on the same factual findings.

This recent penalty is not the first time Interactive Brokers has faced scrutiny regarding its stock lending operations. Last year, the Australian financial market regulator investigated similar compliance lapses within the firm’s stock lending program in Australia.

Under the stock lending program, Interactive Brokers allows shareholders to lend their stocks to traders looking to take short positions. This mechanism is vital for market liquidity but requires stringent compliance to ensure that all firms follow regulations.

In a related development, a recent report from Bloomberg revealed that Interactive Brokers is among the bidders looking to acquire Danish brokerage giant Saxo Bank. Other notable bidders include Altor Equity Partners and Centerbridge Partners, signaling Interactive Brokers‘ ambitions for growth in the competitive brokerage landscape.

As Interactive Brokers moves forward, it aims to bolster its compliance framework to avoid further regulatory issues and enhance its position within the financial services industry.

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