Interactive Brokers LLC has agreed to pay a $475,000 fine to settle violations related to its fully paid securities lending program. The settlement comes as part of a Letter of Acceptance, Waiver, and Consent (AWC) submitted to the Financial Industry Regulatory Authority (FINRA).
The violations stemmed from improper calculations of borrowed shares returned to customers between June and December 2021. Interactive Brokers used an algorithm that mistakenly included anticipated loan return activity, resulting in more than 800 instances where borrowed shares were returned prematurely.
This error created or increased securities deficits worth approximately $30 million, breaching the firm’s regulatory obligations under the Exchange Act and FINRA rules.
The firm also failed to establish proper supervisory systems to monitor these returns and ensure compliance with its possession and control requirements. The violations were further exacerbated by allowing an unregistered individual to lead software development for the securities lending program. This person oversaw critical changes to the lending algorithm without being registered as an Operations Professional, in violation of FINRA rules.
Interactive Brokers has since corrected these issues, updated its supervisory procedures, and ensured that only registered personnel oversee the firm’s securities finance business. The firm agreed to the settlement without admitting or denying the violations.
As part of the settlement, Interactive Brokers consented to a censure alongside the $475,000 fine. The sanctions are part of FINRA’s ongoing effort to maintain regulatory compliance within the financial industry.
FINRA stated that the settlement concludes its examination into the matter and ensures corrective measures have been put in place by the firm.
This action marks another chapter in the ongoing regulatory oversight of broker-dealers and their responsibility to protect customer assets and comply with industry rules. Interactive Brokers, a prominent player in online trading, is expected to maintain higher standards moving forward.
Previous enforcement actions against IBKR Interactive Brokers has faced several significant regulatory enforcement actions in recent years. One of the largest was in 2020 when the firm paid a total of $38 million in fines for failures in its anti-money laundering (AML) program. This penalty was imposed by multiple regulatory bodies, including the SEC, FINRA, and the Commodity Futures Trading Commission (CFTC). These violations stemmed from the firm’s failure to file Suspicious Activity Reports (SARs) related to microcap securities trades. The firm failed to detect and report red flags associated with suspicious activities in its customer accounts over a period from 2013 to 2018.
In a separate case in 2020, the CFTC fined Interactive Brokers over $12 million for supervisory and AML violations linked to commodity trading accounts. The firm failed to implement effective procedures to detect and report suspicious transactions in its futures commission business, further revealing gaps in its compliance and supervision systems.
Earlier, in 2018, FINRA fined the company $5.5 million for violating Regulation SHO, which governs short sale practices. These violations were related to the firm’s failure to deliver shares on time and to properly supervise short sale transactions over a period of three years.
IBKR launched Securities Lending Dashboard last year As to securities lending, IBKR last year launched the Securities Lending Dashboard designed to help clients assess the short-selling activity for specific securities and inform trading decisions.
Sophisticated individual and institutional investors, including hedge funds, can leverage the Orbisa-powered Securities Lending Dashboard to view an expanded universe of securities lending data across key metrics.
The new securities lending data includes information for securities that trade in North America, Europe, and Asia and is provided to all clients of Interactive Brokers through Fundamentals Explorer on the Trader Workstation platform.
This complements Interactive Brokers’ Securities Loan Borrow (SLB) system, which is a fully electronic and actionable self-service utility that lets clients search for stocks available to short on the Interactive Brokers platform for free.
Clients can use both the Securities Lending Dashboard, as well as the existing Securities Loan Borrow system, which includes the quantity, number of lenders, and current indicative borrow rates for securities based on IBKR client holdings.
