The Financial Industry Regulatory Authority (“FINRA”) has censured and fined Apex Clearing Corporation for violations of Securities and Exchange Commission Rules.
According to FINRA’s findings, Apex failed to establish procedures reasonably designed to assure that introduced customers received the initial margin interest rate disclosures and failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures, reasonably designed to achieve compliance with Securities and Exchange Commission Rule 10b-16(a)(1).
Securities and Exchange Commission Rule 10b-16(a)(1) requires that the initial disclosure include a “written statement or statements disclosing . . . the annual rate or rates of interest that can be imposed.” The initial disclosure is designed to ensure that a customer, before account opening, understands the terms and conditions under which margin interest charges will be made, and to enable the customer to compare the various credit terms available
According to FINRA’s findings, Apex did not have procedures to assure that introduced customers received margin interest disclosures at the time of account opening. And certain customers of Apex’s introducing firms did not receive the initial disclosure stating the annual rate or rates of margin interest that could be imposed. As a result, Apex violated SEC Rule 10b-16(a)(1) and FINRA Rules 3110(a) and (b) and 2010.
FINRA found that Apex maintained a system in which it provided the Margin Disclosure Statement was sent to the introducing firms, but the Statement never specifically disclosed the introducing firm-specific margin interest rate.
Apex predominantly used online retail firms to act as introducing firms that disclosed the required margin interest rate on their online web portals. But Apex had no system to confirm that the disclosures were in fact made and received by its customers. At the time of account opening, multiple introducing firms used by Apex failed to make any of the margin interest rate disclosures.
Apex acted as the broker extending credit and had the responsibility to confirm that customers received disclosure of the interest rates at the time they opened margin accounts. Despite this obligation, Apex had no form of procedures to do so. As a result, several customers of the introducing firms were never aware of the annual rates of margin interest that could be imposed.
The FINRA findings concluded that, from January 2015 through November 2019, Apex Clearing Corporation violated SEC Rule 10b-16(a)(1) and FINRA Rules 3110(a) and (b) and 2010 by:
- failing to establish reasonable procedures to make sure that introduced customers received initial margin interest rate disclosures
- failing to establish, maintain, and enforce a reasonable supervisory system including WSPs.
Because of this misconduct, the firm was censured, fined $250,000 and required to certify within 90 days that a a review of its systems and procedures and its compliance with SEC Rule 10b-16(a)(1) was conducted and are reasonably designed to do so.