FINRA’s Crackdown on Broker Misconduct

This week, FINRA ramped up its enforcement efforts, penalizing two brokerage firms—Fenix Securities, LLC and Interactive Brokers LLC—for serious compliance violations. The regulator’s actions reflect an aggressive stance on firms that fall short of maintaining industry standards.

FINRA sanctioned Fenix Securities, LLC, with a $250,000 fine for multiple rule violations between December 2016 and April 2024. The New York-based firm, specializing in online trading for institutional clients, was found to have violated FINRA’s registration rules by allowing 47 unregistered foreign individuals to engage in securities transactions through its systems.

These unregistered individuals, who should have been licensed as representatives under U.S. securities laws, were trading on behalf of foreign entities. This conduct is prohibited under FINRA Rule 1220, which requires firms to ensure that all associated persons engaged in securities activities are properly registered. Fenix also failed to maintain adequate supervision over these activities, a violation of FINRA Rule 3110, which mandates firms to implement effective supervisory systems.

In addition to allowing unregistered individuals to trade, the firm was also cited for deficient anti-money laundering (AML) procedures. Fenix’s AML program failed to adequately monitor for and detect suspicious transactions, further compounding the firm’s regulatory lapses.

As a result, Fenix Securities was censured and fined $250,000, signaling FINRA’s intolerance for firms that skirt registration and AML rules.

Interactive Brokers: Lapses in Securities Lending & Unregistered Personnel Oversight

Meanwhile, Interactive Brokers LLC was hit with a $475,000 fine for its mishandling of securities lending and allowing unregistered personnel to assume supervisory roles. The violations took place between June and December 2021, when the firm’s algorithm miscalculated the number of excess shares available for return in its European securities lending program, leading to significant customer deficits.

Interactive Brokers mistakenly returned borrowed shares to customers before receiving anticipated returns from lending transactions. This resulted in over 800 instances of improper stock returns, violating the SEC’s Customer Protection Rule, which ensures customer funds and securities are properly segregated.

The firm’s errors led to approximately $30 million in deficits, prompting them to revise their algorithm and reimburse affected clients. However, this wasn't the only violation—Interactive Brokers also allowed an unregistered individual to oversee software development related to its securities lending program. This oversight, a violation of FINRA Rules 1210 and 2010, added to the firm’s compliance missteps.

In response to these violations, Interactive Brokers agreed to a $475,000 fine and a censure without admitting or denying the allegations.

FINRA’s Message: Strengthening Compliance Programs

Both enforcement actions underline the importance of adhering to FINRA’s registration and supervisory rules. Fenix Securities’ failure to properly register personnel and monitor for AML compliance, alongside Interactive Brokers’ lapses in securities lending and unregistered supervisory roles, demonstrates the risks firms face when compliance programs are not rigorously enforced.

FINRA continues to emphasize the need for robust compliance measures, particularly in areas where customer protection and market integrity are at risk. These recent actions serve as a reminder to brokerage firms that lax oversight and registration failures will not go unpunished.

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