“Fully Paid Stock Lending” (FPSL) refers to when your custodian broker-dealer — in Vest’s case, Drivewealth — lends stocks in your portfolio to borrowers who need liquidity. These borrowers pay Drivewealth interest while your stocks are on loan, and Drivewealth splits that interest between them, us, and you.
FPSL can seem scary at first, but the reality is that the “fully paid” part of FPSL makes these transactions extremely safe. According to SEC Rule 15c3-3 — the “Customer Protection Rule” — when Drivewealth lends out your securities they must provide you with 100% collateral coverage for the market value of your position, and update your collateral coverage daily. These collateral reserves are typically cash and treasury bonds: if for any reason at all the borrower doesn’t return your original position, Drivewealth will purchase it for you at the market rate. You do technically lose your SIPC coverage while a stock is on loan, however, the 100% collateral requirement under SEC Rule 15c3-3 provides equivalent or better protection than SIPC's $500,000 limit.
When you want to sell a stock that is on loan, Drivewealth either recalls the loaned stock from the borrower, or sells other shares in its portfolio to complete the sale. Your ability to trade and manage your portfolio as you wish is not interrupted by FPSL.
FPSL also impacts how dividend income is classified. When stock on loan pays a dividend you receive a “manufactured dividend payment,” which is typically classified in the U.S. as ordinary income as opposed to capital income. For foreign investors this change is typically not relevant from a tax perspective, however check with a tax professional familiar with U.S. investments to confirm.
Finally, when your stocks are on loan, you may lose voting rights. In practice, this may not be relevant to you, but it's worth keeping in mind.
Not only is FPSL safe, it is rare: of the $53M of assets on Vest that are currently eligible to be lent out, Drivewealth has only lent $2.1M. Large, well-known companies and ETFs may be lent out via FPSL, but it’s relatively more common for meme and penny stocks. If you’re not trading these kinds of companies you’ll interact with FPSL much less frequently.
We want to keep your investment costs as low as possible. DriveWealth, our custodian, is implementing changes to its fee structure that, starting in December, will require us to cover new costs for accounts not enrolled in the Fully Paid Securities Lending (FPSL) program. To avoid having to pass these new costs on to you, we suggest you consider enrolling in FPSL. This is why enrollment is now one of the key ways to earn points in your rewards program (Vest Points).
Vest believes in putting you in the driver’s seat. Starting in November, we will add indicators to the app to show whether any stocks in your portfolio — or any stocks that you’re considering purchasing — are being lent out via FPSL. Even with the minimal risk, we want you to be able to choose what’s best for you.
If you have any questions at all, don’t hesitate to reach out to us at support@mivest.io.
Securities offered by Northbound Securities, LLC Member FINRA/SIPC