What is fully paid securities lending?
Fully paid securities lending is a way our clients can passively earn income on stocks they already own by loaning them out.
With your permission, we lend shares of fully owned stocks in your portfolio to other financial institutions such as banks, market makers, and institutional investors.
These market participants borrow shares for a variety of reasons, but commonly use them to facilitate short sales or settle trades.
In exchange for borrowing these shares, the borrowing institution pays us a fee, and some of the fee is shared with our clients.
How much do I earn from participating in fully paid securities lending?
You’ll automatically receive 10% of any of the revenue earned from lending out your shares. You won’t need to select certain stocks for participation or accept individual offers to loan shares – this is all done automatically for you.
Who owns stocks that are loaned from my account?
The stocks in your account are still economically yours even if they are on loan. This means the value of lent stock still changes along with the market and you can still sell them the same way you could if they weren’t on loan.
However, ownership is temporarily granted to the borrower while stocks are on loan. This means the borrower receives voting rights and SIPC coverage of the borrowed shares.
How does SIPC coverage work with loaned stocks?
While stocks on loan are not directly covered by SIPC, cash collateral is held by a third-party bank to protect your loaned stock’s value. We aim to hold at least 100% of the value of your stocks for this purpose.
In the event M1 was unable to return your stock M1 will purchase the shares in the market to provide to you.
Why does M1 participate in fully paid securities lending?
Fully paid securities lending is one way M1 earns revenue, allowing for commission-free* trading and the sophisticated, wealth-building tools loved by our clients.
What if the loaned stock received a dividend?
If your stocks receive a dividend when loaned through fully paid securities lending, you’ll receive a substitute dividend payment, also known as a dividend in lieu (DIL).
Although the payment amount is the same, substitute payments in lieu of dividends are non-qualified and will be reported on tax form 1099-Misc and taxed as ordinary income.
What are the tradeoffs of participating in fully paid securities lending?
While you can passively earn income on stocks you already own, there are some tradeoffs to consider:
You’ll temporarily forfeit the right to participate in shareholder votes.
Dividends paid while the stock is on loan will be received as a substitute dividend payment, also known as a dividend in lieu (DIL). DIL may be taxed at a higher rate than qualified dividend payments.
Stocks on loan are not covered by SIPC and instead protected by cash collateral.
How do I change my enrollment in securities lending?
Most clients opt-in to securities lending when creating their M1 login for the first time.
To check if you’re currently enrolled in securities lending, or to re-enroll after previously opting-out, please send an email to [emailprotected].
You can opt-out of participating in fully-paid securities lending at any time by sending an email to M1 at [emailprotected] with “Securities Lending Opt-Out” as the subject line. Please include the last 3 digits for each account number you would like unenrolled.
*M1 Finance, LLC does not charge commission, trading, or management fees for self-directed brokerage accounts. You may still be charged other fees such as M1’s platform fee, regulatory fees, account closure fees, or ADR fees. For a complete list of fees M1 may charge visit M1’s Fee Schedule.
Brokerage accounts on the M1 platform are either fully disclosed to APEX Clearing or cleared through M1 Finance LLC. Please look at your account statement to determine how your account is cleared.
All investing involves risk, including the risk of losing the money you invest. Past performance does not guarantee future performance. Using margin can add to these risks. Users utilizing APEX cleared margin accounts should review the APEX margin account risk disclosure before borrowing. Users utilizing M1 cleared margin accounts should review the M1 margin account risk disclosure before borrowing. M1 Margin Loans are available on margin accounts with at least $2,000 invested per account. Not available for Retirement or Custodial accounts. Margin rates may vary.
Brokerage products and services are offered by M1 Finance LLC, Member FINRA / SIPC, and a wholly owned subsidiary of M1 Holdings, Inc.
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