1 FINANCIAL INDUSTRY REGULATORY AUTHORITY LETTER OF ACCEPTANCE, WAIVER, AND CONSENT NO. 2020068953101 TO: Department of Enforcement Financial Industry Regulatory Authority (FINRA) RE: M1 Finance LLC (Respondent) Member Firm CRD No. 281242 Pursuant to FINRA Rule 9216, Respondent M1 Finance LLC (M1 Finance) submits this Letter of Acceptance, Waiver, and Consent (AWC) for the purpose of proposing a settlement of the alleged rule violations described below. This AWC is submitted on the condition that, if accepted, FINRA will not bring any future actions against Respondent alleging violations based on the same factual findings described in this AWC. I. ACCEPTANCE AND CONSENT A. Respondent accepts and consents to the following findings by FINRA without admitting or denying them: BACKGROUND M1 Finance, a FINRA member firm since March 2016, operates a retail and proprietary trading business. The firm is headquartered in Chicago, Illinois and employs approximately 60 registered persons. 1 OVERVIEW From March 2016 through the present, M1 Finance violated Regulation SHO Rule 203(b)(1) and Rule 200(g), and FINRA Rule 2010, by effecting more than 12 million short sales without locating securities available for borrowing and by inaccurately marking those orders as long. By inaccurately recording these short sales, and another 3.5 million principal buy orders, as executed in an “agent” capacity, the firm also maintained inaccurate books and records and violated Exchange Act Section 17(a), Exchange Act Rule 17a-3, and FINRA Rules 4511 and 2010. Finally, from March 2016 to the present, M1 Finance violated FINRA Rules 3110 and 2010 by failing to establish, maintain and enforce a supervisory system, including written supervisory procedures (WSPs), reasonably designed to achieve compliance with the provisions of Regulation SHO’s locate and order marking requirements and applicable books and records rules and regulations. 1 For more information about the firm, including prior regulatory events, visit BrokerCheck® at www.finra.org/brokercheck. 2 FACTS AND VIOLATIVE CONDUCT This matter originated from an examination conducted by FINRA’s Department of Market Regulation. M1 Finance failed to obtain locates for short sales. Rule 203(b)(1) of Regulation SHO, known as the “Locate Requirement,” provides that a broker-dealer may not accept a short sale order in an equity security from another person, or effect a short sale in an equity security for its own account, unless it has (i) borrowed the security or entered into a bona fide arrangement to borrow the security, or (ii) has reasonable grounds to believe the security can be borrowed so that it can be delivered on the date delivery is due, and (iii) has documented compliance with subsection (b)(1). A broker-dealer must, therefore, locate securities available for delivery before effecting short sales for its own account. A violation of Rule 203(b) also constitutes a violation of FINRA Rule 2010, which requires member firms to observe high standards of commercial honor and just and equitable principles of trade in the conduct of their business. Since March 2016, M1 Finance has provided retail customers the opportunity to engage in self-directed trading in both whole and fractional shares of securities. The firm does not permit customers to sell short. M1 Finance permits customers to trade at two designated times each day. The firm aggregates all buy-side customer orders in a specific security into a single buy-side order, all sell-side customer orders entered in dollar amounts of a specific security into a single sell-side order, and all sell-side customer orders entered in shares of a specific security into a second sell-side order. Because customers’ buy and sell orders may include fractional share quantities, the firm applies a set increase ( e.g. , a buffer) to the size of each aggregated buy and sell order and rounds the resulting amounts up to the next whole share. The firm routes the aggregated, buffered, and rounded buy and sell orders, marked as “long” and “agent”, for execution. The firm receives executed positions in its average price account and allocates the executed positions back to customers who entered buy orders in the securities. The firm places any remaining whole or fractional shares into its inventory account and then sells any long whole shares and purchases shares to cover any short positions. As a result, at the beginning of the two daily trading sessions, the firm’s inventory account typically is flat ( i.e. , no shares) or “net long” ( i.e. , less than one whole share) in the securities its customers traded. When the firm is “net long” in a security, each sell order executed in the next trading window contained a quantity of shares that the firm did not own. As a result, this portion of the sell order is “short” and subject to Rule 203(b)(1)’s locate requirement. During the period of March 2016 to the present, because the firm incorrectly treated all sales as long, the firm effected more than 12 million sell orders that required compliance with Regulation SHO Rule 203(b)(1) without obtaining a locate for the short sale. Therefore, M1 Finance violated Regulation SHO Rule 203(b)(1) and FINRA Rule 2010. 3 M1 Finance mismarked short sales as long and maintained inaccurate books and records. Rule 200(g) of Regulation SHO requires broker-dealers to mark all sell orders of any equity security as “long,” “short” or “short exempt.” A sell order may be marked “long” only if the seller is deemed to own the security being sold and either (i) the security to be delivered is in the physical possession or control of the broker or dealer; or (ii) it is reasonably expected that the security will be in the physical possession or control of the broker or dealer no later than the settlement of the transaction. Where a sell order is only partially net long, the seller may either split the order into its “long” and “short” components, or mark the entire order as short. 2 FINRA Rule 4511(a) provides that “[m]embers shall make and preserve books and records as required under the FINRA rules, the Exchange Act and the applicable Exchange Act rules.” Section 17(a) of the Exchange Act and Exchange Act Rule 17a- 3(a)(7)(i) require broker-dealers to make and keep current memoranda for trade executions that include the terms and conditions of the order. Implicit in these provisions is the requirement that such memoranda be accurate. A violation of Regulation SHO Rule 200(g) or FINRA Rule 4511 also constitutes a violation of FINRA Rule 2010. From March 2016 to the present, M1 Finance incorrectly marked more than 12 million sell orders as long sales, when the orders should have either been (i) split into separate orders, with one order containing shares equal to the firm’s net long position marked as “long” and a second with the balance of the shares marked as “short,” or (ii) marked as a single “short” order. In addition, the firm incorrectly marked more than 12 million sell orders as executed in an “agent” capacity, even though a portion of the sell orders ( i.e. , the buffer and rounded-up quantities) represented shares purchased for the firm’s inventory account executed in a principal capacity. The firm also incorrectly marked more than 3.5 million buy orders it effected at the end of each trading window as “agent,” even though a portion of the buy orders were executed in a principal capacity. As a result, the firm maintained inaccurate memoranda for each of those orders and executions. Therefore, M1 Finance violated Regulation SHO Rule 200(g), Exchange Act § 17(a), Exchange Act Rule 17a-3, and FINRA Rules 4511 and 2010. M1 Finance failed to establish and maintain a supervisory system, including WSPs, reasonably designed to achieve compliance with Rules 203(b)(1) and 200(g) of Regulation SHO and related recordkeeping rules. FINRA Rule 3110(a) requires member firms to establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules. FINRA 2 U.S. Securities and Exchange Commission, Division of Market Regulation, Responses to FAQs Concerning Regulation SHO, Question 2.4, updated as of August 28, 2009, and Question 2.4(A), updated as of April 10, 2012. 4 Rule 3110(b)(1) requires member firms to establish, maintain, and enforce written procedures (WSPs) to supervise the types of business in which it engages and the activities of its associated persons that are reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules. A violation of FINRA Rule 3110 is also a violation of FINRA Rule 2010. From March 2016 through the present, the firm had no supervisory systems or WSPs relating to Reg SHO Rule 203(b)(1). From March 2016 to January 2021, M1 Finance also had no supervisory systems or WSPs relating to Reg SHO Rule 200(g). The firm’s WSPs required a principal to conduct a daily review of transactions for “compliance purposes.” However, the WSPs did not provide any additional guidance for how this daily review was to be conducted, such as identifying the individual responsible for the review, specifying the number of trades to be reviewed, or describing what the reviewer should monitor for and what materials the reviewer should use. In January 2021, M1 Finance implemented WSPs with respect to Rule 200(g)’s order marking requirement that instructed representatives to mark all order tickets “long” without considering the firm’s treatment and execution of customer orders and residual shares held in the firm’s inventory account. The January 2021 WSPs did not address review of the firm’s trading activity or related records, and the firm did not implement any systems, surveillance or reviews to monitor its compliance with applicable locate, order marking, and recordkeeping rules. Therefore, M1 Finance violated FINRA Rules 3110 and 2010. B. Respondent also consents to the imposition of the following sanctions: a censure; a $400,000 fine; and an undertaking that, within 180 days of the date of the notice of acceptance of this AWC, a member of Respondent’s senior management who is a registered principal of the firm shall certify in writing that, as of the date of the certification, the firm has remediated the issues identified in this AWC and implemented a supervisory system, including written supervisory procedures, reasonably designed to achieve compliance with Rules 200(g) and 203(b)(1) of Regulation SHO, Exchange Act Section 17(a) and Rule 17a-3, and FINRA Rules 4511 and 2010 regarding the issues identified in this AWC. The certification shall include a narrative description and supporting exhibits sufficient to demonstrate Respondent’s remediation and implementation. FINRA staff may request further evidence of Respondent’s remediation and implementation, and Respondent agrees to provide such evidence. Respondent shall submit the certification to Tiffany A. Buxton, Director, at tiffany.buxton@finra.org, with a copy to EnforcementNotice@finra.org. Upon written request showing good cause, FINRA staff may extend this deadline. Respondent agrees to pay the monetary sanction upon notice that this AWC has been accepted and that such payment is due and payable. Respondent has submitted an Election of Payment form showing the method by which it proposes to pay the fine imposed. ■ ■ ■ 5 Respondent specifically and voluntarily waives any right to claim an inability to pay, now or at any time after the execution of this AWC, the monetary sanction imposed in this matter. The sanctions imposed in this AWC shall be effective on a date set by FINRA. II. WAIVER OF PROCEDURAL RIGHTS Respondent specifically and voluntarily waives the following rights granted under FINRA’s Code of Procedure: A. To have a complaint issued specifying the allegations against it; B. To be notified of the complaint and have the opportunity to answer the allegations in writing; C. To defend against the allegations in a disciplinary hearing before a hearing panel, to have a written record of the hearing made, and to have a written decision issued; and D. To appeal any such decision to the National Adjudicatory Council (NAC) and then to the U.S. Securities and Exchange Commission and a U.S. Court of Appeals. Further, Respondent specifically and voluntarily waives any right to claim bias or prejudgment of the Chief Legal Officer, the NAC, or any member of the NAC, in connection with such person’s or body’s participation in discussions regarding the terms and conditions of this AWC, or other consideration of this AWC, including its acceptance or rejection. Respondent further specifically and voluntarily waives any right to claim that a person violated the ex parte prohibitions of FINRA Rule 9143 or the separation of functions prohibitions of FINRA Rule 9144, in connection with such person’s or body’s participation in discussions regarding the terms and conditions of this AWC, or other consideration of this AWC, including its acceptance or rejection. III. OTHER MATTERS Respondent understands that: A. Submission of this AWC is voluntary and will not resolve this matter unless and until it has been reviewed and accepted by the NAC, a Review Subcommittee of the NAC, or the Office of Disciplinary Affairs (ODA), pursuant to FINRA Rule 9216; B. If this AWC is not accepted, its submission will not be used as evidence to prove any of the allegations against Respondent; and C. If accepted: 1. this AWC will become part of Respondent’s permanent disciplinary record and may be considered in any future action brought by FINRA or any other regulator against Respondent; 2. this AWC will be made available through FINRA’s public disclosure 6 program in accordance with FINRA Rule 8313; 3. FINRA may make a public announcement concerning this agreement and its subject matter in accordance with FINRA Rule 8313; and 4. Respondent may not take any action or make or permit to be made any public statement, including in regulatory filings or otherwise, denying, directly or indirectly, any finding in this AWC or create the impression that the AWC is without factual basis. Respondent may not take any position in any proceeding brought by or on behalf of FINRA, or to which FINRA is a party, that is inconsistent with any part of this AWC. Nothing in this provision affects Respondent’s right to take legal or factual positions in litigation or other legal proceedings in which FINRA is not a party. Nothing in this provision affects Respondent’s testimonial obligations in any litigation or other legal proceedings. D. Respondent may attach a corrective action statement to this AWC that is a statement of demonstrable corrective steps taken to prevent future misconduct. Respondent understands that it may not deny the charges or make any statement that is inconsistent with the AWC in this statement. This statement does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA. The undersigned, on behalf of Respondent, certifies that a person duly authorized to act on Respondent’s behalf has read and understands all of the provisions of this AWC and has been given a full opportunity to ask questions about it; that Respondent has agreed to the AWC’s provisions voluntarily; and that no offer, threat, inducement, or promise of any kind, other than the terms set forth in this AWC and the prospect of avoiding the issuance of a complaint, has been made to induce Respondent to submit this AWC. Date M1 Finance LLC Respondent Print Name: Title: Reviewed by: Andrew Rutkowski Senior Director, Assistant General Counsel M1 Finance 200 N. LaSalle Suite 800 Chicago, IL 60601 May 2, 2024 Ryan Burke General Manager 7 Accepted by FINRA: Signed on behalf of the Director of ODA, by delegated authority Date Andrew Cattell Principal Counsel FINRA Department of Enforcement 200 Liberty Street, Floor 11 New York, NY 10281 ”øß ÍÙ ÓÓÏ