Online brokerage services provider TD Ameritrade agreed to pay a $600,000 fine for violations of Financial Industry Regulatory Authority (FINRA) rules over its automated approval system that allegedly allowed inexperienced traders to engage in options trading.
TD Ameritrade used an automated, electronic system to issue approvals and denials for customer options trading requests that was not reasonably designed to catch inconsistencies in customers’ descriptions of their trading experience, as well as other factors that might lead to their application being denied, according to a FINRA order published Friday.
The details: From November 2019 to October 2022, TD Ameritrade approved 1,288 customer applications for advanced options trading, despite many of those customers not having the requisite three years of trading experience or levels of income and net worth required by the firm’s policies and procedures, FINRA said.
TD Ameritrade’s automated system only compared a customer’s most recent application with previous applications filed within 60 days. It also did not compare a customer’s most recent application with previous applications that had been rejected, FINRA said.
The system failed to detect certain red flags contained in customer applications, leading the firm to “not detect certain instances in which customers submitted materially inconsistent information to TD Ameritrade in their new applications with respect to their income, net worth, and years of option trading experience,” FINRA said.
The alleged due diligence failures led to TD Ameritrade violating FINRA rules 3110, 2360, and 2010.
Compliance considerations: The alleged issues with TD Ameritrade’s automated approval system were discovered during a FINRA examination conducted in October 2022.
During that examination, on its own initiative, the firm made enhancements to its system for improving customer applications for options trading, including “implementing new exception reports to monitor when customers changed information they provided to the firm and to identify additional customers who provided inconsistent information on prior options applications in a given time period, including in any rejected applications,” FINRA said.
Firm response: In an emailed statement, a TD Ameritrade spokesperson said the company “addressed and remediated the matter in 2022. Options trading involves unique risks, and we prioritize diligence and prudence in our approval process to safeguard the interests of our clients and promote responsible trading practices.”
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