AUTOMATED APPROVALS
In Re: TD Ameritrade Inc.
Date: April 26, 2024
Issue: TD Ameritrade Inc.’s consent order with the Financial Industry Regulatory Authority (FINRA) related to automated approval allegations.
Case Summary: TD Ameritrade agreed to pay $600,000 to resolve allegations claiming the firm violated FINRA’s rules by relying on an inadequate automated approval system for options trading.
FINRA Rule 2360 requires firms to exercise due diligence to determine “the essential facts relative to the customer” in approving accounts for options trading. These facts include the customer’s age, income, net worth, investment objectives and investment experience. FINRA Rule 3110 requires firms to have a supervisory system for the activities of their associated persons. Any entity that violates FINRA Rule 3110 or Rule 2360 automatically violates Rule 2010. Rule 2010 requires firms to “observe high standards of commercial honor and just and equitable principles of trade in the conduct of their business.”
FINRA launched a targeted examination of the firm’s practices related to the opening of options accounts and related areas. Following its investigation, FINRA alleged TD Ameritrade did not exercise reasonable due diligence before approving customers from November 2019 to October 2022. As a result, the agency claimed TD Ameritrade violated FINRA Rules 2360, 3110 and 2010 during the relevant period.
According to FINRA, TD Ameritrade’s system to review and approve customer-options applications was not “reasonably designed.” Allegedly, TD Ameritrade primarily used an automated process for approving or denying these applications. The process allowed the firm to approve a customer for the highest level of options trading they qualified for based on eligibility criteria. FINRA explained TD Ameritrade’s system did not detect when customer-supplied information materially differed from prior rejected applications. As a result, FINRA alleged TD Ameritrade could not detect when customers submitted materially inconsistent information on income, net worth and years of options trading experience.
FINRA also alleged TD Ameritrade approved customers for certain options trading levels despite red flags showing these levels were inappropriate for them. TD Ameritrade requires its applicants to have at least three years of options trading experience to be eligible for “full/advanced” options trading. However, FINRA claimed TD Ameritrade approved 1,288 customers for “full/advanced” options trading despite having less than one year of trading experience. FINRA also alleged TD Ameritrade approved 496 customers who claimed they had more than six years of trading experience, despite previous applications declaring they had less than one year of experience.
In October 2022, TD Ameritrade enhanced its system for approving customers for options trading, including implementing new exception reports to monitor changed information provided to the firm. Along with paying $600,000, TD Ameritrade agreed to a censure to resolve FINRA’s allegations.
Bottom Line: TD Ameritrade did not admit to or deny FINRA’s findings. Separately, on May 3, 2024, Merrill Lynch agreed to pay $825,000 to resolve FINRA allegations claiming it failed to maintain supervisory procedures and comply with recordkeeping requirements. (In an emailed statement, Charles Schwab Corporation, which acquired TD Ameritrade in 2020, said: “Ameritrade 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.”)
Documents: Letter of Acceptance, Waiver and Consent
This article was updated to include a statement from Charles Schwab Corporation.
