TD Ameritrade's automated system to approve clients for options trading missed numerous “red flags,” including when clients would submit multiple applications with different information, under a FINRA agreement. The firm agreed to pay a $600,000 fine.
The period in question runs from November 2019 to October 2022, when Charles Schwab acquired TD Ameritrade (announced Schwab was buying TD in November 2019, closing the acquisition less than a year later).
According to FINRA, the settlement stemmed from brokerage regulators' targeted examinations of firms' practices related to options accounts. TD Ameritrade's process for accepting or rejecting client options account applications was “largely automated,” with TD's approval based on several factors submitted by applicants, including income, net worth and years of options experience. trading. However, if the TD system rejects a client because he does not meet the criteria, a client may submit a new application with different credentials and experience.
TD Ameritrade designed the automated system to check client options trading applications against those submitted in the past. If the information changed, it would either be automatically rejected or sent for manual review. However, that system only returned 60 days, according to FINRA. In other words, if a customer had applied more than 60 days ago, TD's systems would not compare it to the new iteration. Additionally, TD Ameritrade's system did not compare a client's new options applications with previous ones rejected by the firm to check for similarities (including those filed within 60 days). As a result, TD approved some clients to trade options whose applications had information that differed from other applications they had submitted or contained warning signs that should have prevented TD from approving them, according to FINRA.
Overall, TD Ameritrade approved more than 1,288 clients for the highest levels of options trading during this period who previously admitted to having less than one year of options experience, according to FINRA (TD required that clients trading in this level have three or more years of experience in the options space). In one case, a client approved for a lower level of options trading submitted three applications for a higher level; the first two were rejected because the client said he had less than a year of experience.
“However, the firm automatically approved the client's third application for a higher level, which the client submitted on the same day as the first two, because the client claimed between one and two years of experience,” the agreement said. “The firm did not compare this application with rejected applications.”
Later, the firm rejected five more applications from the same client for an even higher level of trading, but approved a sixth application they submitted, which claimed to have between six and nine years of options trading expertise. In another case, the firm rejected a client who submitted five applications because his claim of more than 10 years of experience did not match his stated age. The client's sixth application for the highest level of options trading was approved because he claimed to have between six and nine years of experience, which may be consistent with his age.
A Schwab spokesman said Ameritrade had “addressed and corrected” the issue in 2022.
“Options trading involves unique risks and we prioritize due diligence and discretion in our approval process to protect our clients' interests and promote responsible trading practices,” the spokesperson said.
TD began making improvements to its automated system after FINRA began its examination, including implementing exception reports to check when customers changed information and to flag customers who were providing inconsistent information between applications.
The firm did not admit or deny the allegations in the settlement, but agreed to a censure in addition to a $600,000 penalty.