TD Ameritrade Fined $600,000 by FINRA Over Flawed Options Trading Approval System

TD Ameritrade, the brokerage firm now owned by Charles Schwab, agreed to pay a $600,000 fine from the Financial Industry Regulatory Authority (FINRA) over deficiencies in its automated system for approving customers for options trading.

According to the FINRA settlement, from November 2019 to October 2022, TD Ameritrade's automated system for vetting options trading applications missed numerous "red flags" from customers, including instances where applicants submitted multiple applications with conflicting information about their income, net worth and trading experience.

FINRA found that TD Ameritrade's system failed to compare new options applications against previous rejected applications from the same customer to check for inconsistencies. The system only looked back 60 days, meaning applications submitted prior to that window were not cross-checked against new submissions.

As a result, TD Ameritrade improperly approved more than 1,200 customers for the highest levels of options trading during this period, even though they had previously stated having less than the firm's required 3 years of options experience.

In one egregious case highlighted by FINRA, a customer was approved for a high options level after claiming 6-9 years of experience, despite having five prior applications rejected when stating less than 1 year of experience.

After FINRA began its investigation, TD Ameritrade made enhancements to its system in 2022, including adding exception reports to flag inconsistent information across applications.

While neither admitting nor denying the findings, TD Ameritrade agreed to a censure and the $600,000 penalty. In a statement, Charles Schwab spokesperson said "we prioritize diligence and prudence in our approval process to safeguard the interests of our clients and promote responsible trading practices."

The settlement highlights the need for robust supervisory systems at brokerages, particularly when it comes to approving customers for complex, risky products like options trading. Deficient systems that fail to properly vet applicants can potentially put ill-equipped investors at significant risk of losses.

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