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Regulation and Compliance > Federal Regulation > FINRA

TD Ameritrade Hit With $600K FINRA Fine Over Options Trading Approvals

By Melanie Waddell

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What You Need to Know

  • The brokerage relied on an automated system to approve customers for options trading.
  • The system failed to detect red flags, including contradictory statements by customers about their trading experience, FINRA says.
  • Most TD Ameritrade accounts moved to Schwab in 2023.

The Financial Industry Regulatory Authority has censured and fined TD Ameritrade $600,000 for failing to exercise reasonable due diligence before approving certain customers to trade options.

From November 2019 to October 2022, the firm relied primarily on an automated, electronic approval system to approve or disapprove customers for options trading, FINRA’s order states.

“However, the system was not reasonably designed and resulted in certain customers being approved for options trading levels despite red flags that the approved level was potentially inappropriate for them,” according to the order.

As a result, TD Ameritade violated FINRA Rules 3110, 2360 and 2010 during the relevant time period.

The purchase of TD Ameritrade by Schwab closed in October 2020, and most TDA accounts moved to the Schwab platform in 2023. TD Ameritrade is still registered with FINRA as a brokerage firm.

The matter originated from a FINRA targeted examination of firms’ practices related to the opening of options accounts and related areas.

According to the order, TD Ameritrade’s system to review and approve customer options applications was not reasonably designed.

“TD Ameritrade used a primarily automated process for systematic approval or denial of customer options account applications,” the order states. “Pursuant to that process, the firm could approve a customer for the highest level of options trading authority a customer qualified for based on the firm’s eligibility criteria and the information submitted by the customer, including income, net worth, and years of options trading experience.”

During the relevant period, TD Ameritrade’s systems “automatically compared information provided on an options application with information previously provided by the customer in an approved options application submitted in the past 60 days,” the order states.

However, prior to October 2022, the firm’s system “did not detect when the information supplied by a customer in a new options trading application materially differed from information the customer had previously provided to the fnm in prior rejected applications or in applications approved by the firm more than 60 days before the new application,” FINRA said.

Ignored Red Flags

TD Ameritrade approved customers for certain levels of options trading “despite red flags that the requested level of options trading was not appropriate for them,” the order states.

Between November 2019 and October 2022, TD Ameritrade approved certain customers to trade options “whose applications contained information that was materially inconsistent with other information those same customers had provided to the firm in prior applications,” FINRA said. “These customers’ applications contained red flags that a higher level of options trading may not have been appropriate.”

During this period, the firm “approved more than 1,288 customers for Full/Advanced options trading — which required customers to have three or more years of options trading experience pursuant to the firm’s eligibility criteria — despite previous statements from those customers in applications submitted within the prior six months that they had less than one year of experience,” the order explains.

In particular, the firm ”approved more than 496 customers who claimed they had more than six years of options trading experience despite previous applications from those customers submitted in the prior six months that stated these customers had less than one year of experience,” FINRA said.

TD said Monday in a statement shared with ThinkAdvisor that “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.”

Melanie Waddell

@Think_MelanieW

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