FINRA Fines Scottrade $200,000 for Pattern Day Trading Violations
Firm Also Improperly Extended Credit to Cash Account Customers
Washington, DC — The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Scottrade, Inc. $200,000 for violating pattern day trading margin rules and for extending credit to customers in violation of federal securities laws and banking regulations.
FINRA determined that Scottrade allowed certain margin account customers who executed a high volume of trades to continue to trade after the value of their accounts fell below the minimum equity requirement.
"The day trader margin rules were devised to limit the risk to which day traders expose clearing firms and the market while their positions are open during the course of the day," said James S. Shorris, FINRA Executive Vice President and Executive Director of Enforcement. "Scottrade's systems allowed day-trading customers to continue risky, leveraged day trading without meeting the $25,000 minimum equity requirement."
FINRA rules require margin account customers who meet the definition of "pattern day traders" to maintain at least $25,000 in their margin accounts. A day trader is someone who buys and then sells the same stock in the same day in a margin account. A pattern day trader is generally defined as a customer who day trades four or more times in five business days.
FINRA found that from February 2006 through October 2007, Scottrade did not properly restrict pattern day traders' trading activities when the value of those customers' accounts fell below the required $25,000. Instead, Scottrade sent first-time violators a written notice advising them to restore their account value to at least $25,000 before continuing trading.
But customers who failed to restore their account values were allowed to continue day trading without restrictions. Customers who violated this margin requirement after the first warning were sent a second written notice, giving them five additional business days to meet the $25,000 requirement. Scottrade did not take action to restrict those customers' margin until after the customers failed to heed the second notice.
In all, Scottrade permitted customers in 11,708 margin accounts in which pattern day trading was being conducted to execute 171,910 day trades when the values of their accounts were below the minimum equity requirement.
FINRA also found that from February 2006 through January 2007, Scottrade improperly extended credit to certain cash account customers by failing to obtain timely cash payment from the customers for their purchases and by failing to cancel or liquidate those transactions within the time period specified by Federal Reserve Regulation T.
When a customer did not have sufficient funds to cover the cost of the stock purchase in a cash account, Scottrade sent the customer a "sellout" letter on the date the funds were due. This had the effect of allowing the customer additional days to pay for the transactions, in violation of Regulation T.
In concluding this settlement, Scottrade neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2009, members of the public used this service to conduct 18.5 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999.
FINRA, the Financial Industry Regulatory Authority, is the largest non-governmental regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business - from registering and educating all industry participants to examining securities firms, writing and enforcing rules and the federal securities laws, informing and educating the investing public, providing trade reporting and other industry utilities, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web site at www.finra.org.