Late last year, the Securities Lawyer Blog posted on $600,000 in fines imposed by the Financial Industry Regulatory Authority (FINRA) on Scottrade, Inc. for what FINRA found to be an inadequate money-laundering program.
On April 1, 2010, FINRA announced 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."
This time, FINRA found that the firm had permitted some margin account customers to trade even after their account values had fallen below the minimum equity required to continue. The problem centered around high volume traders whose minimum equity fell below the $25,000 required to continue trading. FINRA noted that the minimum is intended to limit risks that day-traders can present to both the market and to clearing firms as they leverage their positions throughout the day.
According to FINRA, the problem for Scottrade was that from February 2006 through October 2007, the firm failed to ensure that pattern day traders were restricted from trading when their account values fell below the required minimum. Rather, the firm provided those traders a written notice telling them to bring their account value to the $25,000 minimum prior to further trading.
Those pattern day traders who did not bring their account values up, were permitted to continue trading and received a second written warning from Scottrade. It was only after a failure to bring accounts up to the minimum that Scottrade restricted these traders from continuing to day trade. Over 11,000 day traders, trading nearly 172,000 day trades were allowed to continue trading in violation of the rules.
Pattern day traders are customers who day trade four or more times within five business days. These traders are required by FINRA rules to maintain at least $25,000 in their margin accounts.
Compounding this problem, Scottrade was also found by FINRA to have improperly extended credit to some cash account customers. These credit extensions were permitted to go beyond the time frame established under Federal Reserve Regulation T. Customers who did not have funds to cover stock purchases were sent a "sellout" letter when the funds were due. According to FINRA, this improperly permitted the customer to have additional days to pay for the transactions beyond the time frames allowed under Regulation T.
Related Web Resources
More information on margin accounts and Regulation T can be found on the SEC's website.
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