FINRA imposes $700k fine on TradeStation Securities
TradeStation Securities, Inc. has agreed to pay a fine of $700,000 as a part of a settlement with the Financial Industry Regulatory Authority (FINRA).
From January 2016 to March 2022, TradeStation failed to establish and implement an AML program reasonably designed to cause the reporting of suspicious trading by its customers.
To monitor for potentially suspicious trading, the firm primarily relied on alerts generated by automated surveillance systems supplied by a vendor. From 2016 to 2019, the legacy surveillance system generated over 100,000 trading alerts, or about 100 alerts each trading day. During this time period, two to three analysts in the Compliance department, who also had other responsibilities, were primarily tasked with reviewing the trading alerts, some of which were false positives.
In September 2019, the firm switched to a different vendor, which had a more robust automated trade surveillance system that reduced the number of false positive alerts, and that generated approximately 50 alerts each trading day in the first six months after its implementation. In 2020, in connection with the growth of its business, the firm also added three additional analysts to assist with review of the alerts.
To resolve an alert, an analyst could close the alert with no further action, send the customer a warning notice, restrict the customer from trading in a security, or close the customer account. In conjunction with resolving an alert, the analysts could also escalate the activity to the AML department to determine whether a SAR should be filed. From 2016 to 2022, the analysts addressed the alerts by taking different actions.
For example, they frequently closed alerts with no further action, but they did not always document their investigation or conclusion that the activity was not suspicious. They also appropriately restricted or closed customer accounts, including for suspicious trading activity, but again did not always document the reason for their actions.
In addition, the analysts did not always escalate the activity to the AML department to consider whether a SAR should be filed. The firm did not have a reasonably designed system to supervise how the analysts reviewed and resolved the alerts or whether they were consistently escalating potentially suspicious trading to the AML department for consideration of reporting to FinCEN.
The firm was made aware that it could enhance the foregoing components of its AML program in 2016 and 2017, as part of its annual AML independent testing. The independent testing reports recommended that the firm better document its process for escalating matters to the AML department and track subsequent AML investigations.
However, the firm did not fully implement these recommendations until March 2022. In 2018, the firm began tracking AML investigations and SAR filings. In 2022, the firm further enhanced its procedures to require documentation of all matters escalated to the AML department.
Because of the foregoing deficiencies, which existed from January 2016 to March 2022, the analysts did not consistently escalate certain potentially suspicious trading to the AML department for an assessment of whether a SAR should be filed.
The firm thereby violated FINRA Rules 3310(a) and 2010.
In addition, the firm did not establish reasonable written supervisory procedures (WSPs) in connection with the acceptance and resale of low-priced securities to achieve compliance with Section 5 of the Securities Act of 1933, thereby violating FINRA Rules 3110 and 2010.
On top of the $700,000 fine, the firm consented to the imposition of a censure.