Interactive Brokers has reached a settlement with FINRA regarding allegations of regulatory violations tied to free-riding activities in customer cash accounts. The broker, a FINRA member since 1995, agreed to pay a $2.25 million fine as part of the resolution, which also includes a formal censure. The settlement concludes the matter without the firm admitting or denying FINRA’s findings.
Over 4.2 Million Free-Riding Instances Identified
Between October 2015 and December 2022, Interactive Brokers reportedly failed to detect more than 4.2 million cases of free-riding involving options and issued options transactions. Free-riding occurs when securities are bought and sold without full payment, a violation of Regulation T and FINRA Rules 4210 and 2010.
FINRA’s investigation revealed that the broker’s automated surveillance system did not effectively identify free-riding activities. As a result, required account freezes for non-compliance were not implemented. Additionally, the firm’s supervisory systems and written supervisory procedures (WSPs) were found lacking in measures to prevent such activities.
Settlement and Compliance Updates
As part of the settlement, Interactive Brokers has agreed to pay the fine and has updated its surveillance systems and WSPs to address the shortcomings identified by FINRA. The firm also waived its right to contest the findings further, and the disciplinary action will be added to FINRA’s public records.
At the time of writing, Interactive Brokers has not issued a statement regarding the settlement.
Tastytrade Fined for Supervisory Lapses
In a related development, FINRA recently fined retail trading platform tastytrade, a U.S. subsidiary of IG Group, $30,000 for supervision failures. Between July 2021 and June 2023, the firm allegedly failed to adequately monitor 84 external securities accounts belonging to 35 employees. FINRA’s investigation revealed significant delays in reviewing trading activities, with some accounts going unchecked until mid-2023. The firm’s WSPs were also found deficient in ensuring mandatory reviews were completed.
These disciplinary actions underscore FINRA’s ongoing scrutiny of compliance and supervisory practices among broker-dealers to ensure adherence to regulatory standards.
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