Daytrading continues to be a blessing and a curse for
In a federal filing, the online brokerage announced that the
recommended disciplinary action against the company for allegedly allowing traders to violate a rule requiring that funds from one trade clear before they can be used in another transaction. The news was inside the company's 10-Q with the
Securities and Exchange Commission
"NASD Staff has advised that it has made a preliminary determination to recommend disciplinary action against Ameritrade, Datek Online Financial Services, and iClearing based on allegations that the specified trades violated Regulation T of the Board of Governors of the Federal Reserve System and NASD Conduct Rules," said the company in its release.
In its SEC filing, Ameritrade said it presented reasons why it should not be subject to the NASD's disciplinary action, but had no way of knowing how this situation will pan out. Ultimately, the company could be subject to fines, suspensions and sanctions.
The possibility for disciplinary action comes after the NASD warned the company about possible Reg T violations back in August 2002. By breaking Reg T, brokerages allow traders to make trades using funds that haven't cleared yet, giving them a "free ride" to make more trades. (As
reported back in February, the NASD has been working hard to make sure brokers follow the law.)
Reg T harkens back to a time when paper stock certificates backed every trade. An initiative under which all trades would clear the same day they were executed looked likely to wipe out the regulation in the 1990s. But the plan, dubbed T+1, was derailed by Sept. 11 and regulators have been cracking down ever since.
According to the SEC, "Section 220.8 of Regulation T states that in a cash account, a brokerage may buy a security on your behalf -- or sell a security to you -- if either: (a) You have sufficient funds in the account to cover the transaction; or (b) The firm accepts in good faith your agreement to make a full cash payment for the security before you sell it." (The entire text of Reg T
can be found here.)
On Monday, Ameritrade shares dropped 18 cents, or 1.8%, to $9.82.