FINRA sees surge in ‘instant funds’ scams

The recent rise in social media–driven trading appears to be fuelling a spike in brokerage fraud, the U.S. Financial Industry Regulatory Authority Inc. (FINRA) is warning.

The U.S. self-regulatory organization reported that, over the past two months, it has seen a “sharp increase” in schemes that involve new clients opening online brokerage accounts to exploit firms’ policies of providing customers instant access to funds so they can start trading immediately.

In these schemes, a new client will open an account and add a bank account to finance their trading. The client will order a transfer from the linked bank account and take advantage of the firm’s provision of “instant funds” to make trades right away, before the account transfer settles.

After the trades are executed, firms will discover insufficient funds in the bank account, resulting in losses to the brokerage firm.

While these kinds of scams have been around for some time, FINRA said that “the recent increase in these events appears correlated to the recent market volatility driven by social media interest in certain securities.”

“Some discussions on social media include descriptions of the ‘instant funds’ policies of specific firms,” it said.

FINRA said firms should review their exposure to these kinds of schemes and take steps to mitigate the risk.

“This could include adjusting the amount of available ‘instant funds,’ delaying transactions for online brokerage accounts opened by new customers or by enhancing their account validation processes,” it said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.