FINRA Fines Firm for Supervisory Failures on Options Approvals

A firm settled FINRA charges for supervisory and recordkeeping failures related to its automated approval process for self-directed options accounts. 

According to the AWC, the firm relied primarily on an automated process to approve self-directed customers for options trading. FINRA found that most applications were automatically approved based on customer-submitted information, with only limited manual review. FINRA found that customers were approved if they passed an options exam or claimed sufficient years of experience, without adequate verification. FINRA found that the firm allowed customers to repeatedly alter account profiles without comparing changes to prior submissions, thereby leaving inconsistent and unreliable representations of trading experiences.

FINRA highlighted that over a multi-year period, the firm automatically approved hundreds of customers even when their reported options experience increased by more than two years within a twelve-month span. FINRA noted that one customer changed his reported experience multiple times, ranging from one year to more than ten years, yet was still approved, while another customer made similar inconsistent changes before approval. FINRA determined that the firm lacked adequate consistency checks and only later implemented enhanced reviews to identify and address discrepancies.

FINRA also determined that the firm failed to maintain records of its disapprovals of certain self-directed customers seeking options trading authority. FINRA reported that over an extended period, customers who did not meet eligibility criteria were notified through pop-up screens or error messages, but the firm did not preserve records as to who was denied or when. FINRA noted that these disapprovals were based on financial information, investment experience, or objectives that did not meet the firm’s requirements, yet no documentation was retained. FINRA stated that the firm later implemented a process to capture and retain records of all disapproved requests.

FINRA concluded that the firm violated FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade"), 2360 ("Options"), 3110 ("Supervision"), and 4511 ("General Requirements").

To settle the charges, the firm agreed to (i) a censure and (ii) pay a $650,000 fine.