Broker-Dealer Fined for Exercising Options After Cut-Off Time

A broker-dealer settled FINRA charges for exercising a customer's expiring options after the FINRA-designated exercise cut-off time.

In a Letter of Acceptance, Waiver, and Consent, FINRA found that the broker-dealer accepted instructions to exercise out-of-the-money put options after 5:30 pm EST on expiration day, at the instruction of a firm supervisor. According to the Letter, the supervisor said that the firm could exercise the options under the firm's "best efforts basis" exception that allowed the firm to exercise options after its internal cut-off time of 4:30 pm EST in special circumstances. FINRA said that the options would have otherwise expired worthless, but because of a significant change in price of the underlying stock after hours, the options were exercised "in-the-money." FINRA said that the failure was caused in part by insufficient internal controls that did not recognize the FINRA-designated cut-off time as a cut-off for "best effort basis" redemptions.

As a result, FINRA determined that the broker-dealer violated FINRA Rule 2010 ("Standards of Commercial Honor and Principles of Trade"), Rule 2360 ("Options") and Rule 3110 ("Supervision"). To settle the charges, the broker-dealer agreed to (i) a censure and (ii) a civil monetary penalty of $50,000.