FINRA Targeted Examination Letter on Option Account Opening, Supervision and Related Areas - UPDATED
FINRA is conducting a review of Firm Name practices and controls related to the opening of options accounts and related areas, including account supervision, communications and diligence.
The requests below pertain to both self-directed accounts and accounts in which registered representatives recommended options but excludes both institutional1 and managed accounts and covers the period from January 1, 2020 to the date of this letter. To the extent your response to any request differs depending on whether accounts were self-directed or were instead ones in which registered representatives recommended options, please describe those differences in detail. To the extent records requested have previously been provided to FINRA for the specified time period, you may identify such production in lieu of providing duplicative materials. We request production of the information by no later than Date.
- The firm’s Written Supervisory Procedures (WSP), compliance manuals and any other written guidance pertaining to the firm’s processes and procedures regarding the firm’s options account opening and due diligence activities specific to each level of trading permission, including but not limited to: (i) criteria for customers eligibility; (ii) the features and privileges available; (iii) the nature and types of options transactions (e.g., covered options, spreads, uncovered short options) permissible for trading; (iv) the process (automated or manual) and material used in the review and approval/denial of customer applications (include any processes the firm uses to compare information provided by customers during the options application process to other information in the customers’ account records); and (v) any limitations, such as trading limitations, that the firm imposed on customers.
- The firm’s compliance manuals and any other written guidance pertaining to the firm’s process for supervision of options trading in customer accounts.
- State whether the firm surveils or reviews its existing options customers to determine whether accounts that had already been approved for options trading should be: (i) changed to more restrictive options account level and/or (ii) deemed ineligible or denied for further options trading. If so, describe the types of surveillance or review(s) and frequency.
- Describe whether the firm has any technology and/or process for systematic approval or denial of customer options account applications, along with the supervisory review of such systems, including both operational oversight and supervision of account approvals or denials.
- State whether the firm required customers to open margin accounts or otherwise be approved for margin in connection with the options activity. Describe whether the firm has any technology and/or process for systematic approval or denial of margin accounts.
- Describe instances identified by the firm where options limitations (account approval or transactions in options accounts) were not appropriately applied, and any steps taken to date to prevent future breaches of requirements.
- State whether the firm reviewed its customer base to: (i) identify non-options customers for promotion or recommendation of an options account and/or (ii) identify existing options customers for promotion or recommendation of more advanced options account level. To the extent that the firm undertook such efforts, describe the types of review(s) including how often each occurred.
- Describe if and by which means the firm advertised or otherwise made known to customers the availability of option account applications; the mechanics by which the firm made available or provided to customers such applications and how those applications were submitted by customers.
- Produce sample options account applications or similar records used to collect information from customers that facilitate the firm’s options account approval process.
- Produce sample options-related disclosure materials or other communications provided to customers that explain firm practices and polices related to: (i) expiring options; (ii) exercising of options contracts both automatically and customer initiated. Include materials that describe the risks associated with options trading, including risks associated with complex strategies (e.g. spreads) and risks related to expiration of options.
1 As defined in FINRA Rule 4512(c).