The Financial Industry Regulatory Authority is conducting a targeted review of firms’ “practices and controls” when supervising options account trading, according to an examination letter released by the regulator Tuesday.
The focus of the review will include “account supervision, communications and diligence” and will encompass both self-directed accounts and accounts where registered reps made recommendations for options. The range of inquiry will span from Jan. 1, 2020, to the release of the letter, according to the agency.
The letter comes just weeks after FINRA President Robert Cook cited options account trading compliance as one of several areas in which the agency was planning targeted sweeps during a discussion at an annual conference for the Securities Industry & Financial Markets Association. FINRA will sometimes conduct such sweeps to discern the appropriate regulatory response to certain issues and intends to limit the regulatory burden of the sweep by confining it to a smaller number of firms.
The review on options trading will look into firms’ written supervisory procedures, as well as compliance manuals and other guidance regarding options account openings, as well as the due diligence firms perform related to them. According to FINRA, they’ll examine how firms gauge customers’ eligibility, what features and privileges are available, the processes firms used to review and approve customers, as well as the types of options trades allowed. The letter cited covered options, spreads and uncovered short options as examples.
FINRA will also look into firms’ review policies for existing options accounts and how firms discern whether those accounts need more restrictive trading limits or should be considered ineligible for options trading.
The agency would also look into whether firms worked to identify customers they could recommend options to, as well as whether firms pushed for customers with such accounts to be recommended for more advanced account levels. FINRA will also review how often these recommendations occurred.
The full list of focus areas is included in yesterday’s letter.
The regulatory agency’s scrutiny of options trading was recently part of a settlement between FINRA and Robinhood, in which the agency ordered the brokerage app to pay $70 million for “systemic supervisory failures and significant harm” to millions of customers. Among the complaints was that Robinhood failed to alert clients to the loss risk they faced in certain options transactions. The agency also claimed Robinhood failed to do its due diligence by relying on algorithms that relied on “inconsistent and illogical information” when approving customers for particular options trading opportunities.
