FINRA Focused Review Letter on Option Accounts | Burr & Forman
The Financial Sector Regulatory Authority (“FINRA”) recently launched an “in-depth” review with its August 2021 Focused Review Letter on “the practices and controls relating to the opening of options accounts and related areas, including account oversight, communications and due diligence ”. The review covers both self-directed and representative-recommended retail accounts (not institutional or managed accounts) from January 1, 2020 to present.
The scan searches for:
- “Written Supervisory Procedures (WSPs), compliance manuals and any other written guidance relating to the company’s processes and procedures regarding the opening of options accounts and due diligence activities specific to each level of trading authorization , including, but not limited to: “
(i) the eligibility criteria;
(ii) features and privileges available;
(iii) the nature and types of option transactions authorized for trading;
(iv) the process (automated or manual) and equipment used to review and act on customer requests; and
(v) any limitations, such as commercial limitations, imposed on customers.
- Compliance manuals and other documents relating to the supervision of option transactions in accounts receivable.
- If and how the company monitors or reviews its existing option clients to determine whether accounts that have already been approved for options trading should be: (i) restricted and / or (ii) deemed ineligible or denied for trading. trading of additional options.
- “Describe whether the company has a technology and / or a process for the systematic approval or denial of client options account requests, as well as the supervisory review of these systems …”
- Firm requirements for margin accounts in relation to the options, and the technology or process involved.
- Self-identified cases where limitations have not been applied appropriately and corrective actions.
7-8. Description of actions taken to promote or recommend option trading and the review involved, including advertising and the client application process.
9-10. Examples of account requests and option disclosures or communications, including risk disclosures.
The targeted review letter is here: https://www.finra.org/rules-guidance/guidance/targeted-examination-letters/targeted-examination-letter-option-account-opening-and-supervision
The sweep follows FINRA Regulatory Notice 21-15 of April 9, 2021 reminding member firms of their regulatory obligations for opening, approving, monitoring and margin option accounts. Reg. Notice 21-15 is here: https://www.finra.org/sites/default/files/2021-04/Regulatory-Notice-21-15.pdf
The options account opening sweep is the latest fallout from the Robinhood / Gamestop debacle in early 2021, including regulatory and congressional concerns over the ‘gamification’ of trading – and in particular options trading – among novice retail investors.
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