The Financial Industry Regulatory Authority (FINRA) announced recently that it is launching an examination sweep probing the supervision, communications and diligence surrounding the opening of options accounts. 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 with some warning, as FINRA President Robert Cook cited recently at a SIFMA conference that options account trading compliance would be one of several areas in which the agency was planning targeted sweeps.
Sweep exams are used to focus examinations and pinpoint regulatory response to emerging issues. The number of firms included in targeted exams varies and the firms that are included are carefully chosen-in some cases only a few firms are included and in others, dozens. Firms are selected based on a variety of factors, including level and nature of business activity in a particular area, customer complaints and regulatory history, and prior examination findings.
FINRA will be looking into:
- the firms’ Written Supervisory Procedures (WSP), compliance manuals and any other written guidance pertaining to the processes and procedures regarding options account opening and due diligence activities specific to each level of trading permission;
- 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;
- 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
- whether the firm required customers to open margin accounts or otherwise be approved for margin in connection with the options activity;
- provide examples where options limitations were not appropriately applied, and any steps taken to date to prevent future breaches of requirements;
- 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;
- describe if and by which means the firm advertised or otherwise made known to customers the availability of option account applications and 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.
To read the compete letter, click here.