Bates Research | 01-04-23

Are You Doing Enough to Supervise Your Options Accounts?

The likely answer is “no,” based on the latest FINRA targeted sweep. Beginning in August 2021, FINRA examined firms to assess the sufficiency of their practices and controls over options accounts. FINRA recently issued an update based on the results, including new guidance on what they want you to consider in order to enhance your supervision and revise your compliance programs. The guidance takes the form of questions to consider for firms offering options trading to ensure they are aware of their regulatory obligations. Here’s an overview.

Three Key Areas

The targeted exams were directed at retail firms and other diversified firms that offer their clients options trading. FINRA focused on three key areas: options trading approvals, relevant disclosures, and trading supervision. For each, FINRA identifies the relevant rules and poses questions to prompt firms to consider how to tailor a program to their own business.

Options Trading Approvals

FINRA identified different approaches firms might take to approve options accounts: manual review, automated review, or a combination of the two. Regardless of the approach, FINRA will examine how a firm approves an options account subject to its Know Your Customer (KYC), Options, Margin, and Customer Account Information rules. These rules require due diligence procedures for option account approval. FINRA questions would prompt a firm to review for options account application completeness, accuracy, consistency with available customer information, and updates to profiles to ensure the customer remains eligible to trade. FINRA asks firms to consider (i) minimum approval criteria, (ii) eligibility at different options trading levels, (iii) red flags warnings, (iv) compliance with Regulation Best Interest, and (v) other systems and controls to address errors and options trading application rejections or resubmissions.

Disclosures

FINRA identified all the disclosures obligations associated with options accounts and trading, including those required under FINRA rules on public communications, options communications, and other disclosure rules (including margin statements or other options information). FINRA questions prompt firms to review their entire communications approach to customers. Questions center on (i) disclosure of risk in promoting options products and services; (ii) representations regarding potential losses; on disclosure material at account opening (and any supplemental material on complex options strategies (as necessary); (iii) requests to increase options trading levels; and (iv) disclosure consistent with Regulation Best Interest compliance.

Trading Supervision

FINRA urged firms to ensure their options trading and account opening procedures processes, systems and controls align with their overall risk profile under FINRA rules on supervision and options. FINRA questions prompt firms to consider (i) the adequacy of their review processes (is there a specialized review group for options trading?); (ii) the frequency of their reviews (e.g., on options trading activity, trading levels, and eligibility); (iii) the sufficiency of their monitoring and surveillance; and (iv) the adequacy of review and response concerning trading restrictions and red flags.

Conclusion

After a targeted sweep, FINRA’s guidance on supervision over options trading should be taken as more of a warning than a general update. Internal consideration of this guidance demonstrates both responsiveness and good faith as to regulatory priorities should FINRA come knocking. Bates will keep you apprised.

How Bates Helps:

Bates has the experts and consultants to support your options supervision needs. We help you address FINRA’s questions and concerns with the assistance of our experienced former Administrative Managers, Branch Office Managers, and Central Business Review Professionals who will work with your option trading review processes, the frequency of your reviews, the sufficiency of your monitoring and surveillance, and, very importantly, the response to trading restrictions, red flags, and alerts.

In addition to providing options policy & procedure and supervision services, Bates experts also frequently consult and testify in litigation/arbitration matters involving options trading.

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