FINRA Launches Targeted Exam Sweep of BDs' Options Account Activity

FINRA’s targeted exam request pertains to both self-directed accounts and accounts in which registered reps recommended options but excludes both institutional and managed accounts. FINRA’s review covers the period from January 2020 to August 2021, the broker-dealer self-regulator said.

On July 22, FINRA President and CEO Robert Cook had warned BDs to brace for targeted sweeps involving options account opening, special-purpose acquisition companies and “Finfluencers” (or paid social media influencers).

As part of the new sweep program, broker-dealers are being asked to provide information concerning 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 criteria for customers’ eligibility.
• Compliance manuals and any other written guidance pertaining to the firm’s process for supervision of options trading in customer accounts.
• Surveillance and reviews of its options customers to determine whether accounts that had already been approved for options trading should be changed to a more restrictive options account level, deemed ineligible or denied further options trading. If so, describe the types of surveillance or review and frequency.
• Technology or processes 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.
• How it required customers to open margin accounts or otherwise be approved for margin in connection with the options activity.
• Instances identified by the firm where options limitations (account approval or transactions in options accounts) were not appropriately applied, and any steps taken to prevent future breaches of requirements.
• Reviews of its customer base to: identify non-options customers for promotion or recommendation of an options account or identify options customers for promotion or recommendation of a more advanced options account level.
• The means used to advertise or otherwise make 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.
• Sample options account applications or similar records used to collect information from customers that facilitate the firm’s options account approval process.
• Sample options-related disclosure materials or other communications provided to customers that explain firm practices and policies related to expiring options and exercising of options contracts, both automatically and customer-initiated.