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Galvin Charges Fidelity With Failing to Vet Options Traders

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What You Need to Know

  • FBS recklessly failed to make a good-faith effort to review options and margin applications, the complaint states.
  • Failures are especially problematic in light of the explosive growth in FBS' retail brokerage business.
  • Younger customers were responsible for opening a substantial number of these accounts.

William Galvin, Massachusetts’ top securities regulator, charged Fidelity Brokerage Services on Wednesday with unethical and dishonest conduct and practices over “rubber-stamping” of options trading applications.

An administrative complaint filed by the Massachusetts Securities Division cites the company’s “halfhearted and lackadaisical attitude” toward safeguarding retail investors, and takes issue with Fidelity’s failure to properly vet customers who applied to be approved for options and margin trading.

Fidelity’s application review system allowed customers to submit multiple applications, each time with the information altered until the customers met the requirements to be approved, the division said.

FBS, a securities broker-dealer and a subsidiary of Boston-based Fidelity Investments, “has repeatedly failed to perform reasonable due diligence in connection with the approval of Massachusetts customer accounts,” the complaint states.

“Specifically, FBS engaged in facially unethical and dishonest conduct in the securities business by recklessly failing to make a good-faith effort to review options and margin applications submitted by individual retail investors. As a result of FBS’s halfhearted and lackadaisical attitude toward safeguarding, the firm granted options and margin approval to Massachusetts customers in violation of Massachusetts securities laws.”

While FBS has more than 30 million retail brokerage accounts, it uses a group of only 50 broker-dealer agents, called the Central Review Team, to review all options and margin trading applications submitted by customers.

As of July 2016, FBS included a provision in its Options Application Review Compliance Policy that instructed options application reviewers to “be alert to a customer initiating a pattern of reapplying for options approval by frequently increasing his or her financial or experience information in order to meet the approval standards,” the complaint states.

FBS retained the provision when it updated the policy in August 2020, but it removed the provision from the policy in the second half of 2021, according to the complaint.

“Despite including the Provision within the Policy between July 2016 and the second half of 2021, FBS’s careless attitude toward the review of options applications from retail brokerage accounts resulted in the firm never actually enforcing the Provision,” the complaint states.

“With the recent increase in interest in online options trading among many young retail investors, as well as the rise of online and mobile applications, broker-dealers need to make sure they’re still maintaining the same standard of care and attention and making sure these investors qualify,” Galvin said. “This is an issue of investor protection and companies cannot be allowed to rubber-stamp these applications without doing their due diligence, all in the name of efficiency.”

The complaint states that the “failures are especially problematic in light of the explosive growth” FBS experienced in its retail brokerage account business in 2021.

As of Sept. 30, 2021, FBS had a total of 30.9 million retail brokerage accounts, a 22.9% increase from Q3 2020. “Younger customers were responsible for opening a substantial number of these new retail brokerage accounts,” the complaint states.