FINRA recently updated the industry on observations to date from its August 2021 sweep on broker-dealer practices and controls concerning the opening of options accounts and related issues (options account supervision, communications, and diligence). Some may recall that the August 2021 sweep followed FINRA Regulatory Notice 21-15 (reminding broker-dealers of their obligations with respect to options accounts and options trading), a high profile enforcement action in June 2021 resulting in a penalty of nearly $70 million, and the heavy market volatility and retail investor interest that occurred in early 2021.
Overview of Options Account Sweep Update
The sweep update provides broker-dealers another reminder of an area that likely will continue to be a focus for FINRA for the foreseeable future, particularly with the continued push for online application processes and automation. The update also emphasizes that the focus on compliance with options account rules is relevant to both self-directed and full-service broker-dealers. While the update does not break new ground, it does provide firms with lists of helpful questions for consideration, including:
- options account approval practices;
- options account and options trading disclosures; and
- options trading supervision.
Some common issues identified are how firms should manage their automated or manual options account opening review processes, the sufficiency of risk disclosures in options account promotional communications, and the level of expertise in firms supervisory and compliance personnel to review customer eligibility for options trading and the options trading activity itself. As firms seek to find ways to automate processes, embedding checks and reviews into firms’ systems is equally important to ensuring compliance with FINRA rules and expectations.
Firms’ Next Steps
Firms currently offering, or considering offering, options trading should review the update and questions posed by FINRA to consider any potential impacts to their options trading platforms and procedures.
Separately, the sweep update briefly notes that FINRA may provide additional information on the options account sweep as well as other sweeps. At end of 2021, FINRA conducted two additional sweeps involving social media customer acquisition practices and Special Purpose Acquisition Companies (“SPACs”). More recently, FINRA began conducting a sweep on firms’ crypto asset communications, about which we shared insights here.
If your firm needs help considering how this sweep update or FINRA’s other initiatives and sweeps impact your firm, our team of experts stand ready to assist.