FINRA Announces Targeted Exam Sweep of Advisor Options Account Activity
Posted on August 18th, 2021 at 12:20 PM
From the Desk of Jim Eccleston at Eccleston Law:
The Financial Industry Regulatory Authority (FINRA) has announced that it will scrutinize advisors’ practices and controls related to the opening of options accounts and other areas, which includes account supervision, communications and diligence. FINRA’s targeted exam sweep excludes institutional and managed accounts, but focuses both on self-directed accounts and accounts in which advisors recommended options. Due to the new sweep program, advisors are being asked to provide information regarding 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 the firm requires 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.
Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, regulatory and disciplinary matters.
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