Securities Litigation

The Financial Industry Regulatory Authority (“FINRA”) recently kicked off a “sweep” examination with its August 2021 Targeted Exam Letter on “practices and controls related to the opening of options accounts and related areas, including account supervision, communications and diligence.”  The exam covers both self-directed and rep-recommended retail accounts (not institutional or managed accounts) during January 1, 2020 through the present.

The sweep seeks:

1. “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 but not limited to:”

(i) eligibility criteria;

(ii) features and privileges available;

(iii) the nature and types of options transactions permissible for trading;

(iv) the process (automated or manual) and material used  to review and act on customer applications; and

(v) any limitations, such as trading limitations, imposed on customers.

2. Compliance manuals and other documents pertaining to supervision of options trading in customer accounts.
3. Whether and how the firm surveils or reviews its existing options customers to determine whether accounts that had already been approved for options trading should be: (i) restricted and/or (ii) deemed ineligible or denied for further options trading.
4. “Describe whether the firm has any technology and/or process for systematic approval or denial of customer options account applications, along with the supervisory review of such systems….”
5. Firm requirements of margin accounts in connection with options, and the technology or process involved.
6. Self-identified instances where limitations were not appropriately applied and remedial measures.

7-8.      Description of firm actions to promote or recommend options trading and the review involved, including advertising and the customer-application process.

9-10.    Sample account applications and options disclosures or communications, including risk disclosures.

The Targeted Exam Letter is here:  https://www.finra.org/rules-guidance/guidance/targeted-examination-letters/targeted-examination-letter-option-account-opening-and-supervision

The sweep follows FINRA’s April 9, 2021 Regulatory Notice 21-15 reminding member firms of their regulatory obligations in connection with options-account opening, approval, supervision, and margin.  Reg. Notice 21-15 is here:  https://www.finra.org/sites/default/files/2021-04/Regulatory-Notice-21-15.pdf

The option-account-opening sweep is the latest fallout from the Robinhood / Gamestop debacle in early 2021, including regulatory and Congressional concern over the “gamification” of trading – and especially options trading – among novice retail investors.

I wrote about

• The initial Gamestop fiasco and initial regulatory response, here: blogs/securities-litigation/2021/02/05/robinhoods-long-way-out-of-sherwood-forest/
• The “gamification” and wrongful death suits, here: blogs/securities-litigation/2021/02/09/stonk-trading-is-not-a-game/
• And Robinhood’s impending regulatory settlement, here: blogs/securities-litigation/2021/03/01/robinhood-to-settle-options-related-investigations/

Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas, and Louisiana. He has over 35 years of experience representing financial institutions in litigation, regulatory, and compliance matters. See attorney profile.