FINRA reminded members of their obligations regarding (i) the performance of due diligence on customers seeking to open trade options, (ii) the supervisory reviews of options accounts and (iii) margin requirements for options.
FINRA recommended members review their policies regarding:
- the approval process of opening a customer's brokerage account for options, pursuant to FINRA Rule 2360 ("Options");
- obtaining customer information, pursuant to FINRA Rule 4512 ("Customer Account Information");
- "reasonable diligence" when opening and maintaining such accounts, pursuant to FINRA Rule 2090 ("Know Your Customer"); and
- AML requirements, specifically the "Customer Identification Program," pursuant to FINRA Rule 3310(b).
FINRA stated that, during the approval process, members consider whether a customer should be approved only for certain options transactions, such as (i) purchases of puts and calls only, (ii) covered call writing, (iii) uncovered put and call writing and (iv) options spread transactions.
Additionally, FINRA reminded firms to furnish customers with the document "Characteristics and Risks of Standardized Options" and of their obligations under Regulation BI when making recommendations of options transactions, including conformance with the options communications rules.
Further, FINRA reminded members of their obligations under:
- FINRA Rule 4210 ("Margin Requirements"), which sets forth the maintenance margin requirements for options transactions and requires firms to review the limits and types of credit extended to all customers; and
- FINRA Rule 2264 ("Margin Disclosure Statement"), which requires that members furnish non-institutional customers with a margin disclosure statement explaining the risks of trading on margin prior to opening the account.
Commentary
A broker-dealer ordinarily becomes subject to a suitability obligation when it makes a "recommendation" to a customer. However, in the case of options, a broker-dealer is subject to the obligation as a result of effecting the transaction, without regard to whether a recommendation has been made. Accordingly, firms are subject to an obligation to review the decisions of customers who trade options, even if the transaction or product was not recommended.
FINRA may take a more aggressive approach to the regulation of option transactions in the aftermath of GameStop as many retail customers were reported to have traded options on the stock.
Primary Sources
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