Companies recommending choices buying and selling for patrons have to be looking out for “pink flags” on buyer functions, based on the Monetary Business Regulatory Authority (FINRA).
The brokerage trade regulator launched an replace Wednesday on its focused examination and sweep of registered corporations’ supervision of choices buying and selling and techniques, which was first introduced in August 2021.
Based mostly on info to this point, FINRA designed questions for corporations to think about when assessing prospects for choices buying and selling, in addition to their disclosures and supervision of authorised choices accounts.
In assessing how they approve prospects for choices buying and selling, FINRA requested corporations to think about whether or not they’d established “minimal standards” for account functions, together with whether or not their acknowledged funding goals align with their desired ranges of choices buying and selling, and whether or not extra necessities ought to be vital for complicated methods.
Relating to searching for pink flags, corporations ought to evaluate info on an account utility with info already obtainable on the agency, and search for inconsistencies on the functions themselves; FINRA cites hypotheticals together with a 21-year-old applicant claiming to have a decade of expertise in buying and selling choices, an applicant deciding on all funding goals, or a 20-year-old pupil applicant claiming to make $300,000 per yr in earnings.
FINRA additionally urged corporations to evaluation automated programs to make sure they’ll catch such pink flags, and be sure that any choices buying and selling suggestions adhere to compliance necessities within the Securities and Change Fee’s Regulation Greatest Curiosity.
If a rejected buyer resubmits an utility, FINRA desires to understand how corporations evaluate the 2 functions to find out what has been modified, and if corporations require a ready interval earlier than prospects reapply. (This concern rose in a case introduced by Massachusetts Commonwealth Secretary William Galvin earlier this yr, the place prospects outsmarted Constancy’s automated approval system for choices buying and selling by submitting a number of functions, resulting in conditions the place prospects “gained” years of expertise in just some days.)
Concerning disclosures, FINRA wished corporations to evaluation the forms of choices account promotions they use, and whether or not they tailor these communications when advertising and marketing to prospects with totally different backgrounds. It additionally requested whether or not corporations provide steering or academic alternatives to prospects informing them about choices buying and selling, and whether or not their disclosures met Reg BI mandates.
When supervising accounts, corporations ought to “conduct periodic, ongoing” opinions of buying and selling exercise to make sure prospects are nonetheless eligible for buying and selling choices and never transferring out of their authorised house, and corporations ought to be surveilling buyer account info to find out if a buyer’s account ought to be downgraded, denied for additional buying and selling or dominated ineligible.
“Does your agency evaluation prospects’ buying and selling eligibility as market circumstances change?” FINRA requested. “If that’s the case, does your agency downgrade prospects’ buying and selling ranges if their account profiles don’t proceed to fulfill sure standards (e.g., lower in whole internet price)?”
FINRA’s sweep got here shortly after a settlement with the brokerage app Robinhood, during which the company ordered it to pay $70 million for “systemic supervisory failures” that harmed purchasers, together with accusations that the app didn’t alert purchasers to the dangers in sure choices trades, and didn’t correctly supervise its automated approval of shoppers for sure choices buying and selling.
Earlier this yr, the Public Traders Advocate Bar Affiliation known as on FINRA to strengthen its guidelines on complicated merchandise and choices, together with the alleged tendency for small corporations to make use of methods that their very own advisors may not perceive.