BlogLine
3/23/23
By Brett Asa
Webull Financial LLC, a freshly minted online brokerage, came to rise in 2018 by promoting 0% commission trading of stocks, options, and crypto. According to the Financial Industry Regulatory Authority’s (FINRA) latest News Release1, Webull did not incorporate appropriate due diligence checks to meet their options trading approval obligations for customer accounts, amongst other infractions, and were required to shore up $3 million dollars in fines as a result.
Between 2019 and 2021, Webull used an automated system to review customer applications for options trading, which led Webull to approve customers that did not meet eligibility criteria and to miss red flags indicating options trading was not appropriate. Specifically, the “system failed to compare new applications with information from previously provided by the customer.” As a result, although three years of options trading experience was required prior to approving customer applications for options trading:
– 9,000 accounts with no prior investment experience were approved for options trading; and
– 2,500 customers under 21 years old were approved to trade option spreads.
The News Release cited Christopher J. Kelly, Senior Vice President and Acting Head of FINRA’s Department of Enforcement, advising that “[t]he obligations on all FINRA member firms are clear, regardless of their size, rapid growth, or business model . . . . Before they approve customers for options trading, firms must establish systems and procedures that identify essential facts about their customers’ trading knowledge and experience.”
In reminding firms of their obligation to determine whether to approve customers to trade options, FINRA directed firms to review Regulatory Notice 21-15. Regulatory Notice 21-15 cites FINRA Rules 2360(16)(b) and 2360(20)(b) as outlining “the approval process with which members must comply when opening a customer’s brokerage account for options as well as the requirement of ongoing specific supervisory reviews for options accounts.” FINRA, Regulatory Notice 21-15 (2021). In approving a customer’s account for options trading, FINRA Rule 2360(16)(b) requires the exercise of due diligence to determine essential facts about their customer. Specifically, the member should obtain the customer’s investment objectives, financial situation, and investment experience and knowledge. FINRA Rule 2360(16)(b). Regulatory Notice 21-15 highlights “[m]embers are responsible for establishing policies and procedures for options account approval, based on the information provided by the customer and consistent with the firm’s supervisory framework.” FINRA, Regulatory Notice 21-15 (2021).
While many of the options trading rules have been in place for some time, this outcome is an important reminder to brokerage firms to ensure their policies and procedures regarding options trading approval and due diligence meet FINRA requirements in the face of technological advancements and in conjunction with new obligations, including Regulation Best Interest (Reg BI).
For more information, please contact Brett Asa at brett.asa@fmglaw.com, or your local FMG attorney.
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