In recent years, options trading has become more popular with investors. Because of the high risks associated with options trading, FINRA imposes specific rules and guidelines relating to trading options and which accounts can be approved for options trading. For example, firms are required to have an options principal oversee option trading in accounts. Moreover, in April 2021, FINRA sent a notice to members reminding them that, “[r]egardless of whether the account is self-directed or options are being recommended, members must perform due diligence on the customer and collect information about the customer to support a determination that options trading is appropriate for the customer.” See FINRA, Notice to Members 21-15 (2021).
FINRA’s recent investigations and sanctions against financial institutions, brokers, and advisors for options-related violations demonstrate how serious rules relating to options approval and option trading are. For example, last month FINRA imposed its largest financial penalty ever against Robinhood Financial LLC, in part, for failing to exercise due diligence before approving investors for options trading in self-directed accounts. Below are other recent examples of options-related sanctions FINRA imposed on firms and individuals:
- Cambridge Research, Inc. was censured, fined $400,000, and ordered to pay over $3,000,000 in restitutions for improper conduct relating to the firms “risky strategies” that relied on purchasing uncovered options – options where the seller does not hold the underlying stock and is required to have an option margin to show the ability to purchase the stock when needed (FINRA Case No. 2018056443801);
- J.W. Cole Financial, Inc. and Securities America, Inc. were censured, fined $50,000 and $100,000, respectively, and ordered to pay restitutions for findings relating to the firms “risky strategies” that relied on purchasing uncovered options (FINRA Case No. 2019061764801; FINRA Case NO. 2019061765001);
- PHX Financial, Inc. was fined $50,000 and ordered to pay over $350,000 in restitutions, and the firm’s Registered Options Principal, Robert Delaplain, was fined $5,000 and suspended from association with any FINRA member firm in any principal capacity for six months, in part, for failing to enforce supervisory procedures related to options (FINRA Case No. 2016048921103);
- Israel Soto was fined $7,500 and suspended from associating with any FINRA member in all capacities for three months for engaging in prohibit options trading while associated with Morgan Stanley (FINRA Case No. 2019063686301)
- Efrain Trujillo and Brett Briggs were fined $20,000 each and both were barred from associating with any FINRA member in any principal capacity for failing to supervise four formerly registered representatives who excessively traded and recommended unsuitable trades involving options while at Financial West Group, a former FINRA member expelled from the industry in February 2020. FINRA further found that Trujillo and Briggs were aware of, but failed to investigate and address, specific red flags indicating trading misconduct in violation of FINRA’s suitability rules, including the suitability rules relating to options trading (FINRA Case No. 2017054755208; FINRA Case No. 2017054755207);
- Western International Securities, Inc. was censured and fined $20,000 for failing to establish and maintain a supervisory system that was reasonably designed to achieve compliance with option position limits requirements (FINRA Case No. 2018060330902).
RIK has recently filed several multi-million-dollar claims against financial institutions to recover losses related to options trading. If you suffered losses due to options-related trading, and have questions related to them, we are here to help. Feel free to contact one of our lawyers by email or give us a call at (212) 684-0300.