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Fidelity Fined $1.7M for Lax Approval of Options Traders

By Melanie Waddell

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Fidelity Brokerage Services has been hit with fines from the Financial Industry Regulatory Authority and the Massachusetts Securities Division for “rubber-stamping” options trading applications.

The Massachusetts Securities Division fined Fidelity $750,000, while FINRA hit the firm with a $900,000 fine.

The consent order in Massachusetts, filed by Secretary of State William Galvin, alleged that Fidelity’s application review system “allowed customers to submit multiple applications, each time with the information altered until the customers met the requirements to be approved,” his office said.

On Jan. 26, 2022, Galvin’s division filed a complaint against Fidelity alleging that the firm “failed to properly vet customers who applied to be approved for options and margin trading,” his office said.

FINRA’s order states that from May 2017 through April 2022, Fidelity did not exercise reasonable due diligence before approving customers to trade options.

During this period, Fidelity “used an automated, electronic system to screen customers’ online applications to trade options, after which a principal at the firm reviewed and then approved or disapproved customer accounts for options trading,” FINRA states.

Flaws in Fidelity’s system for reviewing options trading applications “resulted in customers being approved for options trading who did not satisfy the firm’s eligibility criteria or who submitted successive applications with materially different information concerning their finances and/or investment experience that raised red flags that thelevel of options trading the customer sought was inappropriate for them,” FINRA said.

Fidelity has taken steps since then to improve its application review systems and online applications, according to Galvin’s office.

Options trading is risky due to options’ complexity, lack of liquidity and “the fact that just breaking even requires one to accurately predict short-term price fluctuations in the underlying asset,” Galvin said, saying Fidelity showed a “half-hearted and lackadaisical attitude” toward safeguarding retail investors.

Brokers determine an investor’s suitability for different levels of options trading based on their income, net worth, trading experience and general knowledge of investing.

According to the order, Fidelity “failed to enforce certain of its options approval policies and procedures,” including its broker-dealer agents that were part of a Central Review Team “failing to flag different information submitted by retail brokerage customers across successive options applications.”

As a result, Fidelity “approved certain customers for options trading authority based on financial and/or investment experience information that was materially different from the information submitted on prior options applications,” the order states.

In addition to the $750,000 administrative fine, Fidelity Brokerage Services has been censured by the Securities Division.

Fidelity must also submit a report to the division on the findings of an internal review of policies and procedures, including the improvements that have been made to compliance training, Galvin’s office said.

Fidelity said Monday that it cooperated with investigators, ”has already addressed the issue and has made enhancements to its system for approving customers for options trading.”

Melanie Waddell

@Think_MelanieW

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