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Fidelity Brokerage Services’ “lackadaisical attitude” towards how it reviewed options trading applications put retail investors at risk, according to Massachusetts Commonwealth Secretary William Galvin, who fined the company $750,000 for the alleged lapses in the Bay State.
Galvin’s Securities Division originally filed a complaint against Fidelity in Jan. 2022, alleging the firm allowed customers to submit multiple options trading applications with changes until they were approved, though Galvin’s office noted the firm had made efforts to improve its system since that time.
According to the consent order detailing the settlement, Fidelity Brokerage Services’ (FBS) system mandated that customers apply for access to options trading, with five tiers of allowable trading that rose in levels of risk. Applicants could submit paper or electronic applications for margin and/or options trading access, and would either be stamped approved, approved at a lesser tier, denied or require more information.
From approximately March 2020 to June 2021, FBS employed about 51 brokers in Covington, Kent., known as the Central Review Team (CRT), who reviewed options applications from retail investors. CRT members could carry a heavy workload, with some team members reviewing at least 12 paper applications per hour, while others were expected to review at least 300 electronic options applications in that time frame.
Prior to June 2021, FBS didn’t impose any limits on the number of applications a single investor with a retail brokerage account could submit, according to the consent order.
CRT brokers had access to information about an investor’s previous options applications via Fidelity’s computer system, but the firm’s review process didn’t mandate the review team to look beyond whatever single application they were considering.
“As a result, CRT members did not detect when the information contained in a customer’s options application differed from other information the customer had previously provided to Fidelity,” the consent order read.
The 2022 complaint detailed some customers’ determined efforts to win approval for options trading, even if they didn’t qualify; some investors resubmitted applications indicating they’d gained years of experience in just a few days’ time, or their annual incomes had grown less than one day after a previous application was denied. One applicant was denied when he listed his job as “Scientist;” one day later, a resubmitted application with the job title “CEO” was approved.
When customers submitted numerous options applications, the firm’s automated system wasn’t set up to flag the multiple submissions, making it more difficult to conduct manual reviews of the applications for discrepancies, according to the consent order.
The lapses left Fidelity approving some customers for options trading “based on financial and/or investment experience information that was materially different” from information on prior applications, according to the order.
Fidelity “fully cooperated” with the investigation by Galvin’s Securities Division, according to Michael Aalto, a spokesman for the firm.
“As acknowledged by the (Massachusetts Securities Division), Fidelity has already addressed the issue and has made enhancements to its system for approving customers for options trading,” he said.
In addition to the fine, Fidelity agreed to a censure, as well as agreeing to submit a report to Galvin’s office detailing an internal review of its policies, including what changes have been made to its compliance efforts.
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