Fidelity Brokerage Services $900,000 Fine: Options Trading Flaws Exposed

Fidelity Brokerage Services LLC operates as a subsidiary of the renowned financial services firm, Fidelity Investments. Within its array of offerings, Fidelity Brokerage Services provides diverse financial services like financial planning, investment management, brokerage, wealth management, and trading services. As a member of both the NYSE and SIPC, the firm facilitates various brokerage services, encompassing stock, options, ETF, and mutual fund trading.

Options Trading Approval Process

How Did Fidelity’s Automated System Fall Short?

FINRA highlighted flaws in Fidelity’s automated system, responsible for reviewing options trading applications from May 2017 to April 2022. The system lacked a robust design for scrutinizing and approving online applications, relying solely on the information provided by customers in their applications.

Crucially, the system failed on two fronts. First, it did not mandate the consideration of multiple applications from the same customer. Second, there was no requirement to compare information across these applications. Consequently, customers gained approval for options trading without meeting the firm’s criteria.

Compounding the issue, the system permitted customers to submit multiple applications, adjusting information until meeting the approval criteria. This loophole allowed customers to manipulate the system to their advantage.

In response, Fidelity has taken proactive measures to enhance its application review systems and online verification processes. The focus is on customers making material changes to their financial or investment profiles. These steps reflect Fidelity’s commitment to addressing the identified shortcomings and ensuring a more robust and secure approval process for options trading.

What Flaws Existed in the Principal Review Process?

Fidelity’s automated system, tasked with reviewing options trading applications, exhibited significant flaws that led to the approval of customers who failed to meet the firm’s requirements. Key issues include:

The system solely relied on information provided in the customer’s application, neglecting to consider multiple applications or mandate cross-application information comparison.

Certain options approval policies and procedures, including obligations of broker-dealer agents, were not consistently enforced by the firm.

Customers were permitted to submit multiple applications, tweaking information until meeting approval criteria.

These system flaws resulted in the approval of customers for options trading who did not align with the firm’s stipulated requirements. Subsequently, Fidelity has taken measures to enhance its application review systems and bolster online verification processes. These improvements specifically target customers making material changes to their financial or investment profile.

Regulatory Findings

What Were the Implications of Censure and the $900,000 Fine?

Fidelity Brokerage Services LLC faces significant consequences with a censure and a $900,000 fine. The fine stems from the firm’s failure to conduct thorough due diligence when approving customers for options trading between May 2017 and April 2022. Utilizing an automated system to review online applications, Fidelity’s flawed process resulted in the approval of customers who did not meet the firm’s requirements, violating FINRA Rules 3110, 2360, and 2010.

Alongside the monetary penalty, the firm agreed to a censure, a formal reprimand. This settlement underscores the repercussions of Fidelity’s inadequate due diligence and emphasizes the imperative to strengthen its systems for vetting customers seeking options trading approval.

Why Did Fidelity Brokerage Services Neither Admit Nor Deny the Findings?

Fidelity did not admit or deny the Financial Industry Regulatory Authority’s (FINRA) findings about its flawed automated system for reviewing options trading applications. Due diligence lapses resulted in approving customers who didn’t meet the firm’s requirements.

This non-admission stance is common in regulatory settlements, enabling resolution without admitting guilt. In Fidelity’s case, the firm agreed to a $900,000 penalty and a censure, a formal reprimand, allowing them to address the issue and move forward without acknowledging fault.

Systemic Issues in Options Trading Oversight

Fidelity faced issues with its options trading approval process, greenlighting customers who didn’t meet eligibility criteria. Between May 2017 and April 2022, the firm employed an automated system for reviewing online options trading applications. Subsequently, a principal would review and either approve or disapprove accounts. However, the system had notable shortcomings. It solely relied on the information provided in the latest application, overlooked the need to consider multiple applications from a single customer, and allowed applicants to tweak details until they met the approval criteria.

Consequently, customers who didn’t meet Fidelity’s requirements were granted approval for options trading.

FINRA Disciplinary Actions Online