Option Account Compliance

A member firm’s option business requires strict supervision from the ROFSP as well as from the firm’s branch office mangers. All customer option accounts must be approved in writing by a ROSFP. Not all customers will be approved to trade options and not all customers who are approved to trade options will be approved for more advanced or more risky option strategies. In order to determine if a customer should be approved to open an option account, the registered representative must collect as much financial information from the customer as possible. The registered representative must collect the following information:

  • Full name and address
  • Home and work phone numbers
  • Social security or tax ID number
  • Employer, occupation, and employer’s address
  • Net worth and liquid net worth
  • Investment objectives
  • Investment experience
  • Estimated annual income
  • Whether the customer is employed by a bank or broker dealer
  • Marital status

NOTE

If the customer is employed by an NYSE member firm, an exchange or the OCC, the firm opening the account must obtain the employer’s written permission for the customer to open the account, and duplicate confirms and statements must be sent to their employer.

Based on the information collected by the agent, the ROSFP must determine if option trading is suitable for the customer. Most customers will be approved to write covered calls against long stock positions. Writing covered calls is considered to be a conservative strategy. Customers must be able to demonstrate additional levels of sophistication and financial liquidity to be approved for:

  • Buying puts and calls
  • Spreads and straddles
  • Writing uncovered options

Only customers who demonstrate the highest levels of sophistication and liquidity will be approved to write uncovered options. If a firm does allow customers to establish uncovered option positions, the firm must have specific written supervisory procedures detailing suitability requirements and minimum net equity requirements for customers. Additionally, the firm must send customers who are approved to establish uncovered option positions a special risk disclosure document relating to uncovered options prior to or at the time the first uncovered option position is established. This risk document details the fact that many uncovered option positions will have the potential for an unlimited loss. If the branch office manager is not a ROSFP, the branch office manager may initially approve the account to trade options so long as a ROSFP also approves the

account promptly. Each customer who opens an option account must be given the OCC’s risk disclosure document detailing the risks and characteristics of standardized options at or prior to the time the account is approved for option trading. Certain customers will have to provide additional information to document that option trading is allowed. Trusts, corporations, and pension plans will be required to provide additional documents to demonstrate that option trading and, if applicable, margin accounts are permitted. Discretionary accounts will require the customer to sign a limited power of attorney. The limited power of attorney will stay in effect until the customer revokes it or dies. All discretionary option accounts must be approved in writing by two ROSFPs. The approval of the initial ROSFP must be reviewed and approved by a second ROFSP and the account should be reviewed more frequently to ensure against churning. If the agent is going to employ a systematic option program for the discretionary account, the account holder must get a detailed description in writing of the program to be used.

Regardless of the type of account, each option order must be approved on the day that the order is entered. Option orders are not required to be approved prior to being entered by an agent but must be approved promptly by a ROSFP on the day the order is entered. Firms that use electronic or computerized surveillance may review option orders in accordance with their written supervisory procedures.

THE OPTION AGREEMENT

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