Fidelity Brokerage Services agreed to pay a $900,000 penalty levied by the Financial Industry Regulatory Authority (FINRA) regarding alleged due diligence failures caused by errors in the firm’s automated screening system.
From May 2017 through April 2022, Fidelity did not have a system reasonably designed to review and approve customers’ online applications to trade options, FINRA said in its disciplinary action published Monday.
The details: Fidelity relied on an automated system for reviewing options trading applications. After review, a principal at the firm would approve or disapprove customer accounts for options trading, according to FINRA.
Flaws in the system “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 the level of options trading the customer sought was inappropriate for them,” FINRA found.
An issue in the system was that it only considered information a customer provided in his or her most recent options trading application and did not compare those details to other information previously provided, per the self-regulatory organization.
FINRA also faulted the firm for flaws in its process for principal review, including not requiring multiple customer applications to be considered and not mandating comparison of information being provided.
Compliance considerations: In February 2021, Fidelity began enhancing its options trading screening systems, according to FINRA. It implemented an automated age check, limited how often customers could submit applications for options trading authority in a given time period, required customers to certify information submitted on an options application was accurate, and enhanced its verification processes for customers making material changes to their financial or investment experience.
Firm response: “Fidelity fully cooperated with FINRA,” a firm spokesperson said in an emailed statement. “As acknowledged by FINRA, Fidelity has already addressed the issue and has made enhancements to its system for approving customers for options trading.”
The firm neither admitted nor denied FINRA’s findings.
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