FINRA charges that Interactive Brokers (IBKR) failed to conduct sufficient due diligence in approving self-directed option accounts. IBKR, per the allegation, also approved option trading on accounts where red flags existed. FINRA and IBKR settled the matter with Interactive Brokers agreeing to a censure and a $650,000 fine.
All brokerage firms have a duty to act in the best interests of their investors. When it comes to options, FINRA rules require a level of diligence in reviewing and approving option applications. FINRA rules require a brokerage to ascertain “the essential facts relative to the customer,” including the investor’s age, income, net worth, investment objectives, and investment experience and knowledge.
A brokerage must also have systems in place to spot red flags in customer accounts. This includes spotting inconsistent customer application entries. Here, the inconsistencies were investors representing inconsistent levels of experience in account documents.
This settlement serves as an example that self-trading brokerages have obligations similar to full-service brokerages in the trading of options and other areas.
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