The 22-Day Options Agreement
Denise Ortega, 74, is retired with $180,000 in liquid net worth and $42,000 of annual income from Social Security and a pension. Her objective is coded "income" and she has no options experience. On a Tuesday afternoon her registered representative submits a new-account packet marked Level 4 (uncovered writing) and, before any principal has seen the file, enters an order selling 10 uncovered puts on a $95 stock - roughly $95,000 of notional exposure. The options disclosure document is mailed Wednesday morning. The branch manager, who holds no options principal registration, approves the account Thursday. The signed options agreement arrives 22 days later. The rep's written rationale reads only: "Client wants more yield than CDs."
1. Walk through the account-opening sequence as it actually happened. Which requirements were missed, and at which point did the first violation occur?
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Sequence the file against the account-approval requirements:
- Approval authority. An options account must be approved by a Registered Options Principal (or an appropriately designated principal). The branch manager holds no options principal registration, so the Thursday approval is void - the account was never properly approved. The first violation occurs at the moment the rep entered the Tuesday order without a valid approval.
- Disclosure timing. The current options disclosure document must be furnished at or before account approval. Mailing it Wednesday, the day after an order was already executed, fails this requirement.
- Options agreement. The signed agreement must be returned within 15 days of account approval. Day 22 is outside the window, which obliges the firm to close the account or restrict it to closing transactions.
- Suitability and documentation. Ten uncovered puts represent roughly 53% of liquid net worth for a customer with no options experience and an "income" objective. Approval of Level 4 on this profile is not supportable on a reasonable-basis or customer-specific basis, and a one-line rationale does not evidence the analysis.
The rep's own order entry, not the paperwork, is the earliest and most serious event.
2. The short puts are now $6 out of the money with 40 days remaining. What must the ROP do about the position and about the account?
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Two separate problems, handled separately.
The position. The puts were sold in an account that was never validly approved for uncovered writing, and the suitability basis is absent. The ROP should not simply wait for expiry. Options: (a) close the position and absorb the cost, treating the customer as made whole for a transaction the firm should never have accepted; (b) if the customer affirms in writing that she wants the exposure and a genuine suitability analysis supports it, obtain proper approval and margin documentation prospectively. Given the customer's profile, (a) is the defensible choice, and the decision should be documented before the next market move.
The account. Because the agreement came back on day 22, the firm must either close the account or restrict it to closing transactions until a valid agreement is on file - and it still needs a valid ROP approval, which it does not have. The customer must be notified in writing of any restriction.
Do not paper over the gap by having a properly registered principal "re-approve" retroactively to Thursday; a backdated approval is itself a recordkeeping problem.
3. What supervisory follow-up is warranted for the branch manager who signed the approval, and what records should the firm be able to produce on demand?
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The branch manager approved an account she had no authority to approve, and did so on a file that plainly failed suitability. Follow-up:
- Escalate under the firm's supervisory control system; re-review every options account that manager has approved since her last inspection to determine whether this is an isolated error or a pattern.
- Retraining and a written restriction on her approval authority, or removal from the approval workflow entirely.
- A written supervisory-controls finding with a remediation date, and a note in the manager's file. Whether this rises to a Rule 4530 disclosure or a Rule 3110 violation report depends on the dollar impact and whether customers were harmed.
Records the firm must be able to produce: the new-account form with the approval signature and date; proof and date of options disclosure document delivery; the options agreement and its receipt date; the order ticket times showing entry preceded approval; the suitability documentation; the margin approval; and the branch manager's registration record showing no options principal qualification. If any of these cannot be produced, treat the gap as a recordkeeping failure, not a filing inconvenience.