Supervising the Opening of New Options Accounts
The approval decision belongs to the ROP
No options order may be accepted for a new account until a Registered Options Principal (Series 4) has approved the account for options trading. Approval is not a clerical step: the ROP must weigh the customer's investment objectives, financial situation, tax status, age, prior investment and options experience, and the specific level of options activity requested. Document the reasoning - examiners treat an undocumented approval as no approval.
The paperwork chain
Three items are tested repeatedly:
- Options disclosure document - the current Characteristics and Risks of Standardized Options must be furnished to the customer at or before the time the account is approved for options trading.
- Signed options account agreement - must be obtained and returned within 15 days of approval. Until it is returned, the firm may not accept new opening transactions, but it may accept closing transactions and instructions to exercise or to respond to assignment.
- Account application - accurate, complete, and amended when circumstances change.
Joint, trust, corporate, partnership, and custodial accounts need the underlying authority documents plus proof of who may direct options trading. Discretionary accounts require written discretion authorization and heightened supervision.
Traps
A Series 24 general principal who is not a Series 4 ROP cannot approve the account. Delivering the ODD at the time of the first trade is too late. Assuming an unsigned agreement blocks all activity - it does not block closing orders.
Worked example
A customer is approved for covered calls on the 1st. The signed agreement arrives on the 20th. Between the 16th and the 20th the firm may take orders to sell (close) the calls, but may not open a new position.