The Bounced ODD and the Backdated Approval
R. Alvarez, a Series 7/63 rep in a small OSJ, brings you a new-account packet on a Tuesday morning. The customer, Margaret Chen (72, retired), lists $180,000 in liquid securities, a $60,000 annual pension, an investment objective of 'speculation,' and no options experience. Alvarez wants approval that day to write 20 uncovered calls on a volatile semiconductor stock. He says Chen 'wants income and understands she could lose the stock,' and the branch manager is pressing because 'the premium is best before Friday's earnings.' The ODD was emailed Monday, but the delivery receipt shows the message bounced. Alvarez says he 'explained the risks on the phone' and asks you to backdate the approval to Monday so the ticket can be entered today.
1. May you approve the account today? What must be true before a first options order is entered?
Read the worked answer
No, not on this record.
- ODD delivery is a precondition, not a formality. FINRA Rule 2360 permits a member to approve a customer for options only after the customer has received the current ODD (Characteristics and Risks of Standardized Options). The email bounced, so nothing was delivered. A rep's oral 'explanation of the risks' does not substitute.
- Fix the delivery first: re-send the ODD, confirm receipt, or have a registered person read and explain it, then document the delivery and the customer's acknowledgment. Approval can follow on the same day delivery is confirmed - that is not a delay, it is the rule.
- Backdating is disqualifying in itself. Signing or dating the approval Monday when the decision was made Wednesday creates a false record under Rule 4511/2010 no matter how the trade turns out. Refuse, and address the request with the rep.
- Suitability, not just paperwork, blocks this trade. See next task.
2. Assume the ODD delivery is cured. Can you approve 20 uncovered calls for this customer?
Read the worked answer
Not as presented, and the objective code is the tell.
- Uncovered calls carry theoretically unlimited risk. For a 72-year-old retiree with $180,000 liquid, an income orientation, and zero options experience, that risk profile is hard to square with 'speculation' - a code that appears in the rep's handwriting, not the customer's history. Confirm with the customer directly what she understands and wants; do not accept a rep-mediated description.
- Match the approval to the reality: covered calls or cash-secured puts, if the customer actually owns the underlying or can fully fund assignment, are the plausible fit. Approve the narrowest level that fits, not the level the rep requests.
- Document the reasoning on the approval record: financials, objectives, experience, why the approved level fits, and why any higher level was denied.
- If the customer genuinely wants uncovered writing after a documented conversation, that decision must rest on facts that exist - not on the rep's summary. Absent those facts, deny uncovered writing; the customer can revisit later.
3. What do you do about the rep and the branch manager after this conversation?
Read the worked answer
- Separate the pressure from the conduct. A branch manager's urgency is not a supervisory rationale; note who asked for what and when.
- Escalate the backdating request. Asking a principal to falsify an approval date is a supervision and integrity issue. Route it to compliance and to the rep's direct supervisor in writing; it may require heightened supervision of the rep's accounts and, if it recurs, more.
- Audit the rep's other accounts for the same pattern: same-day approvals, 'speculation' codes on retirees, emailed ODDs with no receipt. One bad packet is usually a sample, not an outlier.
- Fix the process that allowed the ask: ODD delivery evidence, customer-direct verification for higher-risk levels, and a rule that approvals are dated when made.