Rolling a Widow's Puts 22 Times
You are reviewing monthly exception reports for the branch. Client D. Whitfield, 81, widowed, with a $250,000 account and an income objective, has generated $61,000 in commissions year to date - 38% of rep Sanders' production. Sanders has rolled Whitfield's short put positions 22 times in five months, each roll producing a debit and a new commission. Account equity is down 14% while premium collected is up. Whitfield's daughter called the branch saying her mother thought the account 'couldn't go down.' Sanders says: 'I told her I'd make her whole if anything went wrong - that's how I keep her calm.' He also recommended she liquidate her municipal bonds to free cash for the strategy.
1. What rules are implicated, and may this trading continue while you investigate?
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- Quantitative suitability (Rule 2111). The question is not whether each put was suitable in isolation, but whether 22 rolls in five months, generating $61,000 of commissions on a $250,000 account, is excessive given the customer's income objective and age. Compute cost-to-equity and turnover; a 24%+ annual commission load against a 14% equity decline is a red flag the report already shows.
- Guarantee against loss (Rule 2150). 'I'll make her whole' is precisely the promise the rule forbids, and it also falsified the customer's understanding of risk - which is why her daughter's account of 'it couldn't go down' matters.
- Senior investor obligations: confirm the trusted contact (Rule 4512) and evaluate whether a temporary hold under Rule 2165 is warranted if exploitation is suspected.
- Also: selling municipal bonds - an income-producing asset - to fund a premium-selling program in an 81-year-old's account needs its own justification, and the liquidation may itself be unsuitable.
- No, the trading does not continue. Place the account under principal pre-approval, stop new roll recommendations, and freeze the strategy pending review. The risk of a few days' lost premium is trivial against another roll.
2. How do you handle the 'make her whole' statement and the daughter's call?
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- The guarantee cannot be cured by good intentions. Sanders must be instructed in writing to cease any such statement and to correct the customer's misimpression directly - with a principal present or on the record. Do not let him 'calm her down' again.
- Contact the customer yourself. Confirm what she was told, what she believes she owns, and whether she understood she could lose money. Document the call.
- The daughter's call is a gift, not an intrusion. Take the information, follow the firm's senior-investor procedures, contact the trusted contact where permitted, and do not disclose account details to the daughter without authorization.
- Preserve everything now: emails, texts, notes, the roll tickets, and the recorded calls if any. The reconstruction gets harder by the day.
- Consider remediation: reversing commissions on the rolls, unwinding positions at the firm's cost, or making the customer whole are business decisions, but they must be evaluated and the reasoning documented. Leaving the loss with the customer while the firm knows the account was managed on a false premise is not a defensible default.
3. What supervisory and reporting steps follow?
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- Escalate to compliance and to whatever committee handles senior-investor and sales-practice matters; this is not a branch-level fix.
- Review the rep's book, not just this account: other clients with high roll frequency, other retiree accounts holding short premium, other 'make you whole' language in emails or notes. A 38%-of-production concentration in one elderly client is itself an exception worth testing.
- Heightened supervision for Sanders - pre-approval of all recommendations, tightened correspondence review - or restriction from options business while the review runs.
- Evaluate reporting duties: if the review substantiates a violation, assess obligations under FINRA Rule 4530 and the Form U4/U5 disclosure questions, and whether the customer must be told.
- Fix the exception report: a metric that flags roll frequency and cost-to-equity by client age and objective would have caught this in month two.