Suitability Part 5: Client Background - Continued
Within 15 days of account approval for options, the firm must obtain a signed written account agreement from the customer that states that the account will be handled in accordance with the applicable rules of the Options Clearing Corporation (OCC) and the SROs. In the agreement, the customer must agree to adhere to the rules concerning position and exercise limits. Another provision might be that the customer agrees to notify the firm of any significant changes in the customer’s investment objectives or financial situation.
The Option Agreement will often have additional provisions for option writers. Such provisions explain the risks of the obligations involved in option writing. Typically, there is also a provision whereby the customer gives the firm discretion to meet margin calls or to liquidate positions. Such a notification is required to be included in customer account statements.
Firms must develop written procedures for overseeing accounts approved for options trading. Examples of these procedures are as follows:
- Specific net equity requirements for approval of such accounts
- Suitability of transactions criteria
- Uncovered option trading approval
- Senior Registered Options Principal and/or Compliance Registered Options Principal designations who grant final approval for accounts that do not meet the firm’s criteria to make such transactions
Additional statements that describe inherent risks are required for customers who are approved for writing uncovered options. These statements are generated by member firms and distributed in addition to the Option Disclosure Document (ODD) prior to the initial uncovered transaction.
Within 15 days of approving the customer for options, the background and financial information must be sent to the customer for verification. Once the firms Option Agreement has been received from the customer a registered representative then completes it and thereby accomplishes verification. To complete the agreement it must be signed by the registered representative (RR) and a Registered Options Principal (or ROP) before any options order can be accepted.
If material changes occur in a client’s financial condition, a copy of the financial information on file must be sent to the customer for updating within 15 days after the firm becomes aware of such changes.
Back to Archive