Customer Agreements - Options

Opening an options account is significantly more involved than opening a cash or margin account. FINRA Rule 2360 establishes a specific multi-step process with precise timing requirements that the exam tests heavily.

The Options Account Opening Process

FINRA Rule 2360 requires a specific sequence:

Information Required for Options Accounts

Before approving an options account, the firm must exercise due diligence to obtain:

• Investment objectives (safety, income, growth, speculation)
• Employment status and income estimates
• Net worth and liquid net worth
• Marital status and number of dependents
• Age
• Investment experience across various instruments (stocks, bonds, options, commodities)

This is more detailed than what is required for a standard cash account under FINRA Rule 4512.

The Options Disclosure Document (ODD)

• Published by the Options Clearing Corporation (OCC)
• Official title: "Characteristics and Risks of Standardized Options"
• Must be delivered at or prior to account approval, not at the time of the first trade
• Describes characteristics, risks, tax consequences, and mechanics of standardized exchange-traded options
• Amendments must be distributed with transaction confirmations

Exam Tip: Gotchas

• The ODD must be delivered AT OR BEFORE account approval. The options agreement must be signed and returned WITHIN 15 DAYS of account approval. These are different timing requirements: the ODD comes first, the agreement deadline runs after approval.
• The ODD is published by the OCC (Options Clearing Corporation), not by FINRA or the SEC. This is a common exam trap.

The Options Account Agreement

• The customer must sign and return the options agreement within 15 days of account approval
• The agreement confirms that the customer:
  • Is aware of and agrees to comply with FINRA rules applicable to options trading
  • Has received the current ODD
  • Understands position and exercise limits
  • Acknowledges the Rules of the Options Clearing Corporation
• If the customer fails to return the signed agreement within 15 days, the firm should restrict the account to closing transactions only. The account is not automatically terminated

Exam Tip: Gotchas

• If the signed agreement is not returned within 15 days, the account is restricted to CLOSING transactions only. It is not automatically terminated. The customer can still close existing positions.

Verification of Customer Information

• Customer background and financial information must be sent for verification within 15 days of account approval
• The information is "deemed to be verified" unless the customer provides contrary notice within a reasonable time
• When the firm becomes aware of material changes in the customer's financial situation, updated information must be sent for verification within 15 days

Registered Options Principal (ROP) Approval

• A Registered Options Principal or the branch office manager must provide written approval or disapproval of each options account
• For discretionary options accounts: a second ROP (other than the original approver) must review the account
• For uncovered (naked) short option writing, the firm must have specific written procedures including:
  • Suitability criteria and standards
  • Written approval by an ROP
  • Designation of a principal for approving non-standard accounts
  • Minimum net equity requirements

Ongoing Supervisory Requirements

FINRA Rule 2360 requires ongoing monitoring of:

• Compatibility of transactions with stated investment objectives
• Transaction size and frequency relative to financial resources
• Commission activity and account profitability
• Concentration in specific options classes
• Compliance with margin regulations

Statement frequency:

• Monthly account statements for customers with options activity
• Quarterly statements for customers with open positions but no activity

Suitability for Options

• A firm may not recommend an options transaction unless it has reasonable grounds to believe the recommendation is suitable
• For opening transactions, the representative must believe the customer has sufficient knowledge and financial capacity to evaluate and bear the risks
• Suitability applies to recommendations. If the customer initiates an unsolicited options trade, suitability requirements are less stringent, but the firm must still ensure the customer is approved