Options Account Supervision

Options carry unique risks that require specialized supervision, centered on the Registered Options Principal (ROP).

Who Approves a New Options Account?

• Persons supervising options sales practices must be designated as Options Principals
• Options Principals must pass the Series 4 examination (Registered Options Principal)
• A new options account must be approved in writing by the branch office manager, an ROP, or a General Securities Sales Supervisor after reviewing customer information, including:
  • Financial status (income, net worth, liquid net worth)
  • Investment objectives (speculation, hedging, income)
  • Options experience (number of years, types of options traded)

Exam Tip: Gotchas

• Three roles may approve: the branch office manager, a Series 4 ROP, or a General Securities Sales Supervisor. A general securities principal (Series 24) alone is not among them.
• If the branch office manager holds neither principal designation, the approval must go to an ROP or a General Securities Sales Supervisor within 10 business days.
• The approver must review financial status, objectives, AND options experience; all three elements are required.

What Extra Supervision Applies to Options Branches and Discretionary Options Accounts?

• A branch office cannot transact options business unless its principal supervisor is qualified as an ROP or a Limited Principal-GSSS; a small branch with three or fewer registered representatives is exempt from that on-site qualification as long as an ROP or GSSS elsewhere appropriately supervises its options activity
• The principal supervisory office must be able to review each options account on a timely basis for strategy compatibility, transaction size and frequency, commission activity, profit or loss, concentration, and Regulation T compliance
• Discretionary options accounts need the customer's written authorization to specifically cover options trading, acceptance in writing by an ROP or GSSS, and a second, independent ROP to review that acceptance; every discretionary order must be marked discretionary at entry
• Discretionary options accounts also need frequent review by an ROP who is not the one exercising the discretion; a firm without computerized surveillance tools must have its designated ROPs approve and initial each discretionary order on the day it is entered
• Firms must keep a central log of options-related complaints with the complainant's identity, the date received, the servicing representative, a description of the complaint, and the action taken; a complaint received at a branch must be forwarded to that central file within 30 days, and the branch keeps its own copy
• Approved options-customer background/financial information and the most recent six months of account statements must be kept accessible at both the servicing branch and the principal supervisory office
• A change to an options account's name or designation must specifically be approved by a Registered Options Principal, not just any registered principal; this is narrower than the general account-name-change rule that applies to non-options accounts

Exam Tip: Gotchas

The independent second-ROP review for discretionary options accounts is stricter than the general discretionary-account rule: it is not enough for one ROP to accept the account, a different ROP must review that acceptance for a reasonable basis to believe the customer could understand and bear the risk.

Does Options Supervision Get Its Own Annual Report?

• Options supervision is part of the firm's overall supervisory-control system
• The firm's supervisory-control annual report to senior management covers options along with the firm's other activities, including:
  • A description of the supervisory control system (covering options)
  • A summary of test results and significant exceptions
  • Any amended supervisory procedures created in response to the findings
• There is no separate options-only report; options activities are reviewed within the single annual report to senior management

Exam Tip: Gotchas

• Options supervision is covered within the firm's single supervisory-control annual report to senior management, not a separate options-only report.
• The distinctive options-supervision requirement is the Registered Options Principal (ROP) approval of each new options account, not a separate report.

How Does Options Supervision Fit the Broader Supervisory Framework?

• Options supervision operates within the broader supervision-and-controls framework but adds the ROP requirement for approving each new options account
• A firm that trades both municipal securities and options needs qualified principals for each: a Series 53 for the firm's overall municipal supervision and a Series 4 (or GSSS) for options

What Should You Check on Exam Day?

• Can you name the three roles that may approve a new options account, and the 10-business-day backstop if the branch office manager holds neither the ROP nor GSSS qualification?
• Do you know the three pieces of customer information the approver must review: financial status, investment objectives, and options experience?
• Can you explain that options supervision is folded into the firm's single supervisory-control annual report, not a stand-alone options report?
• Do you know the small-branch exception (three or fewer reps) to the ROP/GSSS branch-supervisor requirement, and the extra independent-ROP review that discretionary options accounts need on top of the general discretionary-account rule?