Do you understand options trading? Most people have little to no idea what it is. Only experienced, knowledgeable investors are in a position to understand the risks and potential benefits.
The Financial Industry Regulatory Authority (FINRA) recently announced a $3-million fine against Webull Financial. The regulator says that Webull failed to perform appropriate due diligence before it approved customers for options trading. This may have resulted in people being invited to try options trading when it would be an inappropriate investment for them based on their stated goals and risk tolerance.
When a broker-dealer or investment advisor recommends an inappropriate investment and you lose money, there may be recourse through FINRA. You can potentially get some or all of your money back, in addition to other things.
Between December 2019 and July 2021, FINRA alleges, Webull did not perform reasonable due diligence when approving people for options trading. Instead, it left the approval process to an automated program. That program failed to consider information previously submitted by applicants, instead treating every applicant as a new applicant. This led to the program approving applications that didn’t meet the firm’s stated eligibility criteria.
For example, FINRA pointed to the fact that applications had been approved for people under 21 to trade options. This contravened the firm’s rule that customers must have at least three years of separate options trading experience before they could be approved. Overall, the system mistakenly approved 9,000 accounts whose holders had no previous experience with options trading.
It went further, however. Separately, FINRA alleges that Webull attempted to automate its customer service between May 2018 and December 2021. However, the automated system failed to commit the necessary resources to keep up with hundreds of thousands of customer communications some of which were complaints.
FINRA members, including Webull, have the legal duty to respond to customer complaints in an objectively reasonable manner. In some cases, they are also required to report customer complaints to FINRA. Webull’s automated customer service system was not reasonably designed, according to FINRA.
This was more than a software error. People lost money.
As firms across the industry seek to benefit from automation, they need to remember that automation is far from perfect. In this case, it appears to have cost investors real money.
Before firms approve clients for options trading, they have a legal duty to ensure options trading is appropriate for them. They must also provide a reasonable way to respond to customer complaints and comply with other regulatory requirements.
When they fail to uphold these standards, they face regulatory action, as here. They can also face arbitration with customers who were harmed by inappropriate investments.