A Massachusetts regulator has accused the brokerage arm of Fidelity Investments of having “unethical and dishonest” practices in deciding which clients may trade options on its platform, in a time of rising retail demand for the derivatives.
The state securities division filed an administrative complaint against Fidelity Brokerage Services on Wednesday, alleging that the group failed to properly investigate clients who applied to trade options or use margin loans on the platform.
Fidelity has in some cases “approved clients who claimed to have gained years of experience within a few days” or who changed their stated income when their first applications were denied, the regulator said.
Options and margin lending can be more complex and risky than ordinary stock trading, and the regulator requires brokerage platforms to ensure that clients understand the products and meet criteria for both net worth and sophistication in the markets.
The regulator’s move comes as stock option volume break records. According to stock exchange operator Cboe Global Markets, more than 61.3 million contracts turned around on Monday.
“It’s a matter of investor protection and companies can not be allowed to stamp these applications with a rubber stamp without doing their due diligence, all in the name of efficiency,” said William Galvin, Massachusetts Secretary of State. who oversees the securities department.
Boston-based Fidelity has one of the largest retail brokers in the country, with over 30 million accounts.
The privately owned brokerage firm handled an average of more than 3.5 million transactions per day during the first quarter of 2021, adding more than 4.1 million new client accounts during this period. More than a quarter of these new accounts have been opened by investors under the age of 35, according to data from the regulator.
The regulator’s enforcement office said Fidelity had failed to implement policies to ensure customers met minimum salary and asset requirements and did not prevent customers from changing their revenue ranges and resubmitting new applications within a day.
Some of the newly approved clients then bought options on so-called meme stocks, which rose in value in early 2021 after buying campaigns coordinated on social media, the Massachusetts agency said.
The regulator’s action on Wednesday follows another one he took against Robinhood in December 2020 that said the retail brokers had approved option clients who had little or no investment knowledge, contrary to the company’s own policies.
Fidelity did not immediately respond to a request for comment.
The regulator also claimed that Fidelity had failed to track down clients changing their job descriptions on their applications and resubmitting them. One applicant changed their job title from “scientist” to “CEO” within a day of being denied options trading. The applicant was eventually approved, the complaint reads.
Galvin said Fidelity’s “blatant unethical disregard for security, coupled with its inadequate oversight of compliance policies, runs the risk of exposing inexperienced retail brokerage clients to the dangers of options and margin trading.”