A Massachusetts regulator has accused the brokerage arm of Fidelity Investments of “unethical and dishonest” practices to determine which clients can trade options on its platform, at a time of rising retail demand for derivatives.
The state’s securities division filed an administrative complaint against Fidelity Brokerage Services on Wednesday, alleging that the group failed to properly screen clients who applied for trading or used margin loans on the platform.
The regulator said that in some cases, Fidelity is “approved clients who claimed to have gained years of experience in just a few days” or who changed their declared incomes when their first applications were denied.
Trading in options and margin loans can be more complex and risky than trading common stocks, and the regulator requires that brokerage platforms ensure that clients understand the products and meet the criteria of both net worth and sophistication in the markets.
The regulator’s move comes as the volume of stock options reaches record levels. More than 61.3 million contracts were delivered on Monday, according to exchange operator Cboe Global Markets.
“This is an investor protection issue and companies cannot be allowed to approve these applications without due diligence, all in the name of efficiency,” said William Galvin, the Commonwealth Secretary in Massachusetts, who oversees the securities division.
Boston-based Fidelity has one of the largest retail brokerages in the country, with more than 30 million accounts.
The privately owned brokerage firm handled more than 3.5 million transactions per day on average during the first quarter of 2021, and added more than 4.1 million new customer accounts during the period. More than a quarter of these new accounts were opened by investors under the age of 35, according to data from the regulator.
The regulator’s law enforcement office said Fidelity failed to implement policies to ensure clients met minimum salary and asset requirements and did not prevent clients from changing their income ranges and resubmitting new applications within a day for approval.
The Massachusetts agency said some newly authorized clients purchased options in so-called meme stocks, which rose in value in early 2021 after buying coordinated campaigns on social media.
The regulator’s action on Wednesday follows another it took against Robinhood in December 2020, when it said the retail brokerage had approved options clients with little or no knowledge of investing, in violation of the company’s own policies.
Fidelity did not immediately respond to a request for comment.
The regulator also alleged that Fidelity failed to detect and resubmit customers to change their job descriptions in their applications. An applicant changed his job title from “scientist” to “executive director” within one day of being refused options trading. According to the complaint, the applicant was eventually approved.
“Fidelity’s flagrant unethical disregard for protection, combined with inappropriate regulatory compliance policies, continues to risk exposing inexperienced retail brokerage clients to options and margin trading,” Galvin said.