Broker-dealer fined for exercising options after deadline

A broker-dealer paid FINRA’s fee for exercising a client’s expiring options after the FINRA-designated exercise cut-off time.

In an acceptance, waiver and consent letter, FINRA found that the broker had accepted instructions to exercise put options out-of-the-money after 5:30 p.m. society. According to the letter, the supervisor said the company could exercise the options under the company’s “best effort” exception which allowed the company to exercise options after its internal 4 p.m. cut-off time. 30 EST in special circumstances. FINRA said the options would otherwise have expired worthless, but due to a significant change in the price of the underlying stock after hours, the options were exercised “in the money”. FINRA said the failure was due in part to insufficient internal controls that did not recognize FINRA’s designated cut-off time as a limit for “best effort” redemptions.

As a result, FINRA determined that the broker violated FINRA Rule 2010 (“Standards of Trading Honor and Principles of Trading”), Rule 2360 (“Options”) and Rule 3110 (“Supervision”). To settle the charges, the broker-dealer accepted (i) a reprimand and (ii) a civil penalty of $50,000.

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