FINRA Fines Interactive Brokers $650,000 for Options Approval Failures

The Financial Industry Regulatory Authority (FINRA) has fined Interactive Brokers LLC $650,000 and issued a censure after finding that the online brokerage firm failed to exercise proper due diligence before approving certain self-directed customers to trade options.

The sanctions stem from deficiencies that spanned more than five years, between November 2019 and December 2024, and involved shortcomings in the firm’s automated account approval system.

Deficiencies in Options Account Approvals

According to FINRA’s settlement order, Interactive Brokers relied on a largely automated process to evaluate whether customers should be approved for options trading. This system was designed to review customer applications and determine their suitability to engage in options transactions.

However, FINRA found that the system was not reasonably designed to detect when options trading might be inappropriate for certain customers. As a result, the firm approved self-directed customers for options accounts despite red flags indicating that options trading carried risks beyond their financial profiles, investment experience, or stated objectives.

Self-directed customers are individuals who manage their own accounts. FINRA emphasized that the firm’s inadequate controls posed heightened risks because these customers did not have advisors managing their accounts.

Regulatory Rules at Issue

FINRA concluded that Interactive Brokers’ conduct violated several of its core supervisory and suitability rules:

• FINRA Rule 3110 (Supervision): Requires firms to establish and maintain supervisory systems reasonably designed to ensure compliance with securities laws and FINRA rules.
• FINRA Rule 2360 (Options): Sets forth specific requirements for approving customer accounts for options trading, including a thorough due diligence review of customer backgrounds, financial situations, and experience with complex instruments.
• FINRA Rule 2010 (Standards of Commercial Honor): Mandates that member firms observe high standards of commercial honor and just and equitable principles of trade in conducting their business.

By relying on a flawed automated system and failing to ensure its supervisory procedures adequately screened customers, Interactive Brokers fell short of these obligations.

Sanctions Imposed

Without admitting or denying FINRA’s findings, Interactive Brokers consented to the following sanctions:

• Censure
• $650,000 fine

Broader Regulatory Context

FINRA has consistently emphasized the importance of robust supervisory systems for options trading, particularly given the complexity and risks of these products. Options trading is not suitable for every investor, as it involves potential for substantial losses, leverage, and strategies that can expose customers to risks exceeding their initial investment.

For firms that rely heavily on automation and online account openings, regulators expect strong safeguards to ensure that customers are properly screened before being approved for higher-risk trading activities. The Interactive Brokers case highlights that automated systems, while efficient, cannot replace the need for thorough due diligence and oversight.

Implications for Online Brokerages

The sanction against Interactive Brokers underscores a growing regulatory focus on how online and discount brokerages evaluate customer suitability for complex products like options, margin trading, and derivatives.

Key takeaways include:

• Automation requires oversight: Automated approval systems must be regularly reviewed and tested to ensure they are capturing red flags and preventing inappropriate approvals.
• Self-directed customers need careful screening: Even though these investors trade without professional advice, firms still bear responsibility for ensuring their accounts are properly vetted.
• Supervisory obligations extend to technology: Broker-dealers cannot rely solely on algorithms or automated processes without ensuring those systems are reasonably designed to comply with FINRA rules.

Conclusion

Interactive Brokers’ $650,000 fine and censure serve as a reminder that compliance failures in supervisory systems can lead to enforcement actions, even when they involve automated processes designed to streamline account approvals. FINRA’s findings reinforce that customer protection rules apply equally to traditional and online brokerages, and that firms must carefully monitor how customers are approved for higher-risk activities such as options trading.

The full FINRA settlement document is available here: FINRA AWC – Interactive Brokers LLC