MASSACHUSETTS REGULATORS on Monday fined Fidelity Brokerage Services $750,000 for failing to properly vet customers who applied to be approved for more risky options and margin trading.

Secretary of State William Galvin, whose office oversees the state securities division, described Fidelity in a press release as having a “half-hearted and lackadaisical attitude” when it comes to safeguarding individual investors. The lack of due diligence, according to consent order filed by Galvin’s office, occurred between March 17, 2020, and June 30, 2021.  

Michael Aalto, head of corporate communications at Fidelity, issued a statement saying the company fully cooperated with the Massachusetts Securities Division. “As acknowledged by the MSD, Fidelity has already addressed the issue and has made enhancements to its system for approving customers for options trading,” Aalto said.

At Fidelity, investors must submit applications to engage in options and margins trading. Investors who purchase option contracts obtain the right to purchase or sell a security at some set price in the future. Buying on margin involves borrowing money from a broker to purchase a security. 

“Fidelity’s procedures to approve options applications were not reasonably designed and executed, resulting in the improper approval of customers,” according to the consent order. 

The consent order said Fidelity’s system allowed customers to repeatedly re-submit tweaked applications until they met the requirements to be approved. Fidelity failed to notice that customers were sending in applications with inflated financials, investment experience, and employment information despite having previously submitted applications with different information.

Fidelity at one point had a provision in their compliance policy instructing their reviewers to “be alert to a customer initiating a pattern of reapplying for options approval by frequently increasing his or her financial or experience information in order to meet the approval standards.” That provision was removed sometime between July 29, 2021 and December 3, 2021. 

In practice, the provision, even when it was present, was not enforced, the consent order said. The application review team at Fidelity was not directed to check if a prior application by the same customer had been denied. They weren’t required to “look beyond the single application in front of them,” the consent order said.

Fidelity’s failure to exercise due diligence in the review and approval of options trading applications led to financial losses for customers who, according to Massachusetts law, should not have been trading at all or at the level they were trading at, according to the consent decree. 

Since April 2022, Fidelity has addressed the gap in their approvals process and has instituted a system to flag customers who submitted multiple applications during a six-month time period.