This rule is no longer applicable effective February 17, 2009.
Except to the extent that specific provisions relating to transacting business with the public in options contracts govern, the provisions of all other rules relating to conduct of accounts (Rules 401–413) shall be applicable, unless the context otherwise requires.
(a) Approval Required
No member or member organization shall accept an order from a customer to purchase or write a stock-related option contract, Government security option contract, or GNMA option contract unless the customer's account has been approved for options trading in stock-related options, Government security options, and GNMA options, respectively, in accordance with the provisions of this Rule.
(b) Diligence in Opening Account
In approving a customer's account for options transactions, a member or member organization shall exercise due diligence to learn the essential facts as to the customer and his investment objectives and financial situation, and shall make a record of such information which shall be retained in accordance with Rule 722 (Supervision of Accounts). Based upon such information, the branch office manager or other Registered Options Principal shall approve in writing the customer's account for options transactions; provided, that if the branch office manager is not a Registered Options Principal, his approval shall be confirmed within a reasonable time by a Registered Options Principal.
(c) Verification of Customer Background and Financial Information
The background and financial information upon which the account of every new customer that is a natural person has been approved for options trading, unless the information is included in the customer's account agreement, shall be sent to the customer for verification within fifteen (15) days after the customer's account has been approved for options transactions. A copy of the background and financial information on file with the member organization shall also be sent to the customer for verification within fifteen (15) days after the member organization becomes aware of any material change in the customer's financial situation.
(d) Agreements to Be Obtained
Within fifteen (15) days after a customer's account has been approved for options transactions, a member organization shall obtain from the customer a written agreement that the account shall be handled in accordance with the Rules of the Exchange and the Rules of the Options Clearing Corporation and that such customer, acting alone or in concert with others, will not violate the position or exercise limits set forth in Rules 704 (Position Limits) and 705 (Exercise Limits).
(e) Uncovered Short Option Accounts
Each member and member organization transacting business with the public in writing uncovered short option contracts shall develop, implement and maintain specific written procedures governing the conduct of such business which shall include, at least, the following:
1. Specific criteria and standards to be used in evaluating the suitability of a customer for writing uncovered short option transactions;
2. Specific procedures for approval of accounts engaged in writing uncovered short option contracts, including written approval of such accounts by a Registered Options Principal;
3. Designation of the Senior Registered Options Principal or the Compliance Registered Options Principal as the person responsible for approving customer accounts which do not meet the specific criteria and standards for writing uncovered short option transactions and for maintaining written records of the reasons for every account so approved;
4. Establishment of specific minimum net equity requirements for initial approval and maintenance of customer accounts writing uncovered short option transactions; and
5. Requirements that customers approved for writing uncovered short options transactions be provided with a special written description of the risks inherent in writing uncovered short option transactions, at or prior to the initial writing of an uncovered short option transaction [See Rule 726(c)].
• • • Supplementary Material: --------------
.10 In fulfilling its obligations pursuant to paragraph (b) of this Rule with respect to options customers who are natural persons, a member organization shall seek to obtain the following information at a minimum (information shall be obtained for all participants in a joint account):
(1) Investment objective (e.g., safety of principal, income, growth, trading profits, speculation.)
(2) Employment status (name of employer, self-employed or retired.)
(3) Estimated annual income from all sources.
(4) Estimated net worth (exclusive of family residence.)
(5) Estimated liquid net worth (cash, securities, other.)
(6) Marital status; number of dependents.
(7) Age.
(8) Investment experience and knowledge (e.g., number of years, size, frequency and types of transactions) for options, stocks and bonds, commodities, other.
In addition, the customer's account records shall contain the following information, if applicable:
a. Source or sources of background and financial information (including estimates) concerning the customer.
b. Discretionary trading authorization: agreement on file, name, relationship to customer and experience of person holding trading authority.
c. Date or dates applicable current Options Disclosure Document(s) furnished to customer in accordance with Rule 726 (Delivery of Options Disclosure Documents and Prospectuses).
d. Nature and types of transactions for which account is approved (e.g., buying, covered writing, uncovered writing, spreading, discretionary transactions).
e. Name of registered principal or employee.
f. Name of Registered Options Principal approving account; date of approval.
g. Dates of verification of currency of account information.
The member organization should consider utilizing a standard account approval form so as to ensure the receipt of all the required information.
.20 Refusal of a customer to provide any of the information called for in Supplementary Material .10 of this Rule shall be so noted on the customer's records at the time the account is opened. Information provided shall be considered together with the other information available in determining whether and to what extent to approve the account for options transactions.
.30 The requirement of paragraph (c) of this Rule for the initial and subsequent verification of customer background and financial information is to be satisfied by sending to the customer the information required in Items (1) through (8) of Supplementary Material .10 above as contained in the member's records and providing the customer with an opportunity to correct or complete the information. The subsequent verification of the customer's financial background may be satisfied by sending to the customer and providing him with an opportunity to verify the information required in Items (1) through (6) of Supplementary Material .10 above. In all cases, absent advice from the customer to the contrary, the information so sent will be deemed to be verified.
.40 For purposes of Rule 721 (Opening of Accounts), Rule 722 (Supervision of Accounts) and Rule 726 (Delivery of Options Disclosure Document and Prospectus) the term writing uncovered short option positions shall include combinations and any other transactions which involve naked writing.
