Fidelity Brokerage Services has been sued by Massachusetts regulators for alleged "unethical and dishonest" conduct in its supervision of retail brokerage customer applications for options and margins.

Regulators allege FBS failed to conduct proper due diligence in its processing of the client applications.

"FBS engaged in facially unethical and dishonest conduct in the securities business by recklessly failing to make a good-faith effort to review options and margin applications submitted by individual retail investors," the state Securities Division said in a complaint filed last week. "As a result of FBS’s halfhearted and lackadaisical attitude toward safeguarding, the firm granted options and margin approval to Massachusetts customers in violation of Massachusetts securities laws."

According to the complaint, business has been brisk at Fidelity, with an additional 697,000 new brokerage accounts opened by customers age 35 or younger in the second quarter of 2021 alone. Some of these customers went on to apply for options or margins accounts even though they lacked the income, job title or experience that was required, the complaint said.

The complaint also noted that for all of Fidelity’s 30 million retail customers, there were only 51 broker-dealer agents reviewing the options and margin applications, many of whom were not properly trained or monitored. And while as of July 2016, Fidelity instructed options applications reviewers through an addition to its policy to “be alert to a customer initiating a pattern or reapplying for options approval by frequently increasing his or her financial or experience information in order to meet the approval standards,” this was never trained, enforced or referred to afterward, the complaint said.

A spokesperson at Fidelity Brokerage Services (FBS) said via email that the company denied the accusations.

“We disagree with the characterizations of FBS contained in the complaint, believe that we have effective due diligence processes, and look forward to addressing and resolving this matter through the administrative process,” he wrote. “As this is an ongoing Massachusetts Securities Division matter, we feel it is not appropriate to comment further at this time.”

In the complaint, state regulators cited the example of one client who submitted four applications for options trading within a month. His final, successful application was granted after he changed his annual income from between $20,001 and $50,000 to $100,001 or more in one day, with no change in occupation (he was a high school graduate working at an automobile oil change station at the time). His liquid net worth also had changed from between $30,001 and $50,000 to between $100,001 and $500,000 in a single day, the complaint detailed.

Another client made 13 applications in less than a month, with some success coming after he changed his job title from “Scientist” to “CEO,” according to the complaint.

“FBS created an options and margin approval process that was easy for retail brokerage customers to outsmart,” the complaint said.