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Regulatory Sanctions

WWW: Another Unauthorized Discretion Sanction - And How it Could Have Been Avoided

April 11, 2017

[Photo: DunHulk (Duncan Hull) / Flickr]


Looking out for the best interests of one’s customers is admirable, but not a justification for taking short cuts. Like effecting securities transactions without having proper discretionary authority. It’s a mistake that simply exposes everyone – the firm, the broker and, yes, even the customers - to unnecessary risks. But, of course that doesn’t stop brokers from trying. 


Kai Chen of San Francisco, CA, agreed to a $10K fine and a 2-month suspension to settle FINRA charges that he used unauthorized discretion to effect customer security transactions in IPO shares without first confirming the trades with customers.


ABOUT THE RESPONDENT.    Chen joined the securities industry in 2001, starting as a registered rep with Donaldson, Lufkin & Jenrette. When DLJ was acquired by Credit Suisse in 2003, Chen stayed on board and remained with Credit Suisse until he was U5’d in 2013. He then was associated with SF Sentry Securities until 2015. He presently is not registered. Chen has no disciplinary history prior to this case.


FINRA’S SPECIFIC FINDINGS.    From 1/8/13 to 6/28/13, while registered with Credit Suisse Securities as a registered rep, Chen violated the firm’s policy pertaining to IPOs and to using unauthorized discretion in customer accounts. Credit Suisse required its personnel to receive verbal confirmation from customers for indications of interest and the actual allocation of Syndicate Shares to client accounts. However, Chen had informal (verbal) arrangements with customers whereby he would routinely record indications of interest in IPOs, accept allocations from his member firm, place shares into the customer accounts and, at times, sell the shares out of the customers’ accounts all without first obtaining the customers’ verbal confirmations.


  • Chen effected 137 customer security transactions in shares of IPOs: 
  • … 99 IPO share purchases for 18 customer accounts in connection with 38 different IPOs;
  • … 38 sales of IPO share for 13 customer accounts in connection with 18 different IPOs.


TAKE AWAY.    As we mentioned in Financialish 4/10 posting, it may have been prudent for this broker to have each client execute a written term sheet detailing the business arrangement, and to phone each client on the day he planned to submit the indications of interest and the subsequent purchases and flip sales of IPO shares. With client permission in hand, Chen would not have violated just be dealing with a solicited” transaction.


This case was reported in FINRA Disciplinary Actions for February 2017.

For details on this case, go to … FINRA Disciplinary Actions Online, and refer to Case #2013039280301.