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Regulatory Sanctions

WWW: Verbal Discretionary Authority Leads to Fine, Suspension, Lost Job

April 10, 2017


Few firms permit their registered reps to exercise discretion in client accounts. Still, that hasn’t stopped some brokers from seeking a client’s verbal discretionary authority, then trading on that authority in the client’s account. While those brokers may seem to have their clients’ best interests in mind, they are risking a fine, a suspension and a terminated job if and when they are caught.


Ronal Paull III, of Scott Township, PA, agreed to a $5K fine and a 10-day suspension to settle FINRA charges he exercised discretion in customers’ variable annuity (“V/A”) accounts without proper authorization. He also lost his job.


ABOUT THE RESPONDENT.    Paull entered the securities industry in 1997. Prior to working for LPL Financial from 2012 to 2015, Paull had been associated with the following firms: (i) Franklin Financial Servies; (ii) Sunamerica Securites; (iii) AIG Financial Advisors; and, (iv) National Planning Corp. Paull held Series 6 (Investment Company Products/Variable Contracts) and Series 7 (General Securities) licenses. Since being U5’d by LPL in 2015, Paull has worked for Cambridge Investment Research.


FINRA’S SPECIFIC FINDINGS.    While at LPL, Paull sold and serviced VA accounts for approximately 80 of his customers. In July 2014, Paull began contacting these customers and obtaining their verbal permission to discretionarily rebalance their VA’s separate account on a quarterly basis for a period of one year. By February 2015, 71 customers had agreed to Paull's request, though in each case, Paull failed to obtain written authorization from the customer and LPL had not accepted the customers' accounts as discretionary accounts.


From September 2014 through June 2015, Paull exercised discretion when rebalancing V/A accounts for customers that had verbally consented to this arrangement. LPL was unaware of Paull's conduct until 6/29/15 when, during an internal branch exam of Paull's office, Paull voluntarily disclosed to LPL his practice of obtaining standing, verbal authorization to discretionarily rebalance customers' V/A sub-accounts. After learning of Paull' s activity, the Firm instructed him to stop placing discretionary trades and terminated his registration.


TAKE AWAY.    First, it may have been prudent for this broker to have each client execute a written term sheet detailing the business arrangement - if nothing else than to clarify the purpose and methodology for rebalancing. Next, he probably would have avoid the charge of exercising unauthorized discretion had he phoned each client on the day he planned to rebalance the accounts. With client permission in hand, we would 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 #2015046621101.