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Broker Barred for Exercising Discretion on Outside Brokerage Accounts
by Howard Haykin
A broker with Northwestern Mutual Investment Services agreed to be barred from the industry to settle FINRA charges that he and a non-registered 3rd party (his father) exercised discretionary authority to execute securities transactions in accounts held away from the broker's member firm.
NASD Rule 3050 requires that a person associated with a member, prior to opening an account with a different member shall notify both the employer member and the executing member, in writing, of his or her association with the employer member. Under Rule 3050(e), the requirement applies to "an account or order in which an associated person has a financial interest or with respect to which such person has discretionary authority."'
FINRA FINDINGS. Between November 2015 through April 2, 2017 (the "Relevant Period"), a broker – with only 5 years’ experience - convinced 98 Northwest Mutual customers and other individuals, who were not family members (“Investors”), to open 94 accounts ("Outside Accounts") at another broker-dealer (the "Executing Firm" or "Ameritrade"). The Executing Firm provided an online trading platform through which the Investors could effect transactions.
- The broker assisted the Investors in opening the Outside Accounts.
- The broker helped create user names and passwords that he and his father retained (so they could effect options and other securities transactions in the Outside Accounts).
- At the broker’s recommendation, the Investors verbally gave him and/or his father discretionary authority over the Outside Accounts.
During the 1-1/2 year period, the broker and his father executed some 5,931 transactions (on average, 63 trades per account) with an aggregate trade value (buy and sell) of more than $9.6 million for the Investors in the Outside Accounts. For his services, the broker received $34,000 in funds from the Investors.
Additional Violative Conduct. In addition to engaging in undisclosed private securities transactions and exercising undisclosed discretion away from his member firm, the broker:
- Falsely answered on a firm compliance questionnaire that he did not hold trading authority for any account "held at NMIS or elsewhere."
- Never told Ameritrade that he was associated with another broker-dealer.
- Impersonated investors on 10 phone calls by misrepresenting to Ameritrade that he himself was one of the Investors. (in violation of FINRA Rule 2010)
This case was reported in FINRA Disciplinary Actions for May 2018.
For details on this case, go to ... FINRA Disciplinary Actions Online, and refer to Case #2017054247001.