Subscribe to our mailing list

* indicates required







We seek to provide information, insights and direction that may enable the Financial Community to effectively and efficiently operate in a regulatory risk-free environment by curating content from all over the web.


Stay Informed with the latest fanancialish news.




Regulatory Sanctions

Broker Flagged for Exercising Unauthorized Discretion – A ‘Matter of Timing’

December 5, 2017

by Howard Haykin


In October, FINRA reported sanctions against several brokers who apparently exercised unauthorized discretion in client accounts. The sanctions assessed in one of the cases seemed somewhat out-of-line with the "crime." Have a read, and tell me if you agree or disagree.


Ralph Martin agreed to a $10K fine and a one-month suspension to settle FINRA charges that, over a 6-year period, Martin executed discretionary transactions for customers in “Advisory Select” accounts at his member firm in accordance with an agreed-upon strategy and prior oral authorization, but without prior written authorization from those customers or his firm’s approval.


BACKGROUND.    Martin, a resident of Washington, IL, has 32 years’ experience with 2 firms. After working for Princor Financial Services for 29 years (1985 to 2015), Mr. Martin joined Cambridge Investment Research and is still associated with that firm. Martin holds the Series 6 and Series 7 licenses, and he had no prior regulatory disclosures.


FINRA FINDINGS.    In 2008 Martin began using a program made available by Princor for customers called the "Advisory Select" program. Advisory Select accounts were fee-based accounts in which customer funds were invested in accordance with certain “risk models" established by a third-party asset allocation advisor not affiliated with Princor. When establishing advisory select accounts, Martin would meet with customers and select one of the available “risk models." In order to stay in the program, Martin was required to keep a customer's assets in balance with the selected model portfolio.


Martin would speak with his Advisory Select clients periodically regarding their accounts, including a discussion of what securities would have to be bought and sold to keep the account in balance with the risk model selected, and target prices for sales and purchases were agreed upon with the client. The number of Martin's Advisory Select clients grew substantially between 2010 and 2011, and by 2014 Martin had over 300 such clients.


Although firm policies prohibited the exercise of discretion in customer accounts, Martin was under the misunderstanding that he could exercise discretion in an Advisory Select account after discussing a trade with a customer and that discretion was permitted within the context of the Advisory Select accounts as to when the trade would be executed. However, the Advisory Select portfolio agreements stated that the accounts were non-discretionary, and that client consent was required for all securities transactions. Notifications sent to Martin regarding accounts that were "out of drift" with the selected risk models instructed Martin to assist clients with reallocating investments to meet the applicable risk model, and not to reallocate the investments without contacting the customers.


Martin exercised discretion in likely all of his Advisory Select customers' accounts, purchasing and selling securities at targeted prices in order to maintain his customers' assets in balance with the risk model each customer selected. While Martin executed trades in accordance with his discussions with customers, the transactions were not always effected on the same day the discussions occurred. Martin did not have written authorization from these customers to exercise discretion in their accounts and his firm did not approve these accounts for discretionary trading.


FINANCIALISH TAKE AWAYS.    As of 12/31/14, after 29 years of service, Princor terminated its association with Ralph Martin. Here are the statements provided by the firm and the broker.


FIRM ALLEGATIONS:   Princor requires that its investment advisor representatives obtain client approval in advance of each purchase and sales transactions. Princor determined that Mr Martin had placed trades for advisory accounts based on investment parameters he had discussed with clients, but without obtaining specific client approval in advance of specific transactions. Mr Martin's preferred business model is better suited to a firm that allows discretionary trading.


BROKER COMMENT:   RR began conducting business in the above manner in 2008. He continued conducting business in this manner until July 2014. B/D undertook examinations of RR office at least twice a year during this period of time. B/D did not indicate that RR was improperly taking discretionary trading authority in his clients' accounts. B/D first made this claim in July 2014, during a compliance meeting. For the first time, B/D advised RR that he must have a conversation with clients on the day of a trade discussing the specifics. B/D further advised trading had to occur within 24 hours of that. Since this time RR has followed this request. B/D and RR mutually agreed to terminate relationship.


So, Martin loses his job, gets a 1-month suspension and has to pay a $10K fine. Tough medicine for a broker who spent 29 years with a firm, had no prior regulatory disclosures and just 3 customer disputes - 2 settled, 1 closed without action. While Martin appeared to do right by his expanding customer base, he was snared by FINRA's "obligation" to mete out some sort of sanction.


Yet, taking into account Martin's long and relatively spotless financial services record, and giving weight to the explanation for his apparent violations - see Martin's 'Broker Comment' - I would have advocated that Martin receive no more than a "slap on the wrist."  


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

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2014042877101.