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Regulatory Sanctions

Discretionary Authority – A Broker’s Actions Speak Louder Than a Customer‘s Word

March 21, 2018
FINRA Disciplinary Actions for December 2017 through March 2018 include 25 cases in which brokers are cited for exercising “unauthorized discretion” in customer accounts. In seven (7) of those cases, brokers received their customers’ oral or verbal (but not written) permission to use ongoing discretion in their accounts - one for as long as 3-1/2 years. That's a "No-No" to FINRA, especially when broker-dealers had not accepted the account(s) as discretionary.


Here are capsule summaries for each of the 7 disciplinary actions that fit the above profile.

[For case details, click on ... FINRA Disciplinary Actions Online, and enter the Respective Case #.]


Saxony Securities Broker ($5K fine; 15-day suspension) …  executed discretionary transactions (for 3-1/2 years) in accounts pursuant to her customer's prior verbal authorization, but without written authorization from that customer or written approval from her member firm.  (FINRA Case #2015047306901)


WFG Investments Broker ($7.5K fine; 20-day suspension) …  used discretion to place trades (for 4 months) in customers' accounts based on verbal permission from customers to use discretion in their accounts. Customers' authorizations were not in writing and the firm had not accepted the accounts as discretionary.  (FINRA Case #2015047070601)


Wells Fargo Clearing Services Broker ($5K fine; 20-day suspension) …  placed approximately 100 securities transactions (over a 9-month period) in 5 customers’ accounts without first communicating with the customers about each transaction. Permissions from customers were oral and not written, and broker's member firm had not accepted the accounts as discretionary.  (FINRA Case #2016051173901)


Stifel, Nicolaus & Company Broker ($7.5K fine; 15-day suspension) …  improperly used discretion to place 27 trades (over a 13-month period) in a customer’s account, pursuant to that customer's verbal permission for broker to use discretion. Customer's authorization was not in writing and his member firm had not accepted the customer’s account as discretionary.  (FINRA Case #2017053155601)


LPL Financial Broker ($5K fine; 20-day suspension) …  exercised discretion (for 2 years) in the accounts of customers without having obtained customers’ prior written authorization and without his member firm having accepted the accounts for discretionary trading.  (FINRA Case #2015044696201)


UBS Financial Services Broker ($5K fine; 15-day suspension) …  executed 39 discretionary transactions (over a 9-month period) in 13 customers’ accounts without having obtained customers' prior written authorization, and without his member firm having accepted the accounts as discretionary.  (FINRA Case #2016049409001)


Aegis Capital Broker ($5K fine; 15-day suspension) …  exercised several hundred discretionary transactions (over 1 year) in 4 customer accounts based on oral authorizations. Customer authorizations were not in writing, and broker's member firm had not given its written approval of the accounts for discretionary trading. Broker also executed transactions without speaking to each customer before execution on the day of the transaction.  (FINRA Case #2017052696501)


FINANCIALISH TAKE AWAY.   Here's an interesting observation - brokers who exercised discretionary authority based on verbal or oral permission from customers - whether it was for a single transaction or for years of transactions - received similar FINRA sanctions. Fines ranged from $2,500 to $7,500, while suspensions ranged from 10 to 20 days.

[See the nearby Financialish post, "Discretionary Authority – Timing Matters.]


WHY IS THAT? Perhaps it's because FINRA believes that all such actions, regardless of duration, similarly violated FINRA rules and most firms' policies.


  • In some ways that makes sense, in that these violations, regardless of duration, had the presumed support of firm customers - even if they were not aware that exercising discretion violated industry rules and firm policies.  


  • In other ways it doesn't make sense because I'd like to think that FINRA has a valid grading system for assessing sanctions. Committing unauthorized discretion of a limited number of transactions just doesn't seem the same as exercising unauthorized discretion over 2 or 3 years. 


  • Perhaps the explanation lies in the fact that FINRA is only mildly concerned with such violations and therefore metes out that approximate its minimum levels of sanctions - regardless of duration. 


So, perhaps the take away is ... if you're a broker who gets a customer's verbal permission to exercise discretionary authority over that customer's account(s), why not try to go "whole hog" with that customer by getting authorization to transact ongoing discretionary securities transactions. However, don't get greedy and seek "full discretionary" authority, which would entail authority to disseminate funds out of the account. That would be 'crossing the line'.