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Regulatory Sanctions

Discretionary Authority – Timing Matters

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, the brokers received the customers’ verbal (but not written) authorization to purchase or sell a specified security or securities, but then executed the transactions one or more days later. That, according to FINRA, was a “No-No.”  As noted below, FINRA offers at least one exception for the intraday exercise of discretion.


Here are the relevant facts and circumstances for each of the 7 disciplinary actions cited for “bad timing.”

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


Ameriprise Broker ($7.5K fine; 45-day suspension) … used discretion to liquidate positions in 6 different securities with a total principal amount of approximately $20,000, on behalf of the customer, who was a senior investor. Although customer had authorized the broker to execute these liquidations in prior discussions, the broker failed to speak with the customer on the day he liquidated the positions to confirm the customer’s authorization to make these sales. (FINRA Case #2015046329201)


Forsyth Securities Broker ($5K fine; 6-month suspension) … placed trades in a customer’s accounts pursuant to an agreed-upon investment strategy that involved the regular purchase and sale of reverse-convertible notes for the customer’s accounts, and the broker executed the transactions consistent with that strategy. However, broker alone determined when and at what price to affect these transactions, using his discretion to place them without consulting the customer on the day each transaction took place. Broker placed other ‘discretionary’ trades that were not part of the agreed-upon strategy.  (FINRA Case #2015048133101)


Oppenheimer & Co. Broker ($10K fine; 2-month suspension, $3K restitution to a customer) …  failed to execute ‘discretionary’ trades before the end of a business day on which time and price discretion had been given. Broker also executed transactions in another customer’s account without prior authorization - customer was out of the country at the time.  (FINRA Case #2015048159201)


Raymond James Broker ($5K fine; 20-day suspension) …  had discussed making these purchases with his customers prior to the day he executed each transaction, but broker failed to contact his customers to obtain their authorization to go forward with each transaction on the same days the transactions took place.  (FINRA Case #2017053370801)


Edward Jones Broker ($5K fine; 10-day suspension) …  received authorization from customer to effect a purchase, but order was not entered until 2 or 3 weeks later.  (FINRA Case #2016051642201)


Morgan Stanley Broker ($10K fine, 60-day suspension, $1.6K disgorgement of commissions) … was told by customer that he/she would like to invest in certain stocks. Broker did not get customer’s authorization before executing each of the transactions and, while he essentially bought the stocks requested by customer, he did so in a way that generated excess commissions - $3,539 on $37,194 of capital traded.  (FINRA Case #2017053126201)


Morgan Stanley Broker ($2.5K fine; 10-day suspension) …  exercised discretion in customers’ accounts pursuant to authority from the customers to maintain a certain asset allocation in the accounts and to follow certain model portfolio investment strategies. While broker discussed the trades with customers, on many occasions he did not have discussions with the customers on the day on which the trades were executed.  (FINRA Case #2016051154701)


While NASD Rule 2510(b) ...  states that registered representatives shall not exercise discretion "unless such customer has given prior written authorization, Rule 2510(d)(1) ... provides an exception for the intraday exercise of discretion to execute an order given by a customer for the purchase or sale of a definite amount of a specific security.

The authority to exercise discretion pursuant to this exception is effective only until the end of the business day on which the customer granted such discretion and the order ticket must indicate that time and price discretion were used.