For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Enrique Guido Pflucker a/k/a "Henry Lucas" submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of , Enrique Guido Pflucker a/k/a "Henry Lucas",Respondent (AWC, 2010025736701, July 5, 2012).
Pflucker first became registered in 2008 as a General Securities Representative ("GSR") and is presently registered with a FINRA member firm. During the relevant period of:
- July 16, 2009 through November 2, 2009, he was registered with PHD Capital; and
- July 27, 2010 through March 11,2011, with Rockwell Global Capital LLC.
The AWC asserts that Pflucker had no prior disciplinary history.
According to the AWC, between
- September 2009 and October 2009, Pflucker utilized time and price discretion for a PHD customer; and
- September 2010 and March 2011, he utilized T&P for another customer at Rockwell.
FINRA alleged that the T&P discretion was utilized beyond the end of the applicable business day during which customers may grant such limited discretion and neither customer had provided the registered person with prior written authorization that extended his discretionary power over their account (and no such extension was submitted to or authorized by either FINRA member firm).
The AWC alleged that Pflucker's improper exercise of T&P discretion constituted a violation of NASD Conduct Rule 2510: Discretionary Accounts and FINRA Rule 2010; and, in accordance with the terms of the AWC, FINRA imposed sanctions upon him of a $2,500 fine and a 10 business-day suspension from association in any capacity with any FINRA member firm
In the old days, brokers were permitted quite a bit of latitude when exercising T&P; however, a few years ago, the rules changes and such discretion was curtailed. Sadly, either because of a misunderstanding of the limits of T&P or blatant disregard, this violation persists. Registered persons at small firms are just as likely to get tripped up by exceeding the one-trading-day limit as folks at Merrill Lynch, Wells Fargo, JP Morgan, Morgan Stanley, orUBS. This is one of those regulatory stumbling blocks that manages to get in the way of many brokers.
Since the nuances of exercising trading discretion continue to flummox far too many registered persons, how about we go directly to the rule (and especially note the red-highlighted text):
NASD Conduct 2510. Discretionary Accounts
(a) Excessive Transactions
No member shall effect with or for any customer's account in respect to which such member or his agent or employee is vested with any discretionary power any transactions of purchase or sale which are excessive in size or frequency in view of the financial resources and character of such account.
(b) Authorization and Acceptance of Account
No member or registered representative shall exercise any discretionary power in a customer's account unless such customer has given prior written authorization to a stated individual or individuals and the account has been accepted by the member, as evidenced in writing by the member or the partner, officer or manager, duly designated by the member, in accordance with Rule 3010.
(c) Approval and Review of Transactions
The member or the person duly designated shall approve promptly in writing each discretionary order entered and shall review all discretionary accounts at frequent intervals in order to detect and prevent transactions which are excessive in size or frequency in view of the financial resources and character of the account.
This Rule shall not apply to:
(1) discretion as to the price at which or the time when an order given by a customer for the purchase or sale of a definite amount of a specified security shall be executed, except that the authority to exercise time and price discretion will be considered to be in effect only until the end of the business day on which the customer granted such discretion, absent a specific, written contrary indication signed and dated by the customer. This limitation shall not apply to time and price discretion exercised in an institutional account, as defined in Rule 3110(c)(4), pursuant to valid Good-Till-Cancelled instructions issued on a "not-held" basis. Any exercise of time and price discretion must be reflected on the order ticket;
(2) bulk exchanges at net asset value of money market mutual funds ("funds") utilizing negative response letters provided:
(A) The bulk exchange is limited to situations involving mergers and acquisitions of funds, changes of clearing members and exchanges of funds used in sweep accounts;
(B) The negative response letter contains a tabular comparison of the nature and amount of the fees charged by each fund;
(C) The negative response letter contains a comparative description of the investment objectives of each fund and a prospectus of the fund to be purchased; and
(D) The negative response feature will not be activated until at least 30 days after the date on which the letter was mailed
So, what's the takeaway here? Frankly, it's fairly simple. A broker cannot exercise trading discretion for a retail customer absent that customer's prior written authorization. Once you have that authorization in hand, you have to take it to a duly designated individual at your member firm and get a written acceptance.
Now it gets a tad more complicated. You don't need to have a prior-written-authorization/written-firm-acceptance for the exercise of only time and price discretion for a retail customer provided that such a discretionary grant was given by your customer and is only effective through the end of the business day on which given.