June 21, 2016
I call them the "Yeah Buts." Those are the explanations frequently offered by stockbrokers when first confronted with any number of allegations about their having engaged in industry misconduct: Yeah, Bill, I did that, but I didn't realize it was a violation and no customer was harmed. Few issues cause more Yeah Buts than when a stockbroker is accused of unauthorized discretion despite having gotten a prior, verbal okay from a client for the very trade at issue. Consider this recent FINRA regulatory settlement.
Case In Point
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, Gregory Edward Barr submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Gregory Edward Barr, Respondent (AWC 2014041373401, June 14, 2016).
The AWC asserts that Barr entered the securities industry in 1984 and was first registered in 1985. By March 2012, Barr was associated with FINRA member firm Deutsche Bank Securities, Inc..
The AWC alleges that about 7 to 10 days before November 21, 2013, Barr discussed the sales of the same stock with four different customer. In apparent response to those conversations, each customer verbally authorized Barr to enter sell order at his discretion in the event that the stock's price decreased.
On November 21, 2013, Barr used his discretion to sell the stock for each of the four customers. At the time he entered the sell orders, Barr had not discussed those sales with each customer subsequent to the above-referenced conversations that had occurred about or week or so previously.
Consequently, the AWC asserts that Barr did not have written authorization from the customers to exercise discretion in their accounts,and the sales failed to comply with the requirements of exercising time and price discretion, which must be undertaken within a single day consistent with Rule 2510(d)(1).Moreover, the AWC asserts that Deutsche Bank had not accepted the customers's accounts as discretionary accounts,
According to online FINRA BrokerCheck records as of June 21, 2016, Deutsche Bank Securities "Discharged" Barr on May 22, 2014, based upon allegations that:
EMPLOYEE ADMITTED EXERCISING DISCRETION IN NON-DISCRETIONARY ACCOUNTS. AS OF THIS FILING, DBSI IS NOT AWARE OF ANY COMPLAINTS BY ITS CUSTOMERS RELATING TO THIS CONDUCT
According to online FINRA BrokerCheck records as of June 21, 2016, Barr submitted this statement in response to his former employer's allegations:
MY CLIENTS CONSENTED TO AND APPROVED THE TRADES IN QUESTION AND DID NOT COMPLAIN OR SUFFER A LOSS. I ACTED IN THEIR BEST INTEREST AND WITH THEIR TACIT APPROVAL AND CONSENT.
FINRA deemed Barr's entry of the cited sell orders to have constituted his exercise of improper discretion because he did not obtain the customers's prior written authorization and, also, he failed to obtain his firm's acceptance of the proposed discretionary accounts in violation of NASD Conduct Rule 2510(b) and FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon Barr a 10-business-day suspension from association with any FINRA member firm in all capacities and a $5,000 fine.
Bill Singer's Comment
Compliments to FINRA on this AWC, which sets out the allegations with sufficient content and context to explain the underlying transactions and the regulatory concerns. On top of that, the fine and suspension are relatively moderate. That being said, I'm not sure that FINRA necessarily needed to impose a $5,000 fine on top of a 10-business-day suspension given the facts but if Barr was happy to accept the sanctions, I defer to his sensibilities. If nothing else, this settlement should alert many stockbrokers as to the pitfalls of exercising oral discretion beyond a one-trade-date horizon.
Reprinted below is FINRA's NASD Conduct Rule 2510: Discretionary Accounts, which imposes a simple compliance regime of prior written authorization by the customer coupled with the firm's written acceptance. Upon placing a duly authorized and approved discretionary trade, a member firm must undertake prompt written approval of each discretionary order; and, further, must frequently review all discretionary accounts to ensure that the transactions are suitable. That's about as straightforward a regulatory proposition as you could imagine.
Note that Rule 2510(d)(1) carves out an exception for Time And Price discretion - T&P comes into play when there's a customer order "for the purchase or sale of a definite amount of a specified security" but for the exercise of time and price discretion by the stockbroker. T&P is an effective order ONLY "until the end of the business day on which the customer granted such discretion . . ." In the old days, there wasn't such an intra-day limit on T&P, which is why the one-business-day limit trips up a number of industry veterans. Note the yellow highlighted sections of FINRA's Discretion Rule:
NASD Conduct Rule 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.