A Stockbroker's Indiscretion Of Discretion

October 10, 2012

Gary Darling, Baseball umpire

Before you argue the rules, know 'em

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 Vila submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Enrique Vila, Respondent (AWC 2012031465801, October 8, 2012).

Vila entered the securities industry on August 24, 1998, as a General Securities Representative of Merrill Lynch, Pierce, Fenner & Smith Incorporated, and since March 15, 2012, Vila has been registered with another firm. The AWC asserts that he had not previously been the subject of a formal disciplinary action by any regulatory body,

During the period on or about January 8, 2009 through on or about November 29, 2011, the AWC alleged that Vila exercised discretion involving numerous trades in a customer's account. Although the client had previously authorized Vila to use discretion, the AWC alleges that the stockbroker failed to obtain the customer's required written authorization and did not obtain the brokerage firm's acceptance of the use of discretion in the subject customer account. Vila executed numerous trades in the customer's account during this time period.

In accordance with the terms of the AWC, FINRA imposed upon Vila a $5,000 fine and a 15-business-day suspension from association with any member in all capacities.

Bill Singers Comment

Okay, so now you know. Even if the customers says "It's okay - exercise discretion," that's not enough under the rules.  You need to get it in writing from the customer (and before you enter the trade) and you need to get your firm's written approval.

Among the bedrock of Wall Street violations is unauthorized discretion; and in Vila we have a very common variation of that theme; a stockbroker's use of improperly authorized and unapproved discretion.  Yeah, there's a nuance there but it's an important consideration that stockbrokers misunderstand at that peril. And don't think that such a misunderstanding is a rare miscue.  It's not.  The failure to obtain properly authorized and approved account discretion plagues registered persons at indie/regional firms as well as the big boys such as Merrill, UBS, JP Morgan, Morgan Stanley, and Wells Fargo.

Below, I've set forth the full-text version of the rule. Read it!

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.
(d) Exceptions
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.