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, James Harman McNeill submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of James Harman McNeill, Respondent (AWC 2012030927101, March 12, 2013).
McNeill first became registered with FINRA in 1983, and during the relevant time from June 1, 2009 through January 6, 2012, McNeill was registered with Morgan Stanley Smith Barney ("MSSB"). The AWC asserts that McNeill had no prior formal disciplinary history with the Securities and Exchange Commission, any state securities regulator, or any self-regulatory organization.
In November 2011, McNeill allegedly exercised discretionary power in the accounts of five MSSB customers. At the time of these transactions, McNeill lacked prior written authorization to engage in discretionary trading from both his customers and MSSB, in apparent violation of NASD Conduct Rule 2510(b) and FINRA Rule 2010.
On November 30, 2011, McNeill entered six purchase orders for six customers for a so-called non-traditional Exchange Traded Fund ("ETF"), and he marked the tickets as "unsolicited," when, to the contrary, the AWC alleges that they were "solicited." The AWC alleges that the erroneous designations caused MSSB's books and records to be inaccurate in violation of NASD Conduct Rule 3110 and FINRA Rule 2010.
In accordance with the terms of the AWC, FINRA imposed upon McNeill a $15,000 fine and a 9-month suspension from associating with any FINRA member firm in any and all capacities
In the scope of things, entering five discretionary orders and mis-marking six orders isn't exactly the stuff of headlines these days. Whether McNeill's explanation was one of well-intentioned but perhaps misguided customer service or simply the byproduct of fast-moving market pressures, doesn't matter because he's getting hit with a fine and a multi-month suspension. That's the message that FINRA wants to send. That's the message that registered representatives should comprehend.
Whatever your rationale, if you're going to engage in non-compliant discretion in a customer's account, your compliance department and industry regulators may not give a damn as to your reasons. And if you add into the mix a few solicited trades checked off as solicited, well, the sanctions in this case speak to that far better than any explanations I can offer.
The temptations of exercising discretion and marking solicited trades as unsolicited frequently bedevil stockbrokers. Over the years, I have heard many explanations and excuses from my law firm's clients as to why they engaged in such forbidden behavior. In some instances, it was nothing more than a misunderstanding: a belief that written discretionary powers were on file. Other times, it was an inadvertent goof: a quick checkmark in the "UNSOL" rather than "SOL" box.
How does one explain the reason for engaging in unauthorized discretion? More often than not, the motivation was time pressure when a stockbroker couldn't get a hold of a client and figured, what the hell, the timing is right to buy this stock and we have been discussing the possibility. As to mis-marked tickets, hey, it happens. Frankly, Wall Street's regulators and rules are at their most absurd and moronic when they wag fingers at misconduct that is little more than an inadvertent example of human error not prompted by financial considerations. Is there much that we can do to avoid human error in these high-tech days? Probably not. You want to remove the erasers from all pencils and pull out the "DELETE" key on your computer?
On the other hand, not every example of unauthorized trading or mis-marked tickets can be ascribed to time pressure and fatigue. Frequently, bad folks are simply up to no good. Similarly, some folks just won't listen to reason and no matter how often you warn certain registered persons to avoid shortcuts and go by the book, they figure that it's their lucky day and who's gonna know and who's gonna find out - and that's exactly when bad goes to worse.
Reprinted below is FINRA's discretionary rule [Ed: highlights added] for all those men and women on the Street who hear the Sirens' call and lose the will to resist. Note that the regulatory scheme is one of authorization by the customer and acceptance by the member firm. That's about as straightforward and simple a two-step proposition as you could imagine.
Note that Rule 2510(d)(1) carves out an exception for Time And Pricediscretion - the old 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 T&P 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.
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.