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, John K. Woch submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of John K. Woch, Respondent (AWC 2010023334501, April 2, 2013).
Woch entered the securities industry in February 1980, and during the relevant time of 2003 through June 2010, he was registered with FINRA member firm Wells Fargo Advisors, LLC (including its predecessor in interest Wachovia Securities, LLC); and, thereafter, he registered with another FINRA member firm. The AWC asserts that Woch had no prior relevant disciplinary history with FINRA, the Securities Exchange Commission, any state securities regulator or any other self-regulatory organization.
The AWC alleges that Woch had recommended to at least eight of his customers the purchase of shares of an unnamed pharmaceutical company, which had a drug awaiting final Food And Drug Administration ("FDA") approval. According to the AWC, Woch's customers had purchased the pharma shares with the understanding that they would be sold immediately upon FDA approval.
On April 29, 2010, Woch was out of town when the FDA announced its approval of the drug, and the AWC asserts that Woch could not reach all of his customers. On April 30th, consistent with previous customer discussions, Woch sold shares of the pharmaceutical company for seven of his customers.
SIDE BAR: My online research indicates that on April 29, 2010, the FDA approved PROVENGE, a drug for advanced prostate cancer, for manufacture and sale by the Dendreon Corporation.
Woch acknowledged that his sales of the shares were not consistent with his firm's discretionary trading policies; and he conceded that he had failed to secure his firm's prior written approval in order to exercise the discretion involved in the sales. Moreover, the AWC asserts that a few months before the subject sales, Wells Fargo had notified Woch about some issue "regarding exercising discretion without authority.
In accordance with the terms of the AWC, FINRA imposed upon Woch a $5,000 fine and a five-business-day suspension from association with any FINRA registered firm in any capacity.
As best I understand this case (replete with some inferences), Woch's customers had purchased Dendreon shares based upon an understanding that in the event the FDA approved PROVENGE, that the shares would be promptly sold into favorable market demand following the announcement. As such, the customers had given Woch authorization to engage in Time And Price discretion ("T&P"), but as more fully explained below, that too was regulatorily deficient.
Woch had something akin to oral authorization to enter sell orders conditioned upon FDA approval, but those orders constituted a grant to the stockbroker of discretion, which needed to be in writing and approved by his firm (which was not what transpired). Added into this mix was some prior tiff between the Wells Fargo and Woch over prior allegations involving unauthorized discretion. A prior warning followed by similar non-compliant conduct often spells trouble - as seems to have been proven out by FINRA's subsequent investigation and settlement.
Reprinted below is FINRA's Discretionary Rule 2510, which relies upon a fairly simple regulatory scheme of prior written authorization by the customer coupled with the firm's written acceptance; and prompt written approval of each discretionary order 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 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.
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.