by Bill Singer
Former Raymond James Broker Stumbles With Discretionary Sales
April 23, 2013
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, Michael Corbett Milne submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Michael Corbett Milne, Respondent (AWC 2011026262301, April 19, 2013).
Milne entered the securities industry in 1988 and from 2004
until January 25, 2011, he was associated with Raymond James Financial
Services, Inc. The AWC asserts that Milne had no prior previous record of
formal discipline.
Conditional Order
Shares of an unspecified stock ("XYZ") rose from a March 1,
2010, closing price of $7.75 to a November 10, 2010, closing price $9.32 -
during the spring and summer of that stretch, Milne recommended the purchase of
that security to many of his customers. Contemporaneous with his buy
recommendations, Milne discussed with purchasing clients his approach of taking profits at $10 or
cutting losses on negative market developments.
The AWC asserts that "Milne generally obtained the customers' approval
of this approach;" however, Milne did not obtain written authorization from the
87 customers to exercise discretion in their accounts, or Raymond James' acceptance
of these accounts as discretionary.
Downgrade
On November 11, 2010, Raymond James downgraded XYZ from
"1-Strong Buy" to "3-Market Perform;" and upon learning of
the downgrade that same morning, Milne liquidated XYZ positions in 87 customers'
accounts without generally undertaking prior customer contact before submitting
the tickets. Although the customers had generally given advance approval for
such action, Milne did not obtain written customer authorization or Raymond
James' acceptance for the exercise of his exercise of discretion in effecting
the sales, in alleged violation of NASD Rule 2510(b) and FINRA Rule 2010.
According to online FINRA records as of April 24, 2013, Raymond James "Discharged" Milne on January 25, 2011, based upon allegations of:
UNAUTHORIZED USE OF DISCRETION
In accordance with the terms of the AWC, FINRA imposed upon
Milne a $5,000 fine and a 15-busines-day suspension from association with any
member in all capacities.
Bill Singer's Comment
As best I understand this case, Milne's customers had purchased XYZ shares based upon a contingent sell order that would kick-in upon either the trade price rising to $10 or upon the development of certain negative market events. As such, the customers had given Milne authorization to engage in a form of Time And Price discretion ("T&P"). In reality, the trades were put on with an improper grant of oral discretion that was not properly authorized by Raymond James and that set-up was compounded by the improper exercise of discretion by the stockbroker in liquidating those same positions. In essence, FINRA had Milne comin' and goin'.
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.
(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.