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by Bill Singer

A Family Affair In FINRA Discretion Settlement

May 22, 2013

You might not think it would be a big deal for a registered person to handle the brokerage account of a family member -- but, then again, not a lot of Wall Street regulation is intuitive, and this is one of those issues that trips up many industry participants.  In a recent case involving a former Schwab broker, he wound up on the wrong side of FINRA when he was found to have exercised trading discretion in a family member's account.

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, Jonathan A. Browder submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Jonathan A. Browder, Respondent (AWC 2012032685601, May 13, 2013).

From December 2007 through May 23, 2012, Browder was registered with Charles Schwab & Co., Inc. The AWC asserts that he had no prior relevant disciplinary history.

Schwab Policy

During the times relevant to the AWC, Schwab prohibited registered representatives from exercising discretion in a customer's account; however, a rep could hold a power of attorney ("POA") over an immediate family member's account provided that the POA was pre-approved by the firm and limited to circumstances where the rep demonstrated that the family member was experiencing an immediate physical or mental hardship.

Oops

The AWC alleges that from June 2009 through May 2010, Browder allegedly  exercised discretion in a family member's Scwhab securities account without having a POA, and apparently without having secured the requisite prior firm approval. There is no suggestion in the AWC, either way, as to the immediate physical or mental status of the family member.

The AWC deemed Browder's conduct in violation of NASD Rule 2510(b) and FINRA Rule 2010; and in accordance with the terms of the AWC, FINRA imposed upon Browder a $5,000 fine and a 30-business-day suspension from association with any FINRA member firm. 

Bill Singer's Comment

In my BrokeAndBroker Blog I often criticize regulators, particularly FINRA, for not providing what I characterize as sufficient "content and context" in many regulatory pronouncements.  My belief is that regulatory settlements and hearing decisions provide a regulator with the opportunity to educate the industry as to best practices and to warn the public about improper conduct.  Consequently, the lack of details and rationale often frustrates the purpose of publishing regulatory settlements and decisions.

In Browder, I believe that FINRA has failed in its mission to provide sufficient context and content.  Based upon my research of this case, I offer you this additional background and ask if you don't feel that it puts a slightly different -- and significantly worse -- twist on the presentation of the conduct in this AWC.  According to online FINRA documents as of May 21, 2013, Schwab alleged as the reason for Browder's May 1, 2012, discharge:

A FIRM CLIENT, WHO IS MR. BROWDER'S MOTHER, NOTIFIED THE FIRM THAT ONLINE TRADES IN HER ACCOUNT IN 2009 AND 2010 WERE NOT ENTERED OR AUTHORIZED BY HER. THE FIRM'S REVIEW OF THE MATTER CONCLUDED THAT THE ORDERS WERE LIKELY ENTERED BY MR. BROWDER

Inexplicably missing from the AWC were the facts that
  • the "family member" was Browder's mother;
  • she had complained about unauthorized trading in her account over a two-year span; and
  • Schwab had concluded that the cited trades were "likely" entered by Browder. 
For those of you unfamiliar with the cited rule, here it is in full-text:

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.

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