October 4, 2013
The Bible says that there is a time for everything. FINRA says that there is a Time & Price order subject to limitations and restrictions. Frankly, it's often easier to understand the old biblical language than regulatory rigmarole.
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, Thomas Q. Tang submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Thomas Q. Tang, Respondent (AWC 2011028861501, September 26, 2013).
Tang was first registered in 2000 with a FINRA member firm that is oddly referred to in this AWC only by the initials "EJ." The AWC asserts that Tang had no prior relevant disciplinary history.
SIDE BAR: Online FINRA records as of October 3, 2013, disclose that Tang was employed by member firm Edward Jones ("EJ"). Why that is not set forth in the AWC is puzzling but may be nothing more than an editing oversight.
In November 2010, EJ issued a Letter of Education (which Tang purportedly acknowledged understanding) concerning Tang's failure to confirm on the date or execution a sell order previously received from one customer. The AWC asserts that the Letter of Education stated:
[EJ] does not permit discretionary accounts. It should also be noted that the firm does not allow "time and price" discretion. Specific authorization must be obtained from the client before any order is placed. The client must choose the security, the price, the amount and the timing of the order.
. . .
[T]he financial advisor must speak to the client (or authorized person) and get directions directly from them. This conversation must occur on the day the order is entered. Getting the client's directions the day before, week before, via email, accepting an order relayed through your BOA, etc., does not satisfy this requirement.
Check In The Mail
Following his receipt of the 2010 Letter of Education, between January and May 2011, Tang allegedly exercised improper time and price discretion in four instances involving four customer accounts.
In two instances, the AWC alleges that Tang received a buy order from two separate customers subject to an agreement to mail in a check for each purchase. Following his receipt of the covering checks, Tang executed the buy orders, however, he purportedly did not speak to the customer on the day of the purchase.
Sell And Buy
In a third instance, Tang allegedly discussed with a customer the purchase of a mutual fund financed via sale proceeds from another fund. Having completed the sale end of the anticipated sell-and-buy, Tang purportedly executed the buy side without speaking with the customer on the day of the purchase.
Finally, in a fourth instance, a customer discussed with Tang her desire to liquidate her brokerage account in order to use the proceeds to return to school. The client and broker apparently agreed she would take a few days to think over her account liquidation, and subsequently, she called Tang's assistant and gave the go-ahead. The AWC alleges that without speaking further to the customer on the day of the liquidating sales, Tang went ahead with the account's liquidation.
According to online FINRA records as of October 4, 2013, Edward Jones discharged Tang on July 14, 2011, based upon allegations that:
TANG'S EMPLOYMENT WAS TERMINATED AFTER HE ADMITTED TO EXERCISING DISCRETION IN CLIENT ACCOUNTS AFTER HE HAD BEEN PREVIOUSLY WARNED BY THE FIRM FOR OTHER COMPLIANCE ISSUES.
The AWC asserts that Tang did not have written authorization to exercise discretion over the four accounts described above. Additionally, the AWC asserts that EJ, which did not permit discretion, had not designated any of those accounts as discretionary. Such conduct was deemed by the self-regulatory organization to constitute violations of NASD Rule 2510 and FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon Tang a $5,000 fine and a five-business day suspension from associating with a FINRA member firm in any capacity.
Bill Singer's Comment
For starters, Tang proposed a settlement with FINRA and signed off on the AWC. Frankly, the dollars and time are relatively light -- most likely less than what a fine attorney such as I would have charged -- so maybe it's all for the best. Still, the facts don't suggest a particularly egregious bit of "discretion," but, then again, the sanctions sort of enforce that conclusion.
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.