Staying on top of new industry rules and regulations is one of the greatest challenges facing registered reps and their supervisors these days. Overnight, long-established practices become violations because of an incomprehensible subparagraph to an innocuous subsection of an amended rule. Tough! The regulators will still impose the fine and suspension.
Case In Point
Without admitting or denying the findings but consenting to the sanctions, Philip Craig Albrecht entered into an Acceptance, Waiver and Consent (AWC) settlement with the Financial Industry Regulatory Authority (FINRA) that found he had engaged in unauthorized discretion when effecting trades for customers “without the customers' contemporaneous prior knowledge and consent” (the trades occurred one and two months after the orders were placed). Albrecht was fined $5,000 and suspended in all capacities for 10 business days. (FINRA AWC/2007010827501/August 2008)
Some of you veterans may be scratching your head over this one — it looks like Albrecht may have exercised time and price discretion. The customer gives you an oral order to buy or sell, but leaves the time and price of execution to your discretion. You've been taking those T&Ps for years. It gives you flexibility to do what's best for your customer. So, what's the problem?
The problem is that what you once did, you can't do any longer. In fact, this isn't even a recent change. The old NASD changed the rule in 2005. Unfortunately, old habits die hard, and this one seems to have some unfortunate staying power.
Devil In The Details
NASD Conduct Rule 2510: Discretionary Accounts, prohibits the exercise of any discretionary power in a customer's account unless such customer has given prior written authorization (a Power of Attorney/Trading Authorization) to a specific individual(s) and the account has been accepted by the member firm, as evidenced in writing by the firm or a designated partner, officer or manager (in accordance with NASD Conduct Rule 3010: Supervision).
Rule 2510(d)(1) provides an exception for price and time discretion on orders of a specified amount of a security. But the advisor's ability to exercise this discretion is in effect only until the end of the business day on which the customer granted such discretion, absent written instructions to the contrary, signed and dated by the customer. This limitation does not apply to institutional accounts, 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; …
Let me try to put that regulatory gobbledygook into something approximating English:
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One, the order must be given to you by the customer. No unauthorized third parties: Not the wife; not the kid; not your mutual friend the accountant. From the horse's mouth.
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Two, the order must be for the buy/sell of a definite amount of a specific security: 1,000 shares of XYZ. Not “some of my shares.” Not, “Buy what you think is a good number.”
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Three, given one and two above, you may then exercise discretion as to the time and price of execution.
Warning!
The newfangled version of T&P is essentially a Day Order that must be placed by the end of the business day, or subsequently renewed on a daily basis. In years past, oral T&P orders did not have a daily expiration. This trips up many veterans. Of course, if you don't want to go through the daily grind of renewing the oral order, the rule provides for signed and dated written instructions from the customer.
Writer's BIO:
Bill Singer is the publisher of RRBDLAW.com and BrokeAndBroker.com