FINRA Disciplinary Actions

Excessive buying and selling of securities in an investor’s account, also known as churning, is not only unethical, but also violates securities laws.  Most, if not all, churning stems from the broker’s desire to generate commissions that benefit the broker.  For churning to occur, the broker must exercise control over the investment decisions in the

Working under the supervision of the SEC, one of FINRA’s tasks is to write and enforce rules governing the ethical activities of brokerage firms and brokers.  With respect to discretion, FINRA Rule 3260(b) (aka NASD Rule 2510(b)) provides that for a broker to exercise discretionary power in a customer’s account, the customer must provide prior written authorization and that the broker’s firm must approve the discretionary arrangement.

FINRA’s Monthly Disciplinary Actions for December 2019 include several instances of brokers who ran afoul of FINRA Rule 3260:

  • Charles Harper Bridgers (CRD #1226108, Wilson, North Carolina) October 16, 2019 – Bridgers entered into an AWC with FINRA in which he was assessed a deferred fine of $10,000 and suspended from association with any FINRA member in all capacities for three months. Without admitting or denying the findings, Bridgers consented to FINRA’s findings that he entered municipal-bond orders in a customer’s brokerage account without the customer’s specific authorization and without authorization to exercise discretion over the account. FINRA further found that before learning the customer had died, Bridgers entered the orders in the customer’s account, and entered notes in the firm’s system that falsely stated that he had conferred with the customer before executing these transactions. FINRA found that both the trades and the system notes post-dated the customer’s death, and therefore, the trades were unauthorized.  The suspension is in effect from October 21, 2019, through January 20, 2020. See FINRA Case #2018057553801.  Bridgers previously was registered with Wells Fargo Clearing Firm LLC (1999-2018).
  • Steven Tarasius Yellen (CRD #1281663, El Paso, Texas) October 22, 2019 – Yellen entered into an AWC with FINRA in which he was assessed a deferred fine of $25,000 and suspended from association with any FINRA member in all capacities for one year. Without admitting or denying the findings, Yellen consented to FINRA’s findings that he engaged in unauthorized trading, amongst other things. In particular, FINRA found that Yellen exercised discretion in a customer’s account without written authorization or acceptance of the account as a discretionary account while registered with Morgan Stanley.  Yellen also completed false annual compliance questionnaires wherein he denied having any accounts in which business was transacted on a discretionary basis. Yellen further opened a second account for the customer without her knowledge or authorization and subsequently made an unauthorized transfer of $30,000 from her original account to the second account and used the funds to execute two unauthorized transactions. After Yellen left Morgan Stanley and became associated with Ameriprise Financial Services, he continued to engage in unauthorized trading by entering trades for customers that were beyond the option trading risk levels authorized by the customers. FINRA found that in so doing Yellen mismarked options order tickets as unsolicited when they were solicited, which was intended to circumvent the firm’s systems.   The suspension is in effect from November 4, 2019, through November 3, 2020. See FINRA Case #2018057175001.  Yellen previously was registered with Morgan Stanley entities (1984-2016), then Ameriprise Financial Services (2016-2018).

Continue Reading FINRA Publicizes Recent Cases of Unauthorized Trading

Merriam-Webster defines discretion as “individual choice or judgment.”  In the investment arena, discretion similarly refers to the exercise of judgment.  When the customer makes all the trading decisions in the account, then the account is non-discretionary.  In contrast, a discretionary account is one where the customer has given the broker written authority to buy and sell securities without the customer’s consent; that is, the broker can place trades without conferring with the customer.  Even in discretionary account, however, the broker must make decisions in keeping with the customer’s risk tolerance and investment objectives.

  • What if I never initiate trades in my account and always follow my broker’s recommendations – is my account discretionary?  NO.
  • What if I told my broker he can do whatever he wants in my account and doesn’t need to consult me regarding trades – is my account discretionary?  NO.

Following your broker’s lead by uniformly accepting her recommendations does not equate to discretionary authority, nor does giving your broker verbal carte blanche to do as she pleases with your account.  Your account is discretionary only if you have provided formal written permission for your broker to place trades without your consent.  This should involve completing the brokerage firm’s form, which is then approved by firm management.  In this regard, FINRA Rule 3260(b) (aka NASD Rule 2510(b)) states:

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 3110.

(FINRA Rule 3260(d) describes the limited exceptions to the Rule.)

One recent FINRA broker discipline aptly illustrates the application of Rule 3260(b).  In October 2019, Simon Michel Joseph (CRD #5602157, Alexandria, Virginia) entered into a Letter of Acceptance, Waiver and Consent (“AWC”) in which he was fined $10,000 and suspended from association with any FINRA member in all capacities for 30 business days as a result of unauthorized trading.  Without admitting or denying the findings, Joseph consented to FINRA’s findings that he exercised discretion in accounts maintained by customers without having written authorization from the customers and without having requested or obtained approval from his member firm.
Continue Reading Discretion – Who Has the Power to Choose?