BD Discretionary Accounts and Unauthorized Trading

Overview

Both FINRA and the MSRB have rules applicable to the exercise of discretion by broker-dealers over customer accounts. To a good extent, these rules likely are outdated, given that the SEC now has taken the position that ongoing discretionary control over an account by a broker-dealer means that the firm is acting in the role of an investment adviser, and not just as a broker-dealer. Accordingly, any firm that is exercising ongoing discretionary control over an account should consider whether it ought to be doing so as a broker-dealer, or whether the exercise of discretion should be treated as an investment adviser activity.

Leaving that aside, there are numerous enforcement actions as to broker-dealer employees who either exercised discretionary control without following the required procedures of their employer or, even worse, who acted without any grant of authority by the customer. Not surprisingly, employees who traded in a customer's account without a grant of authority from their customer also often committed other even more serious violations, including churning or even outright theft.

Steven.Lofchie@cwt.com's picture
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Senior Attorney

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