| April 11
April 11 Morgan Stanley broker Douglas
Greenberg recently suffered a fate that is increasingly
Greenberg was fined $10,000 after he traded securities in a
client account in 2010 without written instructions from the
client or the firm to do so, according to a Financial Industry
Regulatory Authority settlement dated March 27.
"The client and broker spoke and agreed on the strategy,"
said Abe Lampart, Greenberg's San Francisco-based lawyer.
Lampart said it was not a case where the trades were not
Greenberg, who neither admitted nor denied FINRA's findings,
still works at Morgan Stanley. The firm directed inquiries to
FINRA in most cases prohibits brokers from making such
trades - a practice known as "using discretion" - without
clients' written approval. Brokerage firms typically want to
approve such arrangements in advance as well. Some may even bar
Yet, Greenberg is among a growing number of brokers who have
been penalized by the watchdog for trading on clients' behalf
without first getting permission to do so in writing, showing
why, when in doubt, advisers would be well-advised to err toward
getting their paperwork in order.
FINRA has disciplined 17 brokers since January for
violations stemming from its rule about improper use of
discretion. That is nearly twice the number of cases involving
such violations during the same period last year. In all, FINRA
sanctioned 47 brokers last year, in part, for not following its
rule about discretion.
The penalties, which can include fines and short-term
suspensions, can have serious consequences for brokers. Even a
brief, five-day suspension, for example, can be a roadblock to
finding a job later, especially at a big-name brokerage.
"Don't do it," said Michael Sullivan, a lawyer in
Morristown, New Jersey, who advises brokers. "The rules are
The risk of getting slapped by FINRA could make brokers
think twice before intervening in a major market shift, such as
the 2010 "flash crash," when their clients may stand to lose -
or gain - a bundle. The rules also create practical headaches
for brokers and clients - when one of them is on vacation, for
"It introduces a real monkey wrench," said Joe Romano,
president of Romano Brothers & Co, a wealth management firm in
Evanston, Illinois. The rule should take into account whether
the trade helped or harmed the customer, he added.
The overall number of enforcement cases involving paperwork
slipups are rare. The regulator oversees about 630,345 brokers
and 4,270 brokerages.
Susan Axelrod, head of FINRA's member regulation unit, said
in an interview that prior approval from the client is a key
element of trust.
Without that approval, customers will be pleased with
winning transactions, but complain about losing ones, she said.
Axelrod declined to comment on recent enforcement actions.
The only exception to the rule is when brokers make the
trade on the same day that the client gives them a verbal nod,
according to Francis Curran, a New York-based securities lawyer
who advises brokerages on regulatory issues.
In that case, the broker can decide the time at which to
trade in a security or the price for certain quantities of
securities. Even then, a brokerage may not allow the practice.
To be sure, not all the brokers sanctioned by FINRA were
trying to honor clients' wishes. Some brokers cross the line
into an offense known as "unauthorized trading." The brokers may
think they are getting a good share price, for example, but
never discuss the move with their client. Others may even try to
boost commissions by conducting extra transactions, say lawyers.
Brokers' troubles often begin when clients are either not
available or reluctant to give them broad authority to make
decisions on their behalf.
Some clients sign documents when opening their accounts,
explicitly giving brokers such authority. But many do not.
Some worry that brokers may abuse the authority, while
others know their brokers only through telephone conversations,
said Richard Roth, a New York-based lawyer who defends brokers
in enforcement cases.
Roth added that brokers should also always remember to check
the firm's policy on use of discretion.
Brokers can try to ease clients' worries by writing specific
instructions about when the permission begins and ends, and
circumstances under which the broker can trade.
For example, a client who is going away can give permission
for the broker to buy $5,000 of a stock if it goes below $80 per
share during that time, Roth said.