Oral Discretion Isn't Worth The Paper It's Not Written On

February 19, 2016

You got Oral Roberts University. You have Oral Hygiene. You got Oral Arguments before a judge. You got Orel Hershiser, the former major league pitcher. You even got that whole Oral thing involving former President Clinton. On Wall Street, however, you got Oral Discretion, which, as you will soon discover, isn't worth the paper it's not written on.

Case In Point

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, Michael J. Mularski submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Michael J. Mularski, Respondent (AWC 2014040884801, February 3, 2016).

In 1990, Mularski was first registered with a FINRA member firm and from 1997 to April 2014, he was registered with Wells Fargo Advisors. The AWC asserts that Mularski had no prior relevant disciplinary history.

A Matter of Discretion

The AWC asserts that during the relevant time between February 2013 and February 2014, Mularski was the registered representative of record for a charitable organization's Wells Fargo securities account. As set forth in the AWC, the charity's Chief Financial Officer verbally authorized Mularski to:

purchase securities in its account, using discretion, whenever there was more than $100,000 in cash in the account.

Notwithstanding the above "verbal" authorization, Mularski did not obtain prior written discretionary authorization from the charity client. Further, Wells Fargo's written supervisory procedures explicitly prohibited registered representatives from exercising any discretion in brokerage accounts, and Mularski had not obtained permission from the firm to engage in the discretionary trading at issue. Accordingly, FINRA deemed the above cited conduct by Mularski as constituting violations of NASD Rule 2510(b) and FINRA Rule 2010.

A Matter of Authorization

Additionally, the AWC asserts that around February 2013, "approximately $3,200,000 was rolled into" the charity's account. Thereafter, during the relevant time, without the charity's written or oral authorization, Mularski purportedly effected

47 securities transactions using the $3,200,000, without the knowledge or consent of the charitable organization . . .

FINRA deemed Mularksi's cited trades as constituting a violation of FINRA 2010.

Costly Non-Compliance

Although not stated in the AWC, online FINRA BrokerCheck records as of February 18, 2016, disclose that Wells Fargo Advisors, LLC "Discharged" Mularski on April 4, 2014, based upon allegations that:

FA ENTERED CERTAIN TRADES IN A CUSTOMER'S ACCOUNT WITHOUT AUTHORIZATION

In accordance with the terms of the AWC, FINRA imposed upon Mularski and $12,500 fine and a six-month suspension from association with any FINRA registered firm in any capacity.

Bill Singer's Comment

Reprinted below is FINRA's Conduct Rule 2510: Discretionary Accounts, which imposes a simple compliance regime of prior written authorization by the customer coupled with the firm's written acceptance. Upon placing a duly authorized and approved discretionary trade, a member firm must undertake prompt written approval of each discretionary order; and, further, must frequently review all discretionary accounts to ensure that the transactions are suitable. That's about as straightforward a regulatory 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.

(d) Exceptions

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.

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