Discretionary Rules, Selling Away & Market Manipulation
Details prior written authorization for broker-dealer discretion, the time and price execution exception, selling away, and market manipulation tactics.
- Broker-Dealer agents must have PRIOR WRITTEN discretionary authority before executing discretionary trades (0 oral discretion days!).
- Time & Price Exception: If the client specifies Action, Amount, and Asset, verbal discretion on time and price is valid for that business day.
- Selling Away: Participating in private securities transactions outside the employing broker-dealer without prior written notice and approval.
- Market manipulation: Wash sales (no change in beneficial ownership) and matched orders (pre-arranged paired trades) are illegal.
Discretionary Trading: An agent may not exercise discretionary power in a broker-dealer account without first obtaining PRIOR WRITTEN authorization from the customer and written approval from a designated supervisory principal. The only exception is 'Time and Price Discretion': if the customer specifies the Action (Buy or Sell), Amount (number of shares), and Asset (the security), the agent may use professional judgment on the time and execution price for that trading day without written discretionary authority.
Selling Away (Private Securities Transactions): Under FINRA Rule 3280 and state law, an agent may not participate in any securities transaction outside the regular course of employment without providing prior written notice to the broker-dealer detailing the proposed transaction and whether the agent will receive selling compensation. The firm must approve the activity in writing before the agent participates.
Market Manipulation: Manipulating securities prices to deceive investors is a criminal and civil violation of Section 101. Prohibited practices include: (1) Wash sales: Executing trades resulting in no change of beneficial ownership to create misleading volume. (2) Matched orders: Coordinating buy and sell orders with colluding parties at identical prices and times. (3) Spreading false rumors or market rumors to influence trading prices.
Customer Complaints: Complaints under securities rules must be in WRITING. Verbal grievances do not trigger formal regulatory complaint files, but all written complaints must be forwarded to a supervisory principal and preserved in the firm's complaint file.
- Remember: The 10-day oral discretion grace period applies ONLY to Investment Advisers, NEVER to broker-dealers or agents.
- Selling private company promissory notes to clients without written broker-dealer approval is selling away, even if the agent takes no fee.
A client calls her broker-dealer agent and says: 'I am boarding a flight to Europe. If the market takes a dive this afternoon, sell whatever you think is necessary in my account to protect my profits.' The client has not signed a written discretionary trading agreement. Can the agent legally enter trades based on this verbal statement?