Once Granted, Permission to Trade with Discretion Can Be Problematic

Attorney Advising Disclaimer

When an investor grants "discretionary authority" to a broker to trade the investor's account using only the broker's own judgment, the grant of authority must be in writing and given to the broker's firm. Discretionary trading creates a wide variety of problems with brokers churning accounts, abusing margin, and even sometimes outright theft.

FINRA continues to discipline brokers for taking advantage of this permission. For instance, in August of 2007, broker Russell Philip Macke allegedly abused discretionary authority given to him and engaged in excessive trading and use of margin. As a result, his customer's account lost over $50,000 in value while Macke's customers paid over $50,000 in margin interest, fees and commissions.

Some firms forbid the practice outright or in part, even if the client would otherwise have authorized discretionary trading. For instance, a SagePoint Financial, Inc. broker was disciplined for effecting 10 discretionary ETF trades without the firm's permission. According to that investigation, SagePoint does not allow commission-based brokerage accounts to be discretionary.

Still, some brokers effect discretionary trades without even first securing the customer's written authorization or do so in accounts deemed non-discretionary: Chrisopher Michael Frank of Los Angeles was fined for allegedly engaging in this brand of misconduct while James A. Owen was additionally ordered to pay over $300,000 in restitution for misconduct which included unauthorized discretionary trading.

If you grant your broker discretionary authority to trade your account, your broker is acting as your fiduciary and owes you a duty of loyalty. Brokerage firms are required to monitor and review the trading activity to insure the grant of authority is not being abused.

If you invested with a broker who has failed to first secure your and/or the firm's written authorization to engage in discretionary trading, has engaged in obviously excessive trading or has otherwise effected inappropriate transactions that have proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.

News: When Discretionary Trading Leads to Trouble (The Wall Street Journal)

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