On September 15, 2015 FINRA suspended former First Allied broker, Herbert Leonard Kaye, for four months and fined him $25,000 which includes the disgorgement of $11,000 in commissions. According to FINRA, Mr. Kaye entered over 2,000 discretionary trades in the account of a customer between June 2010 and April 2013 without the customer’s prior written authorization, in violation of FINRA Rule 2010 and 2510(b). FINRA Rule 2010 states that “A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.”
In June 2010, Mr. Kaye’s customer realized a significant loss on the unsolicited sale of equities that she had inherited from her deceased husband. Following that sale the customer requested that Kaye recommend investments and investment strategies that would limit her exposure to large market fluctuations. The customer, who’s information was not disclosed, gave Mr. Kaye verbal authority to use his discretion to enter trades in her account without contacting her.
According to FINRA, Mr. Kaye did not obtain written authority to trade in her account. Moreover, First Allied’s written policies and procedures prevented discretionary trading except in limited circumstances. Nonetheless, between June 2010 and April 2013, Mr. Kaye executed over 2,000 discretionary trades generating over $173,000 in commissions.
FINRA Rule 2510(b) provides “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, office or manager, duly designated by the member, in accordance with Rule 3010.” By entering over 2,000 trades in the customer’s account without obtaining her prior written authorization, Kaye violated NASD Rule 2510(b). By virtue of that violation, Mr. Kaye also violated FINRA Rule 2010.
FINRA also determined that Mr. Kaye violated FINRA Rule 2310 (the suitability rule). FINRA Rule 2310 provided that when recommending the purchase, sale, or exchange of any security to a customer, a registered representative must have reasonable grounds for believing that the recommendation is suitable for the customer taking into consideration facts disclosed by the customer as to their other security holdings, financial situation, and investment needs.