FINRA Rule 3260
FINRA Rule 3260 covers discretionary accounts, as well as how and when regulated securities professionals can complete transactions without the prior authorization of their client. Given the speed at which many securities transactions have to be conducted in order to maximize the return on the investment, prior written authorization is not always feasible. However, FINRA Rule 3260 leans towards protecting investors from unauthorized trades by their broker-dealers, rather than giving regulated securities professionals the leeway that they often need in order to further the interests of their clients.
The securities litigation and FINRA defense attorneys at Oberheiden P.C. strive to defend broker-dealers and their firms against allegations of unauthorized trading, and help to guide them through the complex legal obligations imposed by FINRA Rule 3260.
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An Overview of FINRA Rule 3260
FINRA Rule 3260 is titled Discretionary Accounts. However, it does more than just label certain types of client accounts as discretionary and others as non-discretionary; it also provides rules for securities professionals to follow with regards to trading without the authorization of their clients.
Subsection (a) of the Rule also bans the practice of engaging in transactions that are “excessive in size or frequency,” given the character and resources of the account. This covers the practice of “churning,” where broker-dealers complete numerous transactions that do not further the client’s financial interests, but instead rack up transaction fees for the broker-dealer to charge.
Subsection (b) of FINRA Rule 3260 creates, through implication, two types of brokerage accounts:
- Those that have the client’s prior written authorization for certain brokers to carry discretionary power over the account, known as Discretionary Accounts, and
- Those that do not have such authorization, known as Non-Discretionary Accounts.
To be a Discretionary Account, the brokerage firm also has to sign off on its creation through a principal who has supervisory powers under FINRA Rule 3110.
These Discretionary Accounts do not have to give the broker complete latitude to do whatever they want, though. Many clients’ prior written authorization set parameters for the broker to follow, or at least goals that the account is supposed to pursue, like retirement or an education fund.
Non-Discretionary Accounts, on the other hand, generally require the client’s sign-off on all securities transactions.
FINRA Rule 3260(c) aims to curtail or at least mitigate violations of the prohibition against unauthorized trading by requiring the supervisor of the account’s broker to enforce Rule 3260 by promptly reviewing and approving each discretionary order, in writing. Even if this does not detect unauthorized trading on an account, it creates a paper trail of the transactions that could run afoul of the Rule.
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Exceptions to Rule 3260: Time and Price Discretion
Like all rules, FINRA Rule 3260 has exceptions.
One is limited to bulk exchanges of money market mutual funds that use negative response letters.
The other is more common, and gives brokers discretion to act on a client’s order to buy or sell a defined amount of a specific security for a definite price. Known as time and price discretion, or T&P discretion, FINRA Rule 3260(d)(1) gives broker-dealers the power to decide when is best to act on the order during the day that it was submitted by the client. Once the business day ends, brokers lose T&P discretion to act on the order.
This day-long window to execute a trade for a set amount of a specific security at a defined price is relatively new. FINRA Rule 3260 went into effect on May 8, 2019, replacing the old NASD Rule 2510. The old Rule 2510 allowed for T&P discretion on the day that the order was received, and the following business day as well. This is no longer the case.
Importantly, any authorization that the broker receives from the client has to be in writing. Oral authorization is insufficient under FINRA Rule 3260.
Recent enforcement actions by FINRA show that the organization is intent on upholding this requirement.
In one letter of acceptance, waiver, and consent, a broker admitted to violating FINRA Rule 3260 – then NASD Rule 2510 – by executing trades on accounts without speaking to the account owners first. Those clients, however, had orally authorized the broker to exercise discretion on their accounts, though the brokerage firm had not approved the accounts as Discretionary Accounts.
It did not matter that the customers did not complain, or even whether the trades lost value for the accounts at issue. Even though the broker admitted to the allegations of unauthorized trading, he was still fined by the state for $10,000, plus $5,000 in costs, and was suspended by FINRA for 30 days.
Even if the trade is conducted using a Discretionary Account, broker-dealers can still violate the requirements of FINRA Rule 3260 if the transaction is outside the parameters of the customer’s prior authorization. Not all Discretionary Accounts allow the brokers managing them to use their full discretion – in fact, many if not most of these accounts still put limits on how brokers can trade through them. Going outside those limitations can lead to allegations of unauthorized trading.
Frequently Asked Questions About Oberheiden P.C. and FINRA Rule 3260
What is the NASD Predecessor for FINRA Rule 3260?
Like many of the rules that it uses to regulate the securities industry, FINRA Rule 3260 came from an existing rule from the National Association of Securities Dealers (NASD) – the agency that FINRA replaced. That prior version of Rule 3260 was NASD Rule 2510.
Can Violations of FINRA Rule 3260 Lead to Criminal Charges?
Potentially, yes. Some egregious violations of Rule 3260 involve unauthorized trading that also include criminal acts. Those criminal acts are frequently done to cover up the nature of the trade to make it appear as if it was an authorized one. Generally, the offense will fall under the broad category of securities fraud. However, securities professionals who make unauthorized trades and then try to cover their tracks by making it seem as if their client gave them prior authorization can be charged with forgery or even identity theft.
Convictions for these white collar offenses are serious, and often carry substantial periods of confinement and hefty fines. Having a criminal conviction for any of these offenses can also make it virtually impossible to return to the securities industry after you have served your sentence, making it difficult to earn a living in the future.
No, investors cannot give legally meaningful authorization for securities transactions that they do not understand. This means that brokers have a legal duty to describe the transaction in a way that a reasonable layperson could make sense of it. It also means that mischaracterizing a securities transaction in a way that is designed to illicit the customer’s approval and authorization can violate FINRA Rules, particularly Rule 2020.
Why Should I Trust Oberheiden P.C. With My Defense?
Oberheiden P.C. is a unique law firm in that it only employs senior lawyers. We do not have junior associates, paralegals, or even any legal secretaries on our staff.
What this means for our clients is simple: All of the legal work that is performed on your case is done by a senior lawyer with extensive experience handling cases similar to your own. Other firms are likely to rely heavily on the work of inexperienced attorneys and other staffers who do not understand the intricacies of U.S. securities law.
Why Don’t You Call Yourselves the Best FINRA Defense Lawyers?
We prefer to let our prior clients’ testimonials do that sort of talking on our behalf. When we make statements to this effect, it comes off as trite, insincere, and potentially even arrogant. When our past clients say it, though, it is far more meaningful as it comes from their personal experience with our firm.
FINRA Defense and Compliance Lawyers at Oberheiden P.C.
FINRA Rule 3260 is an important part of the self-regulatory framework that the Financial Industry Regulatory Authority (FINRA) has implemented to protect investors while still allowing the securities industry to work efficiently. Unfortunately, Rule 3260 exists in an important position between these investors and the brokers who are tasked with maximizing their returns. While it is important to protect investors from broker misconduct, it is also important to let brokers act when necessary to do their jobs to the best of their abilities.
Rule 3260 aims to strike a balance between these competing interests, to mixed results.
Regulated securities professionals who have been accused of violating FINRA Rule 3260 need effective legal help to defend against the allegation. FINRA has shown an interest in enforcing its rules against unauthorized transactions and penalizing broker-dealers and their brokerage firms for purported violations – even when the customers have not complained and even when the transactions themselves have caused no financial harm.
The FINRA defense lawyers at the national law firm Oberheiden P.C. can help. If you have been accused of making unauthorized trades in violation of FINRA Rule 3260, call them at (888) 680-1745 or contact them online for the vigorous defense that you need to avoid costly fines, protect your professional future, and shield your reputation.