According to FINRA, Arun Kumar Aggarwal was assessed a deferred fine of $7,500 and suspended from association with any FINRA member in all capacities for two months for exercising discretionary authority to effect trades in a customer's account without obtaining written authorization from the customer to exercise discretion and without his member firm having accepted the account as discretionary. Aggarwal also caused the firm to maintain inaccurate books and records by mismarking the discretionary trades as unsolicited.
Discretionary trading occurs when a broker makes decisions about what securities to buy or sell, how much, and when, without obtaining the customer's prior approval for each specific transaction. Because of the significant control this gives brokers over customer assets, discretionary trading is permitted only when specific requirements are met: the customer must provide written authorization, and the firm must approve the account for discretionary trading. These safeguards exist to ensure customers understand they are granting significant authority to their brokers and that firms can provide appropriate supervision of discretionary accounts.
Although the customer in this case understood that Aggarwal was placing trades in the account, the customer had not provided the required prior written authorization for discretionary trading. The absence of written authorization meant there was no clear documentation of the scope of Aggarwal's authority or the parameters within which he could exercise discretion. This lack of formalization creates risks for both customers and brokers, as disputes can arise about whether specific actions were authorized.
Compounding the violation, Aggarwal mismarked the discretionary trades as "unsolicited," meaning trades initiated by the customer rather than recommended by the broker. This false marking served to conceal the discretionary nature of the trading from the firm's supervisory systems. By causing the firm to maintain inaccurate books and records, Aggarwal impaired the firm's ability to supervise his activities and ensure customer protection. For investors, this case highlights important protections around discretionary trading. Customers should be wary of allowing brokers to trade their accounts without prior approval for each transaction. If discretionary trading is appropriate, it should be formalized through written authorization that clearly specifies any limitations, and customers should monitor discretionary accounts carefully to ensure trading remains consistent with their objectives. Any representative who trades an account without authorization, or who attempts to conceal the nature of trading through false markings, raises serious red flags about trustworthiness.
