According to FINRA, John Charles Barnes was fined $5,000 and suspended for one month for exercising discretion in customer accounts without the customers' written authorization and without his member firm having accepted the accounts as discretionary.

The findings revealed that Barnes exercised discretion in transactions in customer accounts, even though each customer had given him express or implied authorization to do so. Despite having the customers' permission, Barnes violated FINRA rules by not obtaining written authorization and not having the firm accept the accounts as discretionary.

Discretionary authority allows a representative to decide what securities to buy or sell, the amount, and when to execute trades without obtaining the customer's specific authorization for each transaction. While this can be convenient for customers who want professional management of their accounts, it also creates significant risks of abuse and requires special safeguards.

FINRA rules require that discretionary authority be documented in writing and that the firm accept the account as discretionary before any discretionary trades can be made. The written authorization requirement ensures that customers clearly understand they are granting broad authority to their representative and that there is a clear record of this authorization. The requirement that the firm accept the account as discretionary ensures that the firm's supervisory system is aware of the discretionary authority and can provide appropriate oversight.

Even though Barnes' customers had given him permission—either expressly or impliedly—to make trades on their behalf, his failure to follow the proper procedures created risks for both the customers and the firm. Without written documentation, disputes can arise about the scope of authority granted. Without the firm's acceptance of the accounts as discretionary, the firm may not have appropriate supervisory procedures in place, such as frequent reviews of trading activity to ensure it remains consistent with customers' objectives and risk tolerance.

The one-month suspension and fine send an important message that following proper procedures for discretionary authority is mandatory, not optional. These procedures exist to protect customers from unauthorized trading and to ensure proper supervisory oversight. Representatives who take shortcuts, even when they believe they have customers' permission, undermine these important investor protections.

Investors should understand that if they wish to grant discretionary authority to their representative, it must be done in writing and the firm must accept the account as discretionary. If a representative is making trading decisions without going through these formal steps, it violates FINRA rules even if the customer has informally agreed to it.