According to FINRA, Patrick A. Perugino was fined $5,000 and suspended from association with any FINRA member in all capacities for one month for exercising discretion in customer accounts without proper authorization.
Perugino exercised discretion in customer accounts to effect trades without prior written authorization from the customers and without his member firms having accepted the accounts as discretionary in writing. Although one of the firms permitted discretionary accounts, Perugino did not follow the firm's procedures to obtain written authorization from the customers or seek approval from the firm to maintain any discretionary accounts at the firm. Instead, Perugino failed to disclose the discretionary trading, incorrectly marking on firm annual attestations that he did not handle any customer accounts on a discretionary basis.
The suspension was in effect from January 3, 2023, through February 2, 2023.
Discretionary authority means the representative has the authority to decide which securities to buy or sell and the amount and timing of those transactions without obtaining the customer's prior approval for each trade. Because discretionary authority gives the representative significant control over the customer's account, FINRA rules require specific protections before a representative can exercise such authority.
First, the customer must provide written authorization granting discretionary authority to the representative. This ensures the customer understands and explicitly agrees to give the representative this level of control. Second, the firm must accept the account as discretionary in writing, which triggers heightened supervision of the account to detect any abuse of the discretionary authority. Third, a principal of the firm must review discretionary trades frequently to ensure they are appropriate for the customer.
Perugino's conduct violated these fundamental protections. By exercising discretion without obtaining written authorization from customers or firm approval, he deprived customers of the opportunity to explicitly consent to discretionary trading and deprived the firm of the ability to provide appropriate heightened supervision. His false statements on firm annual attestations that he did not handle any accounts on a discretionary basis compounded the violation by actively misleading the firm and preventing it from discovering and supervising the discretionary trading.
The dangers of unauthorized discretionary trading are significant. Without proper authorization and supervision, a representative might engage in excessive trading (churning) to generate commissions, make unsuitable investments, or otherwise abuse their control over the account. Even if no harm occurs, the lack of authorization and supervision creates an unacceptable risk to customers.
For investors, this case highlights the importance of understanding whether your account is discretionary. If you have not explicitly signed documentation granting your broker discretionary authority, your broker should be contacting you before each trade to obtain your approval. If trades are occurring in your account without your prior approval and you have not signed discretionary authorization documents, this is a serious red flag and should be reported immediately to the firm and to FINRA.
Even if you have granted discretionary authority, review your account statements carefully to ensure the trading activity is appropriate for your investment objectives and risk tolerance. Discretionary authority should not be granted lightly, and you should only grant it to representatives you trust completely and whose judgment you respect.
