It’s really pretty simple. There are two types of investment accounts, accounts where the advisor has to ask permission before placing trades (non-discretionary) and accounts where the advisor can enter trades without asking the client for permission (discretionary accounts). And ne’er the two shall meet! Mr. Hossein Amirriahei learned this lesson the hard way, FINRA records show.
According to records available through the Financial Industry Regulatory Authority (FINRA), Mr. Amirriahei lost his position at Wells Fargo Advisors in Los Angeles, California due to discretionary trading in accounts without customer authorization.
When FINRA began to investigate, Mr. Amirriahei refused to cooperate with their investigation by providing sworn testimony. Failure to comply with a request like this usually results in FINRA barring the individual from the securities industry, which happened here.
Discretionary trading in non-discretionary accounts is a huge problem.
Some folks might think that Wells Fargo Advisors and FINRA overreacted to Mr. Amirriahei’s trading, but making trades in an investor’s account without permission is a big deal, for several reasons.
First, imagine that you’re an investor and you open your brokerage account statement only to discover that you’ve lost a lot of money in a stock you didn’t even know you owned! This can happen when a financial advisor exercises discretion in a non-discretionary account.
Second, imagine that you’re a conservative investor who likes municipal bonds, and you open your brokerage account statement to learn that half of your portfolio has been invested in a speculative Silicon Valley startup. When an advisor goes off the reservation, all kinds of bad things can happen in a customer’s account.
Finally, each investment firm has its own compliance department, which monitors client accounts and keeps an eye on financial advisors. Usually, at least some of the procedures for monitoring discretionary accounts are different from the procedures for monitoring non-discretionary accounts. When an advisor exercises discretion in a non-discretionary account, misconduct might slip by which compliance would have otherwise caught.
One additional implication of discretionary trading is that it can heighten the legal obligations an advisor and his company owe to investors. For many non-discretionary brokerage accounts, advisors and investment firms can recommend whatever investment they want to a client (regardless of how much it pays in commissions to the broker) so long as it is “suitable.” In contrast, when engaging in discretionary trading, an advisor may owe his client fiduciary duties. In other words, when entering discretionary trades, an advisor usually has a legal obligation to put his client’s interests first.
Rather than fight allegations of discretionary trading without permission, Mr. Hossein Amirriahei has accepted a ban from the securities industry. According to FINRA, he has also had at least three reported customer complaints.
If you have questions about investment losses, the securities litigation attorneys at Investor Defense Law LLP may be able to help, and offer free consultations. Investor Defense Law LLP is a law firm dedicated to helping investors in California, Georgia, and Washington State recover investment losses. We understand investment fraud and know how to sue investment advisors, brokerage firms, and financial advisors. To learn more, contact an investment fraud attorney at 800.487.4660.