The Discretionary Account That Wasn't Discretionary
Sultana is a client of a BSEC-registered broker, Meghna Securities. She signed a discretionary management agreement authorising her relationship manager, Imran, to trade her BDT 2.5 million portfolio without prior approval for each trade. Over eight months, Imran executed 340 trades - roughly 40 per month - generating BDT 610,000 in commissions, about 24% of the portfolio's value. Sultana's portfolio is now worth BDT 2.1 million. She complains that she never received contract notes for most trades, that Imran never explained the fees, and that she was told the account was "a safe savings product." Meghna Securities responds that the signed agreement authorises discretionary trading, so no further consent was required, and that commissions are disclosed in the standard fee schedule. Separately, Imran holds a personal account at another broker and traded the same securities within minutes of Sultana's trades on at least 30 occasions.
1. Analyze the suitability, disclosure, and churning issues in Imran's handling of Sultana's account.
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Discretionary authority is not a licence to churn. The signed agreement authorises trading without per-trade consent; it does not authorise trading that is excessive relative to the client's objectives.
Churning / excessive trading:
- 340 trades in eight months on a BDT 2.5 million portfolio, generating BDT 610,000 in commissions (24% of portfolio value), is a strong indicator of excessive trading.
- The test is turnover and cost relative to the client's investment objective and the benefit to the client. A portfolio that loses 16% while generating 24% in fees for the broker is presumptively churned.
- Discretionary status is an aggravating factor: the client cannot intervene trade-by-trade, so the firm bears a heightened duty of care.
Suitability and misdescription:
- Describing an equity discretionary account as "a safe savings product" is a misrepresentation of risk. Suitability requires matching the product to the client's risk profile; a "safe savings" characterization is inconsistent with a 340-trade equity portfolio.
Disclosure failures:
- Failure to deliver contract notes for most trades breaches the record and confirmation obligations that let clients monitor activity.
- A fee schedule buried in standard documents does not discharge the duty to explain the actual cost impact of a high-turnover strategy.
Conclusion: the firm's "the agreement authorises it" defence fails. Authority defines the outer boundary of permitted action, not the standard of care within it.
2. Imran traded the same securities in his personal account minutes before client trades on at least 30 occasions. How should this be characterized, and what should BSEC require of the firm?
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Characterization: front-running / personal-account abuse.
- Trading personally ahead of a client order exploits the expected price impact of the client's trade. Even where the client's order is small, the pattern (30+ occasions, minutes apart) is not coincidence.
- It breaches the duty to act in the client's best interest and to manage conflicts of interest. The firm must prevent employees from trading on information about pending client orders.
- It also breaches personal-account dealing rules: employees must pre-clear personal trades, and firms must monitor for correlation with client flow.
What BSEC should require of Meghna Securities:
- Immediate suspension of Imran pending investigation; freeze his personal trading.
- Full trade reconstruction - match every client order against Imran's personal account and any accounts of persons connected to him.
- Disgorgement of profits made on the correlated trades and compensation to affected clients.
- Control remediation - mandatory personal-account pre-clearance, a restricted list, holding-period rules, and automated surveillance matching employee trades against client order flow.
- Supervisory accountability - the failure to detect 30 correlated trades indicates the surveillance system was absent or ignored; hold supervisors responsible.
- Client remediation - reverse or credit excessive commissions on the churned account and provide a clear, itemised fee statement.
Enforcement principle: front-running is treated seriously because it corrodes market integrity and the client's trust simultaneously; penalties should reflect both the profit captured and the breach of fiduciary duty.