The Last-Minute Order With No Discretion and No Closing

Several problems.

• No discretion. “You pick the tranche” is an instruction to exercise discretion over which security to buy. That requires prior written discretionary authorization (a limited power of attorney) plus firm approval of the account as discretionary. She has neither. The representative may present alternatives and obtain a specific instruction - nothing more.
• The order ticket is inaccurate. Writing “client instructed” when the client did not specify the tranche misstates the record. Order tickets are books and records under Rule 4511, and an inaccurate ticket is worse than no ticket.
• Suitability is unresolved. “Highest distribution” is a yield-chasing instruction, not an investment objective. Class A units typically carry a front-end sales load that reduces the amount invested, which can defeat the very distribution comparison she is asking for. Her documented objective is moderate growth with income; the recommendation must be reconciled to that in writing, including illiquidity and concentration.
• Deadline pressure. Submission before the cutoff does not cure an unauthorized order; if the specific tranche could not be confirmed with her, the correct action was to call back and, failing that, not to submit.

What should have happened: explain the classes and their fee structures, obtain a specific tranche instruction, document it, and submit.

No sale has occurred. Under a best-efforts minimum/maximum offering, subscriptions are held in escrow at an independent bank and are not accepted until the minimum is reached and the offering closes. Because the sponsor fell short of $8 million, the offering terminates and the escrow agent must promptly return each subscriber's funds, with any interest earned as the escrow agreement provides.

Tell her directly and promptly:

• Her funds are being returned; she has not purchased units and owns nothing.
• The subscription was subject to the minimum, which was not met; this contingency is disclosed in the offering document, and subscribers have an unconditional right to a refund until the minimum is satisfied.
• There is no confirmation of a purchase because there was no transaction to confirm.

Send a written explanation, retain the escrow release records, and note the outcome in the account file. Also confirm the escrow agent returns funds directly to the subscriber of record and not to the representative or the branch. If she wants to reinvest, start over with a suitability discussion - do not roll the order into a different program without a new instruction.

Explain that a confirmation is generated only for an executed transaction. Because the minimum was never met, there is no trade to confirm; the written escrow-return notice substitutes for it.

Had the offering closed, the confirmation delivered at or before settlement would have been required to disclose, under Rule 10b-10 and Rule 2232:

• The security, the number of units, and the price, including any sales load or mark-up.
• The firm's capacity - whether it acted as agent for the issuer or as principal.
• The remuneration the firm received, including the selling commission and any due diligence or marketing fee from the sponsor.
• Whether the security is redeemable or has a public market and the applicable distribution or redemption terms.
• Settlement date and the amount owed.

She should also have received the offering document before subscribing, with the risk factors on illiquidity, return of capital, and loss of principal. Finally, if a confirmation showed a different amount or tranche than she authorized, that is a discrepancy to escalate immediately - an unauthorized trade must be corrected, not papered over, and the firm's error-account procedures apply.