On October 10, 2000, NYLIFE terminated Lu's employment. Adkins testified that he explained to Lu that Lu was being discharged for "[e]xercising discretion on [sic] a client's accounts. There were several [NYLIFE] violations, but that certainly was the most serious." NYLIFE subsequently paid Dr. Hu $80,000 for the total losses she incurred as a result of Lu's options trades in both her Schwab and NYLIFE accounts.

Dr. Hu testified that Lu told her he could not accept commissions because NYLIFE's policies prohibited his trading the NYLIFE account, indicating Lu's awareness that NYLIFE prohibited its representatives from exercising discretion in customer accounts. While Lu does not dispute Dr. Hu's testimony on this point, he maintains that he refused compensation from her because she was a fellow immigrant from his hometown.

Lu checked the box in the column marked "No."

The SEC noted that Lu admitted in the October 2 Letter that, after Dr. Hu gave him the password to her Schwab account, "I bought some options for her account . . . ." When the Hearing Panel asked Lu if he was "making the decisions of which options to buy and which options to sell" in Dr. Hu's Schwab account, Lu replied, "[c]orrect."

Similarly, the SEC considered Lu's contention that he did not break any rules because his trading of Dr. Hu's online accounts was a "private matter" between himself and Dr. Hu. However, the SEC stated that the requirements of Conduct Rule 3050(c) that a registered representative disclose the exercise of discretion in an account at another member firm to both his employing member firm and the executing member firm are designed to prevent this kind of "private matter" that could expose the member firms to risk.  ALu claimed that "[a]t no time did I believe I was breaking any rules" because, he asserted, "there is no any rules or regulations regarding the online trading in an ordinary person (non-stockbroker)'s private home spending private time on his/her own personal computer . . . ." In fact, SEC ruled that NASD Conduct Rule 3050(c) requires notice regardless of how or where the associated person effectuates the trades. 

The SEC found that Lu violated Conduct Rules 3050(c) and 2110 when he failed to notify both NYLIFE and Schwab, in writing, that he was exercising discretionary authority over a Schwab account while he was associated with NYLIFE.

NASD Conduct Rule 2110:
 Standards of Commercial Honor and 
Principles of Trade 

A member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade.

NASD Conduct Rule 3050: 
Transactions for or by Associated Persons 

. . . 

(c) Obligations of Associated Persons Concerning an Account with a Member 
A person associated with a member, prior to opening an account or placing an initial order for the purchase or sale of securities with another member, shall notify both the employer member and the executing member, in writing, of his or her association with the other member; provided, however, that if the account was established prior to the association of the person with the employer member, the associated person shall notify both members in writing promptly after becoming so associated.

Lu admitted in the October 2 Letter that he "couldn't trade [Dr. Hu's] NYLIFE Securities account due to [New York Life's] company rules." Lu indicated on the NYLIFE compliance form that he was aware of NYLIFE's prohibition against exercising discretionary authority over a client's account. Despite this prohibition, Lu "still felt that I should help her out." Moreover, the SEC noted that Dr. Hu gave Lu the password to her NYLIFE account and orally authorized him to trade that account, but did not give him written authorization. He subsequently changed the password so only he could have access to the account. Because Lu concealed his discretionary authority over Dr. Hu's NYLIFE account, NYLIFE did not have the opportunity to enforce its policy against its registered representatives exercising discretion over customer accounts or otherwise supervise his actions.

Lu admitted to the Hearing Panel that he traded options in Dr. Hu's NYLIFE account and made the decisions regarding which options to buy and sell. Lu asserts that his options trades in Dr. Hu's NYLIFE account were not discretionary because she controlled the account and discussed with him what trades to make. Lu not only admitted making trades in this account, but also traded contrary to Dr. Hu's instructions to restrict his trades in the account to covered calls. Moreover, Lu's discretionary authority over Dr. Hu's NYLIFE account was so absolute that, after he purportedly "purchased" Dr. Hu's account, he changed Dr. Hu's NYLIFE account password without consulting her and ignored her online pleas to stop trading that account. 

Lu claimed that he did not consider Dr. Hu his customer because she did not purchase life insurance from him. Regardless of whether or not Dr. Hu purchased life insurance from him, the SEC pointedly concluded that Dr. Hu was, in fact, Lu's customer with respect to the trades in her NYLIFE account. He also asserts that he did not expect any compensation from trading her accounts. However, Lu was the registered representative listed on Dr. Hu's NYLIFE account. He in fact earned approximately $300 in commissions for his options trades in that account.

Lu argued that NYLIFE's restriction against exercising discretion in a customer's account does not apply to online trading. However, NASD's prohibition against registered representatives exercising discretion without prior written authorization, which is at issue here, does not distinguish between online and other trading activity. 

The SEC found that Lu violated NASD Conduct Rules 2110 and 2510(b) by exercising discretionary authority in Dr. Hu's NYLIFE account without prior written authorization from Dr. Hu and NYLIFE.

NASD Conduct Rule 2510:
Discretionary Accounts

(a) Excessive Transactions
No member shall effect with or for any customer's account in respect to which such member or his agent or employee is vested with any discretionary power any transactions of purchase or sale which are excessive in size or frequency in view of the financial resources and character of such account. 

(b) Authorization and Acceptance of Account
No member or registered representative shall exercise any discretionary power in a customer's account unless such customer has given prior written authorization to a stated individual or individuals and the account has been accepted by the member, as evidenced in writing by the member or the partner, officer or manager, duly designated by the member, in accordance with Rule 3010

Section 3(a)(35) of the Securities Exchange Act of 1934, 15 U.S.C. § 78c(a)(35), states

 "[a] person exercises ‘investment discretion' with respect to an account if" such person ". . . is authorized to determine what securities or other property shall be purchased or sold by or for the account," or "makes decisions as to what securities or other property" to buy or sell for the account, "even though some other person may have responsibility for such investment decisions," or "otherwise exercises such influence with respect to the purchase and sale of securities or other property by or for the account . . . ." 

Scott E. Wiard, Securities Exchange Act Rel. No. 50393 (Sept. 16, 2004), __ SEC Docket ___ (citing Hotmar v. Lowell H. Listrom & Co., 808 F.2d 1384, 1385 (10th Cir. 1987) (comparing discretionary and non-discretionary accounts)).

After his discharge, Lu found it difficult to find another job. MetLife rejected him after he disclosed to them the reason for his discharge from NYLIFE. When he found employment at Globalink and was required to complete a new Form U-4, he answered Question 23J(1) in the negative. The SEC failed to see how Lu could have reasonably concluded that a negative response was permitted.

Lu maintained that the president of Globalink advised him not to disclose the discharge on the Form U-4 because the matter was pending. However, the SEC noted that a registered representative is responsible for his actions and cannot shift that responsibility to the firm or his supervisor. Rafael Pinchas, Exchange Act Rel. No. 41816 (Sept. 1, 1999), 70 SEC Docket 1516, 1522.

Lu also argued that he did not see Dr. Hu's actual complaint until January 2001. However, the SEC noted that the AG's letter (a copy of which Adkins gave to Lu) fairly represented the allegations contained in Dr. Hu's complaint. Adkins explained to Lu the reasons for his discharge and identified the NYLIFE rules Lu had violated, based on the allegations in the AG's letter. 

Also, Lu stated that he has difficulty understanding the English language and claims that the word "terminate" is defined differently from the word "discharge" in his Chinese dictionary. Lu reasons that, because his termination letter from NYLIFE stated that his contract was terminated, he was not discharged. However, Adkins testified Lu's proficiency in English was "[v]ery good" and that he and Lu "never had any problems communicating" with each other.

The SEC found that Lu violated Conduct Rule 2110 and Membership Rule IM-1000-1 by providing a false answer on the Form U-4 filed in connection with his association with Globalink.

NASD Interpretive Material-1000-1:
Filing of Misleading Information as to Membership or Registration 

The filing with the Association of information with respect to membership or registration as a Registered Representative which is incomplete or inaccurate so as to be misleading, or which could in any way tend to mislead, or the failure to correct such filing after notice thereof, may be deemed to be conduct inconsistent with just and equitable principles of trade and when discovered may be sufficient cause for appropriate disciplinary action.

The SEC frequently holds that the Form U-4 is used by NASD and other self-regulatory organizations to determine the fitness of applicants for registration as securities professionals. Consequently, the candor and forthrightness of applicants is critical to the effectiveness of the screening process.  See, e.g., Daniel Richard Howard, Exchange Act Rel. No. 46269 (July 26, 2002), 78 SEC Docket 427, 431; Rosario R. Ruggiero, 52 S.E.C. 725, 728 (1996); Thomas R. Alton, 52 S.E.C. 380, 382 (1995). See also Robert E. Kauffman, 51 S.E.C. 838, 840 (1993) (asserting that "[e]very person submitting registration documents has the obligation to ensure that the information printed therein is true and accurate").

The Hearing Panel found that the preponderance of the evidence did not support the charge of unsuitability. Lu contends that the NAC erred when it reversed the Hearing Panel's finding on the suitability issue. In light of Lu's other violations and the sanctions imposed, the SEC did not see any reason to reach the unsuitability charge.

NASD Conduct Rule 2860: 
Options 

(b)(19) Suitability 

(A) No member or person associated with a member shall recommend to any customer any transaction for the purchase or sale (writing) of an option contract unless such member or person associated therewith has reasonable grounds to believe upon the basis of information furnished by such customer after reasonable inquiry by the member or person associated therewith concerning the customer's investment objectives, financial situation and needs, and any other information known by such member or associated person, that the recommended transaction is not unsuitable for such customer. 

(B) No member or person associated with a member shall recommend to a customer an opening transaction in any option contract unless the person making the recommendation has a reasonable basis for believing, at the time of making the recommendation, that the customer has such knowledge and experience in financial matters that he may reasonably be expected to be capable of evaluating the risks of the recommended transaction, and is financially able to bear the risks of the recommended position in the option contract.