Unauthorized Trading: Ways to Identify It and What to Do

Investors trust their brokers and financial advisors to guide them in making the right investment. When your broker’s actions caused you to suffer significant investment losses, you may be able to seek reimbursement in a FIRNA arbitration.

The experienced investment loss attorneys at S.A. Law Group can help you understand the full scope of legal remedies to address broker misconduct. Contact our office today for a free consultation.

What Is Unauthorized Trading?

Unauthorized trading is an act whereby a broker purchases or sells securities or other assets without the customer’s permission or authorization.

Fiduciaries and brokers need customers’ authorization before trading on their portfolios. The investment account type determines the means by which they obtain such permission.

Discretionary Account

A discretionary account authorizes your broker to trade without consulting you for every executed trading. The trading is, however, guided by the set of parameters you present to the broker.

Nondiscretionary Account

A non-discretionary account requires your broker to consult you for individual transactions to seek your approval before proceeding.

This account type gives you more control over your account and may help prevent misconduct such as over-concentration.

Despite this, authorized trading remains one of the major misconduct arbitrated by FINRA annually. According to the Disputes and Resolution Statistics by FINRA, 149 cases of unauthorized trading were arbitrated in 2022.

Example of Unauthorized Trading

Two notable cases of unauthorized discretionary trading arbitrated by FINRA in 2016:

  • FINRA fined and suspended two Kentucky registered representatives after it found that they exercised discretion in over 80 customer accounts without written authorization. In addition, FINRA found the two had back-dated customer notes, so it would appear as if they had had conversations with the customers before the trades were made.
  • FINRA fined and suspended a Florida general securities representative after it found that he placed 14 discretionary trades in three customers’ accounts. FINRA found that while the customers had previously spoken with the representative about his general trading strategy for their accounts, he didn’t seek their approval of the trades prior to making them, which he was required to do.

Unauthorized Trading Exceptions

Although a broker needs authorization from the customer before executing a trade, there are certain exceptions. The SEC permits brokerage firms to sell customers security without authorization if their account value is below the firm’s requirement.

What to Do if You Suspect Unauthorized Trading in Your Account

If you notice an unauthorized trading in your account, contact your broker to seek clarification. If the broker’s explanation is unsatisfactory, reach out to the brokerage firm to report the issue.

While doing this, keep records of all correspondence. If the brokerage firm does not react satisfactorily, the SEC has an online complaint form to report such issues. 

In addition to filing a complaint with the SEC, you may consider speaking with an experienced unauthorized trading lawyer to determine the best course of action.

siteFt_mainbgimg
CONTACT US
Suffered a Financial
Fraud? Consult with
Our Team

Fill out the form or Call us at (202)444-4222

  • Free Case Evaluation
  • Recover Your Investment Losses