Unauthorized Trading

In standard brokerage accounts, brokerage firms and their stockbrokers are required to obtain prior approval from a client before making any transaction. An investor who realizes a loss from a transaction executed by a broker without first discussing it with the investor may be eligible to recover for the loss. It is important that an investor dispute the transaction within a reasonable period of time to be able to recover.

Unauthorized trading occurs when a stockbroker purchases or sells securities in a customer’s account without the customer’s prior permission, knowledge or written authorization.

It is a violation of FINRA Rule 2510(b) for brokers to purchase or sell securities in non-discretionary brokerage accounts without first speaking to the customers and obtaining authorization. It may also be a violation of FINRA Rule 2010 Standards of Commercial Honor and Principles of Trade and FINRA Rule 2020 Use of Manipulative, Deceptive or Other Fraudulent Devices.

Unauthorized trading would not apply to discretionary accounts where the customer has provided the broker with prior written authorization to effect transactions in the account at the broker’s discretion AND the brokerage firm has approved the account for discretionary trading (FINRA Rule 2510 Discretionary Accounts). Nonetheless, even if the stockbroker has been granted discretion to make investment transactions in a customer’s account, the stockbroker cannot misuse or exceed that authority by making unsuitable or excessive transactions.

While investors may give their broker some limited discretion as to the execution of an authorized order, discretion in these instances is limited to time and price. A customer may authorize an order for the purchase or sale of a security for a definite amount but leave the time and price of the execution of the transaction up to the stockbroker’s discretion. But if the time and price discretion exceeds beyond the end of the business day in which the order was given (FINRA Rule 2510(d)) it would exceed the authorization given by the customer and would be considered an unauthorized trade.

Investors should protect themselves from unauthorized trading by taking detailed notes when they have discussions with their brokers concerning their investments. Investors should also regularly review brokerage account statements and trade confirmations for any unrecognized transactions.

Investors should immediately notify the brokerage firm’s branch manager in writing if any transaction does not seem familiar or consistent with the instructions given to the broker.

Time is of the essence in these situations. Failure to notify the brokerage firm about the unauthorized transaction within a reasonable time may lead to a weaker claim. Unauthorized trading is a FINRA sales practice violation and losses due to unauthorized trading may be recoverable through a FINRA arbitration claim.

Unauthorized trading is one of FINRA’s top 15 controversy types in customer arbitration claims.

Silver Law Group can help you determine whether an investment loss is the result of unauthorized trading in a brokerage account. If an investor suffers losses as a result of unauthorized trading they may be able recover their losses in a FINRA arbitration claim.