Did you lose money because of a securities transaction you did not authorize? Rules against unauthorized trading are meant to prevent brokers from making trades without their investor’s approval. Brokers should always have their client’s authorization to place a trade unless they place trades in an account approved for discretionary trading. Even then, FINRA requires firms to carefully review the discretionary trades for suitability.
FINRA Unauthorized Trading Rule
FINRA Rule 3260 states that no broker “shall exercise discretionary power in a customer’s account unless such customer has given prior written authorization.” Discretionary accounts are still subject to firm supervision. The firm or supervisor “shall approve promptly in writing each discretionary order entered and shall review all discretionary accounts at frequent intervals to detect and prevent transactions which are excessive in size or frequency.”
Because firms have a duty to approve and review discretionary trading accounts under FINRA Rule 3110, investors can hold their brokerage firm liable for losses when brokers execute excessive or unsuitable trades in their discretionary accounts.
What is the Difference Between Discretionary and Non-Discretionary Accounts?
Non-discretionary accounts are accounts in which the customer retains discretion and makes the final decision about each trade. These accounts are attractive to most investors because they come with lower fees and investment minimums.
In non-discretionary accounts, the broker executes client-approved trades at the best available market price. A broker may recommend trades for the client in a non-discretionary account and execute those trades once they have authorization from their client.
Can Investors Authorize Trades in Non-Discretionary Accounts?
Having the investor’s consent to exercise discretion is not enough. On June 27, 2021, an investor consented to a $5,000 fine and a 10-day FINRA suspension following allegations that he failed to receive written authorization to place discretionary trades, despite the fact “the customers knew [the broker] was exercising discretion in their accounts.” According to FINRA, the brokerage firm had not approved any of the accounts for discretionary trading.
Examples of Unauthorized Trading
Not all unauthorized trades look the same. Here are some of the most common types of unauthorized trades:
- A broker may mark unauthorized trades as unsolicited, making it seem as if the investor requested the trade without a recommendation from the broker.
- Sometimes, brokers will enter trades and then try to obtain the client’s consent after the fact.
- In other cases, a broker may agree to an investment strategy with the client and then fail to receive authorization for every trade that fits the approved strategy.
Time-and-Price Discretion in Non-Discretionary Accounts
There is a small exception to the discretionary trading rule: investors may give their brokers time-and-price discretion in a non-discretionary account.
Time and price discretion means that a broker has authorization to execute certain trades if they occur within a specified timeframe or at a certain price. Investors may authorize their broker to execute time and price discretion without giving them discretionary power over the account.
FINRA rules also state: “The authority to exercise time and price discretion will be considered to be in effect only until the end of the business day.”
Unauthorized Trading Can Take Place in Discretionary Accounts
Investors who opt for a discretionary account decide how much control the broker will have over trading. In some instances, there may be unauthorized trading even if a customer has granted discretionary power to the broker. For example, if the investor instructed their broker to include a mix of stocks, bonds, and mutual funds in their discretionary account, but the broker concentrates the account in only stocks, the broker will have executed an unauthorized trading strategy.
How Do Investors Find Proof of Unauthorized Trades?
FINRA encourages investors to review their brokerage account statements and trade confirmations. Investors receive quarterly account statements and written notification of trade confirmations at or before the completion of a transaction. Keep in mind that you may not receive these documents from your brokerage firm. If your firm is an introducing firm, you may receive your statements from the clearing firm instead.
Spotting unauthorized trades can be tricky.
In September of 2019, The Wall Street Journal reported that Mitsubishi Corp had fired a trader following allegations that he lost $320 million after taking a gamble on oil derivatives. The trader reportedly disguised these transactions to make them look like hedge transactions. This case underlines that firms must also play an active role in detecting particularly sophisticated unauthorized transactions.
Investors Can Only Authorize Investments They Understand
Brokers have a duty to accurately describe an investment to their clients. If you did not understand the nature of the securities transaction because your broker manipulated or deceived you, you may have a case for FINRA arbitration. FINRA Rule 2020 states that brokers may not use manipulative, deceptive, or other fraudulent devices.
Unauthorized Trading and Forgery
Investors may be surprised to learn how common forgery is in the securities industry. Forgery often comes up in cases of unauthorized trading. To make their trades appear authorized, certain brokers forge their client’s signature or use a photocopied signature. Brokers may forge signatures simply to save time, but it can still get them into serious trouble with FINRA.
What Do I Do if I Believe My Broker Executed Unauthorized Transactions?
Bring evidence of the unauthorized transactions to your firm. Next, you can file a Statement of Claim with FINRA and contact a securities attorney. Most brokerage firms require investors to settle disputes through FINRA arbitration – a process specific to securities disputes and an area where a securities lawyer is an invaluable resource.
Unauthorized Trading Penalties
Brokers found to have executed unauthorized trades may have to pay a fine and face a FINRA suspension.
Once FINRA initiates an investigation, brokers must turn over any information related to a suspected unauthorized trade. FINRA Rule 8210 requires that brokers provide documentation and testimony at FINRA’s request.
If the broker does not comply with FINRA requests, FINRA can impose a suspension until they comply. The suspension can also convert to a bar if the broker remains uncooperative.
My Broker Executed Unauthorized Trades. What Now?
If you believe your broker executed unauthorized trades, your first step is a case evaluation with a securities attorney. Contact Patil Law at 800-950-6553 to schedule a free case review with an experienced securities lawyer. Our securities attorneys can maximize your chances of winning your arbitration or obtaining a favorable settlement as quickly as possible.
