Unauthorized Trading

The U.S. Securities and Exchange Commission (SEC) defines unauthorized trading as “unauthorized transactions are trades that a broker makes for a customer without the customer’s permission or authorization.”

Two main motivations, which aren’t always mutually exclusive, might cause a broker to engage in unauthorized transactions. First, brokers are paid commissions for every trade they make. Each addition trade means more money in their pocket; some brokers are motivated to break the law for those extra commissions. Another motivation for unauthorized trading is doing what is best for their client. For example, your broker might want you to get in on the next big stock, they cannot get a hold of you, and they don’t want you to miss out on the money. Regardless of the motivation, unauthorized trading is illegal and brokers who choose to overstep their authority potentially face severe penalties.

The Financial Industry Regulatory Authority (FINRA), formerly NASD, provides the rules and regulations that investment professionals who are members must follow. The following are those related to unauthorized trading:

• NASD Rule 2510 prohibits investment advisers and brokers from making discretionary trades without written permission from their client. If an investment professional makes an unauthorized trade, FINRA may fine them between $2,500 and $16,000 and suspend them from between 10 and 30 business days.
• FINRA Rule 2010 requires members to observe “high standards of commercial honor” in their business dealings. FINRA may fine member who violate Rule 2010 anywhere from $1,000 to $155,000, or higher in extreme cases. Individuals and firms may be suspended for 10 business days for up to two years. In severe cases, FINRA may bar both the individual and the firm from the financial industry.
• FINRA Rule 2020 prohibits the use of manipulative, fraudulent, or deceptive business practices. Much like Rule 2010, fines for violating Rule 2020 may go up to $155,000. Individuals will be suspended for a minimum of 31 days for up to two years and firms might be suspended for up to 90 days. In cases of intentional or gross misconduct, the individual may be barred from the industry and the firm faces expulsion.

Investment accounts are categorized as discretionary or non-discretionary. Discretionary accounts give your advisor/broker permission to make trades on your behalf without first notifying you. When you opened your account, you may have knowingly provided this written permission, or your broker may have tricked you into signing a form granting permission for discretionary trades. FINRA Rule 4512 mandates several requirements for record-keeping, including a record of those with authority to make discretionary trades for an account.

FINRA reports that the vast majority of victims discover unauthorized trades from reading trade confirmations and viewing their regular account statements. Some other scenarios that might indicate your investment advisor is making unauthorized trades on your account include:

• Your account statement shows a number of “unsolicited” orders, those which have been requested by the client.
• Your broker calls you to get consent after they made a trade for you. These conversations often begin with him telling you he made an excellent trade to make you loads of money, but he didn’t have time to contact you or he would have missed out on the trade.
• Many times, unauthorized trading leads to excessive trading; look for excessive fees in your account and a high volume of trade activity to indicate your broker may have overstepped his authority.