What is Unauthorized Trading?

Unauthorized trading happens when a broker makes a trade in an investor’s account without the client’s permission. 

According to FINRA Rule 3260 (formerly NASD Rule 2510), a broker is not allowed to trade in an investor’s account unless the investor has given written permission for a broker to sell or purchase a security in the investor's account. 

Investor accounts for which a broker does not have a client’s written authorization to exercise discretion over the trades are known as non- discretionary accounts. This means that a broker must obtain written permission from the investor before placing a trade for the client’s account, usually on the same day the trade is executed.

Keep in mind that with a discretionary account, a broker is allowed to make trades in a client’s account without having to contact the investor first. Brokers cannot misuse or exceed this authority. The broker is only permitted to make trades that are in an investor’s best interest. 

If a broker makes one or more trades in an investor’s non-discretionary account without the investor’s consent, the broker may be engaging in unauthorized trading. 

Brokers Must Obtain Investor’s Permission for Trades

The Securities and Exchange Commission (“SEC”) and Financial Industry Regulatory Authority (“FINRA”) prohibit brokers from making unauthorized transactions. FINRA has recognized that unauthorized trades are a serious breach of the broker’s duty to observe high standards of commercial honor and just and equitable principals of trade set forth in FINRA Rule 2010. 

The SEC has found that a broker who engages in unauthorized trading in the client’s account violates the antifraud provisions of the securities laws and constitutes a violation of Section 10(b) of the Exchange Act and Rule 10b-5. A broker that places an unauthorized trade demonstrates deceptive conduct by failing to inform the investor of the trade before it is made. 

Brokers are also prohibited from placing their own interests ahead of their clients’ interest. If you see unauthorized trading in your investment account, it could be a sign that your broker is not working in your best interest. 

Can Brokers Try to Get Consent After the Fact? 

Sometimes bad brokers attempt to get acceptance of the trade after the fact. The SEC has recognized that after the fact acceptance of an unauthorized trade does not transform that transaction into an authorized trade. 

Typically, an investor does not discover an unauthorized trade right away. As a result, the investor does not immediately complain about the trade or trades. 

Most of the time, an investor’s delay in complaining about an unauthorized transaction, is a consequence of misplaced trust in a broker, and does mean that the investor approved the broker’s actions. However, an investor who fails to complain may have a more difficult time proving the trade was unauthorized. 

Signs of Unauthorized Trading 

Unauthorized trading is a betrayal of the duty a broker owes an investor. Unauthorized trading claims to recover an investor’s losses are normally pursued in FINRA arbitration. To recover financial losses, you must show:

• There was an unauthorized trade or transaction in your brokerage account.

• The broker was not authorized to make the trade or transaction because you did not give the broker permission to do so. 

• You suffered financial losses as a result of the unauthorized trade or transaction.

If you discover an unauthorized trade or transaction, it is important to act quickly and speak with an experienced securities attorney. The sooner you take action, the more likely your chances of success in FINRA arbitration.

Riera Law is Prepared to Help

Riera Law’s securities attorneys experience and understanding of unauthorized trading claims allows us to help you to determine whether your investment losses were the result of unauthorized trading. Contact us or call us today at 305-204-9779 for a free case evaluation.