The law requires financial advisors to obtain their clients’ permission before each transaction. Though brokers make recommendations to their clients, it is the clients who must ultimately agree to those recommendations before any trading takes place. A client may provide a written discretion, giving financial advisors permission to trade without prior approval for each trade. However, this is very rare. When advisors execute trades in their clients’ accounts without their expressed permission, they have engaged in unauthorized trading.
Brokers who buy and sell securities behind an investor’s back may be trying to defraud clients. Even brokers who believe they’re acting in their investor’s best interests cannot buy or sell securities without permission. For example, being unable to get in touch with an investor but making the trade anyway constitutes unauthorized trading – even if the broker believes it benefits the investor.
How to Spot Unauthorized Trading
When establishing a relationship with a broker and brokerage firm for investments, you set your investment objectives, investor profile, and risk tolerance level. Your broker must use these three things to determine the best financial strategy for you.
The Financial Industry Regulatory Authority (FINRA) requires brokers to send their clients statements that document transactions in an account. These notifications allow you to track the trading of your securities. Not every investor reviews his or her monthly statements from a broker. This creates an opportunity for a broker to trade on your behalf without your permission and without you noticing.
If you know what to look for, you can spot unauthorized trading. Always read your confirmations and account statements from your broker. If you see any transactions you did not approve or you do not recognize, act at once. Time is essential in unauthorized trading scenarios.
Contact the brokerage firm’s branch manager and report the discrepancy. Also contact the compliance department of your brokerage firm, following up with a phone call to ensure they’ve received your complaint. The longer you wait to report an unauthorized transaction, the less credible your argument.
Protect Yourself from Broker Misconduct
Unauthorized trading is one of many ways a broker can harm his or her clients. Making transactions in your account without first obtaining permission may give the broker more money in commissions or serve the broker’s own purposes in some other way. If brokers act within their personal self-interest, it constitutes broker misconduct. You may avoid becoming a victim of unauthorized trading and broker misconduct with these tips:
- Give and repeat instructions to your broker. Be clear and concise in your directions, leaving no room for misinterpretations. Promote a mutual understanding of every transaction.
- Communicate openly with your broker. If you spot a transaction on your account that you did not authorize, connect with your broker to find out what happened. It may have been a simple misunderstanding, or there may be fraud involved.
- Retain all documents your broker sends you for your records, and make note of conversations you have. Documenting your communications will help you in the future if you have to file a claim with FINRA.
- Read your account statements thoroughly. Wise investors read and retain all transaction notifications and confirmations. Ignoring these papers can result in failing to notice suspicious activity right away.
The sooner you file a claim of unauthorized trading in your account, the better your chances are of winning an arbitration case. Erez Law can help you file a FINRA arbitration claim. We can recognize signs of unauthorized trading and other forms of broker misconduct in your account and give you professional legal advice moving forward. Unlike most law firms, we specialize in helping clients in this type of law. Call 888-840-1571 or contact us online for a free consultation.