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What to Do if You Suspect Unauthorized Trading

Many investors trust financial advisors, brokers, and investment advisers to manage their finances. We expect these professionals to handle a client's account with honesty. Unfortunately, broker misconduct continues, and securities fraud happens.

Clients who experience financial losses not attributed to typical market fluctuations have options. The government empowers and encourages clients and the public to report brokers' wrongdoing. This includes stockbroker fraud. This article will discuss unauthorized trading and how to report it.

Unauthorized Trading

When you entrust your finances to a financial advisor or broker, your broker will explain the scope of their authority to act on your behalf. An advisor can suggest certain transactions or strategies. But a broker can't execute a transaction without your permission or authority.

If you select non-discretionary accounts, no one but you has authority over your money. Your broker can still make recommendations, but you have the final approval before they buy or sell assets. The broker must contact the investor before making trades in your account.

Unauthorized Trading Defined

"Unauthorized trading" happens when a broker executes a trade without permission or authority. If your broker makes trades in your account that you did not approve, it's unauthorized trading. A broker can't trade without the investor's authorization and then try to get confirmation after the fact.

Unauthorized trading can happen with any security or financial product. There are exceptions to the unauthorized trading rule. For example, if you have a margin account, your broker can make discretionary trades on your behalf. They may not have to get a trade confirmation. Your broker may be able to make a trade without consulting you first when the account falls below the firm's required limit.

It's a good idea to read your margin agreement carefully. Understanding the situations where your broker can trade without trading authorization is critical.

Examples of Unauthorized Trading

Certain signs show that unauthorized trading is happening in your investment account. When reviewing your investment account statements, you may see red flags of unauthorized trading. This activity includes trades in your account that you did not approve, including the following:

  • Excessive trading. A high volume of trading activity could show churning or identity theft
  • Frequent trading. Frequent in-and-out stock purchases inconsistent with your investment goals and risk tolerance
  • Excessive fees. The total amount of fees charged is higher than normal
  • Records for transactions that can't be verified

Unauthorized trading can take several forms. Customer accounts get pillaged, and unauthorized transactions happen. Being aware of various scams that may impact your brokerage account is critical. The best protection is to avoid scams in the first place.

Investigate the Facts in Your Case

If you suspect unauthorized trading in your accounts, following several steps may be helpful.

  • Speak with your broker immediately
  • If your broker's explanation of any suspect transactions is unsatisfactory, contact the brokerage firm's branch manager
  • If that doesn't help, contact the compliance department to discuss the issue
  • If identity theft or a data breach is an issue, follow these steps

With any investigation, it helps to document your concerns in writing. Keep a copy of this documentation and any firm correspondence for your records.

FINRA Prohibits Unauthorized Trading

FINRA, the Financial Industry Regulatory Authority, oversees all brokerage firms and financial advisors. It's a not-for-profit, self-regulating agency authorized by Congress. The U.S. Securities and Exchange Commission (SEC) oversees FINRA.

FINRA creates and enforces rules that govern the broker-dealer industry. Several FINRA rules ban unauthorized trading.

FINRA Rule 2010

For example, FINRA Rule 2010 requires that brokers "observe high standards of commercial honor and just and equitable principles of trade." This ethical rule authorizes FINRA to punish unethical broker behavior, including unauthorized trading. This rule requires members to observe "high standards of commercial honor" and fair-trade principles.

FINRA Rule 3260

FINRA Rule 3260 bans unauthorized trading. Brokers can't make transactions from discretionary accounts without written client authorization.

FINRA Rule 2020

Unauthorized trading violates FINRA Rule 2020. This rule bans using manipulative, fraudulent, or deceptive practices.

Reporting FINRA Violations

If you suspect unauthorized trading or other misconduct, report it to the FINRA Investor Complaint Center. The FINRA Complaint Program will investigate your complaint. FINRA can take disciplinary action against brokers or firms, including issuing sanctions.

Reporting Unauthorized Trading

There are more ways to report unauthorized trading. If you know of any violations of FINRA rules or any securities fraud or wrongdoing, you should report it.

You can report unauthorized trading and other misconduct to the SEC. The SEC has an online complaint form available on its website.

You can also use the SEC's online portal to report other types of improper broker activities, including the following:

  • Ponzi or pyramid schemes
  • Insider trading
  • Illegal churning or abusive short-selling
  • Bribery
  • Other fraudulent conduct

Whistleblowers with knowledge of unauthorized trading can bring a claim under the SEC Whistleblower Reward Program. Federal law allows the SEC to give monetary awards to those who offer high-quality information to the SEC that leads to a successful enforcement action.

The CFTC (Commodity Futures Trading Commission) Whistleblower Reward Program also has a reporting portal. Which entity to report the wrongdoing depends on the financial products and parties involved.

Get Legal Help with Your Securities Case

Investment fraud in brokerage accounts is serious. If you have information about an unauthorized trading case, you can report it to regulatory agencies.

If you suspect you have an unauthorized trading claim or other broker misconduct, an attorney can help. An unauthorized-trading attorney can explain your legal options. An experienced securities lawyer can help you understand the full scope of your legal options on unauthorized trading.

Most attorneys offer a free case evaluation. So, you have nothing to lose by contacting an attorney for more information. FindLaw can help you find an experienced securities law attorney in your area.

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