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Similarly, if a customer signed a formal agreement with the broker or firm granting “discretionary” control to the broker, empowering the broker to manage the customer’s account without seeking approval from the customer prior to executing a trade or transaction, the customer similarly may not have a viable unauthorized trading claim. For example, if a customer has a margin account and the value of the customer account falls below the broker-dealer firm’s collateral requirements, the customer may not have a viable unauthorized trading claim because the broker in that circumstance might be permitted to execute securities transactions without consulting the customer beforehand. Similarly, a customer should be aware that if a customer executed a margin agreement or an investment adviser agreement granting the adviser discretion, the customer may not have a viable unauthorized trading claim. If the customer waits too long to report an unauthorized trade, the investment firm may deny responsibility because the customer failed to object to the disputed transactions in a timely fashion. In the event the customer detects an unauthorized trade, the customer should report the unauthorized trade to the broker and the investment firm immediately. A customer may orally grant time and price discretion to a broker, but such discretionary trading power does not extend beyond the end of the business day.Īdditionally, it is crucial that the customer review all account statements and trade confirmations in a timely fashion after receiving the account statements and trade confirmations. The only exception applies to time and price discretion. New York Stock Exchange (NYSE) Rule 408(a) clearly requires a grant of discretionary power be in writing. 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Investors can protect themselves from being the victim of unauthorized trading by closely examining their monthly account statements, reviewing all trade confirmations and reading all correspondence received from their broker or investment firm. Furthermore, it is the brokerage firm’s responsibility to ensure that their registered representatives follow all the state and federal law and regulatory rules, as well as the firm’s internal compliance policies and procedures, when making a recommendation and discussing investment trades with their customers. It is the broker’s responsibility to ensure that the customer fully understands the transactions and all risks associated with an investment prior to obtaining authorization to place a trade. Investors are not required to accept every trade recommended by a broker. Additionally, the Securities Exchange Commission (“SEC”) has found that unauthorized trading may constitute securities fraud under Rule 10b-5, as it is promulgated under Section 10b of the Securities Exchange Act of 1934. (“FINRA”) Rule 2010, Standards of Commercial Honor and Principals of Trade, prohibits a broker or registered representative from making any unauthorized transactions or unauthorized trades in a customer’s account. The Financial Industry Regulatory Authority, Inc. In most circumstances, unauthorized trading allegations involve unauthorized purchases and sales of stocks, securities, options or other financial products. Unauthorized trading occurs when a broker or investment adviser makes trades or transactions in a customer or investor’s account without that customer or investor’s knowledge, permission or authorization. |
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