Your financial advisors play a key role in your business and therefore hold positions of trust which puts you at risk of losing money as a result of unauthorized trading. Unauthorized trading relates to any trades that your financial advisor makes without obtaining prior permission from you. When your broker sells, buys, or exchanges securities without your prior consent, then it is referred to as unauthorized trading.
Getting to Know Your Accounts
According to FINRA’s regulations, your financial advisors must obtain prior authorization to make any business transactions in your account, otherwise, this could be considered unauthorized trading. However, how your advisor obtains this permission depends on the type of business account that you have.
Here are the two types of accounts you may have:
Discretionary Accounts vs Unauthorized Trading
A discretionary account gives your broker more authority to manage your account. In this case, your financial advisors will not have to obtain prior authorization to make any transactions. However, they must have obtained written authorization signed by you, otherwise, they are engaging in unauthorized trading.
If you have such an account, you can place specific limits on the types of securities you wish to invest in or how to balance your account so that your broker will only trade within those limits. If you have busy schedules or prefer assuming passive roles in your firm, this type of account will effectively suit your needs.
A discretionary account allows your broker to be proactive in seizing business opportunities without having to reach out to you. As a result, you won’t miss out on any opportunity because you were not able to give permission.
However, this type of account typically requires a relatively higher minimum investment to open. Also, the account charges higher fees as it requires the attention of a financial advisor to constantly oversee it.
Even though brokers do not have to obtain prior permission before handling any transaction, they are usually limited in their transactions. FINRA regulations allow brokers to only execute transactions that serve the interests of the clients.
Non-Discretionary Accounts vs Unauthorized Trading
A non-discretionary account gives you control over the account. With this type of account, your broker must seek written consent or verbal authorization before executing any transactions in your account. This implies that you will be the final decision-maker in your investments, giving you total control over your business.
This account gives you a more practical approach to investing. It would feel intimidating to consider giving your broker free reign over your investment account. If entrusting your investment account with someone else scares you, a non-discretionary account is your best option.
However, this account limits your broker and cannot harness any unexpected opportunity. Also, the broker must always wait for your consent to execute any trade during which the opportunity may have passed.
Trading in Violation of FINRA’s Rules
FINRA rule 2510 (b) stipulates that no registered broker or brokerage firm may use discretionary trading power with regard to their client’s account unless that specific client has given them express written permission to do so.
From this, there is no ambiguity on this issue. Whether the broker believes they are acting in your interests, he can never conduct any transaction without your authorization.
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Why Do Brokers Engage in Unauthorized Trading?
FINRA regulations require brokers to only act in the interest of their clients. However, broker misconduct has been occurring. A broker can engage in unauthorized trading due to:
Obtaining Extra Commission
A broker may try to increase his commission by performing excessive transactions in your account. The broker earns extra cash from unauthorized trading of your investment.
In a bid to cover any losses from previous transactions, your broker may engage in other trades without your consent so as to prevent you from discovering the losses in your account.
Working from selfish and personal interests, your broker may be out to make personal gain from your account by engaging in trades without your consent.
Unauthorized trading is strictly prohibited by FINRA regardless of the reason for making the transactions. If you notice any trades that you did not give consent to, it is important that you contact your attorney.
Trust Us to Help You Fight Unauthorized Trading
As discussed above, unauthorized trading revolves around any transactions that a financial advisor makes for a client without obtaining their express permission. If your financial advisor engages in a transaction without your consent, the advisor has violated FINRA rules and also state and federal laws that prohibit unauthorized trading.
At Schwartz Law Firm, we are a fully-fledged litigation law firm focused on helping our clients with their legal needs. We regularly represent clients in state court, federal court, and arbitration proceedings. If your financial advisor has traded in your account without your express permission, you may have a viable claim for unauthorized trading. Contact us today!