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Unauthorized Trading – Recognizing Unapproved Transactions

How investors can recognized unauthorized tradingWith limited exceptions, a financial advisor must gain approval from the investor before he can recommend a trade (i.e. the purchase or sale of a security) in a brokerage account. The rules about what is considered sufficient approval of a transaction in a brokerage account are narrow. And investors should understand the correct process to approve transactions in their accounts to protect against unauthorized trading.

Assuming a financial advisor does not have discretion to place trades without the customer’s approval, a financial advisor must have same-day verbal approval from the customer before placing a recommended trade. That typically means that the financial advisor must call the customer on the same day that he intends to place the recommended trade, receive verbal approval from the customer, and then place the trade the same day he receives approval.

Written Approval is Insufficient.

Generally, a financial advisor may not place a trade based on written approval from the customer. Therefore, a text or an email approving a transaction (for example) does not constitute appropriate approval.

The trade must be placed on the same day as the verbal approval.

Suppose a financial advisor calls a client at 4:55 p.m. to recommend that the client purchase shares of XYZ stock. And suppose the client provides their verbal approval, but the financial advisor cannot place the trade before the market closes. The financial advisor may not place the trade the following morning. Do so constitutes what FINRA calls improperly taking “time and price discretion.”

Why does same day, verbal approval matter? 

Same-day, verbal approval matters for two general reasons. First, the customer must give verbal approval so the financial advisor knows that the customer (or the account holder) is the one providing the approval—and not someone else. Second, the trade must occur on the same day because prices of securities often fluctuate—sometimes wildly. Therefore, if the financial advisor places a trade on a day different than the day on which he receives approval from the customer, he might expose the customer to a price for the recommended security substantially different than its price when the financial advisor made the recommendation.

How might unauthorized trading impact how a financial advisor gets paid?

A nefarious financial advisor or investment firm might use unauthorized trading—which left unchecked, can escalate to excessive trading or churning—to serve as path to improperly generate commissions if the account is commission as opposed to fee based.

If you believe your accounts have been subject to unauthorized trading, it’s important to consult with a qualified professional to assess your situation.


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