What is unauthorized trading?
Two primary exceptions exist where a broker may place a trade for a customer without the broker getting approval from the customer for the specific transaction. First, when a customer’s account is designated as a “discretionary account”, the broker does not need to get the customer’s specific consent to make a trade. This is because any discretionary account requires the customer to sign a written agreement that pre-authorizes consent for the broker, in his discretion, to make trades in the customer’s account consistent with suitability rules. Second, if the customer has a margin account and the value of the margin account falls below the brokerage firm’s requirements, the customer has signed a written agreement that authorizes the brokerage firm to sell securities as needed to cover any margin balance.
In non-discretionary accounts, FINRA rules require the broker to make a contemporaneous note of an order based upon the approval of the customer. The brokerage firm must then send the investor a confirmation within three days that confirms the details of the order. These details include the name of the security, whether the investor bought or sold the security, the date of the order, and the price at which the customer bought or sold.
Please Note: McCabe Rabin, P.A. provides these FAQ’s for informational purposes only, and you should not interpret this information as legal advice. If you want advice as to how the law might apply to the specific facts and circumstances of your case, please contact one of our attorneys.