Unauthorized trading is one kind of investment misconduct by a financial advisor or broker in which they execute investment transactions on behalf of a client using the customer’s money, but without their written permission or in violation of the customer’s investment instructions. The U.S. Securities and Exchange Commission (SEC) calls unauthorized trading a type of “sales practice abuse.”
Characteristics of unauthorized trading
Securities transactions can be confusing. Financial Advisors may engage in unauthorized trading on behalf of any client but some target those who are elderly or otherwise vulnerable to financial exploitation. These kinds of securities customers may be less financially savvy and less likely to follow up on every detail of their investment accounts, so they may miss telltale signs of transactions they did not approve. Unfortunately, unauthorized trading that goes unnoticed can result in serious financial losses to clients.
Financial Advisors may also be charging the unsuspecting customer for fees and commissions associated with unauthorized trading without their consent.
Unauthorized trades are often inappropriate choices for the individual client because the level of risk or amount of time involved for the investment to yield results is inconsistent with the client’s wishes or profile. For example, it would be unsuitable to invest in a security that will not mature for 15 years or with a long lock-up period on behalf of a client who is elderly and will almost certainly not see the economic rewards during their lifetime.
Unauthorized trading, depending on the individual circumstances, can run afoul of SEC regulations, including potentially the relatively new Regulation Best Interest (Reg BI), as well as rules of the Financial Industry Regulatory Authority (FINRA) like Rule 2010 concerning standards of commercial honor. The broker misbehavior may also violate other laws such as those concerning investor fraud or breach of fiduciary duty. In serious cases, other kinds of state or federal civil or criminal laws may come into play, including those involving misrepresentation or fraud, forgery, elder abuse, emotional distress, consumer protection and others.
Examples of unauthorized transactions
Instances of unauthorized trading are often of similar patterns, but sometimes advisors are creative in their misconduct. Potential examples include:
- Choosing investments with significant risk such as structured products for someone who has designated low or moderate risk only
- Placing the customer in a private investment vehicle when they have requested only publicly traded investments
- Forging a client signature to put them into an investment they would not have approved
- Investing more of a client’s funds than they approved, even putting their net worth or retirement security at risk
Contact an experienced attorney if you suspect Unauthorized Trading.
Anyone who suspects their broker may have engaged in unauthorized trading to the customer’s detriment should seek legal advice and guidance from an experienced, knowledgeable securities attorney. The attorney can launch an investigation on behalf of the client to uncover the extent and type of financial misbehavior as well as the extent of harm to the client. Part of this would include evaluation of the employing brokerage firm’s liability. For example, the firm may not have provided required oversight or training or may have ignored red flags. The lawyer can explain the range of potential legal remedies available to them.