What is Unauthorized Trading?
Before executing a trade, the law requires that your financial advisor obtain prior authorization from the account owner or his or her written designee. Failure to obtain prior authorization may provide you with a claim to recover any attending losses and a return of all commissions charged. Financial advisors who engage in unauthorized trading often do so in order to generate a commission. Passive investors who do not regularly review the details of their account statements are more susceptible to being victimized by unauthorized trading. It is important for you to review your account statements and trade confirmations each month and monitor all transactions made in your accounts.
How Can I Tell if Unauthorized Trades Have Been Made in My Account?
It is very easy to identify unauthorized trades. When you receive monthly account statements and trade confirmations, carefully review them to determine whether you recognize, and can recall having a conversation about, each security purchased in the account. Similarly, if you notice that a security has been sold, confirm that you spoke to your advisor and authorized each such sale. If you cannot answer these questions in the affirmative, chances are your financial advisor has engaged in unauthorized trading.
Why Would My Financial Advisor Engage in Unauthorized Trading?
Simply put—commissions. Financial advisors are compensated based on either their assets under management, the volume of trades placed, or both. If a financial advisor’s compensation is tied to the volume of trading he or she does, it may provide an incentive to place unauthorized trades.
What if I Told My Broker to Use His or Her Discretion in Making Trades? Do I Still Have a Claim for Unauthorized Trading?
Generally speaking, even if you make verbal statements to your advisor allowing them to “use their discretion” in handling your account, that is usually not sufficient to constitute an authorization for all trades.
In some cases, the broker may successfully argue that, even in the absence of written consent, you knew the trades were being made.
As a general rule, the broker or advisor should not make a trade without notifying you first and getting your express consent.
Questions About Unauthorized Trading?
The Wolper Law Firm has extensive experience handling claims involving unauthorized trading. If an unauthorized trade is placed in your account, please contact the Wolper Law Firm for a free consultation and evaluation of any potential claims you have against your brokerage firm or financial advisor.