Unauthorized Trading

Prior to placing an order to buy or sell securities for an investor a broker or advisor must obtain the express permission of that investor. If not, the transaction is unauthorized.

A broker or advisor can obtain a “trading authorization” to buy and sell securities in a client’s account client which allows trades to be placed without contacting the client. Legally, this is a limited power or attorney, limited only to placing trades in the client’s account. Investment advisory firms usually obtain signed forms which allow them to trade for their clients, but brokerage firms do not regularly allow brokers to have “discretion” over accounts, which oftentimes result in unauthorized trading claims.

Experienced investors know that, unless there is written authorization, a broker or advisor can not simply place trades for a client without first discussing each order. However, millions of inexperienced investors have been solicited to open accounts in the past decade, including those with little or no background in investing who have “rolled over” sizeable retirement accounts. These new investors do not know the “rules of the road” at investment firms including those concerning discretionary accounts.

If the client did not give the advisor or broker permission to place a transaction, and there was no understanding a trade would be placed, then the trade can face unauthorized trading penalties. The laws vary as to whether buying and selling securities without a written authorization is an unauthorized if the client knew the broker was placing the trades. In either event, when a broker or advisor uses such discretion to place trades with or without permission there are far greater duties owed to the client.

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