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Securities Violation: Unauthorized Transactions

When stockbrokers violate the rules and regulations governing securities, it is possible that the investors they represent will suffer significant financial loss. As a result, securities violations are taken very seriously by agencies such as the Financial Industry Regulatory Authority (FINRA). The following is intended to provide a brief overview of unauthorized transactions, which is just one of the numerous FINRA sales practice violations.

Acting Without Approval

Unauthorized transactions or trading involves trades (sales or purchases) of securities by a stockbroker without the investor’s knowledge, permission, or authorization. This means that the stockbroker must consult with, and gain the approval of, the investor prior to engaging in securities transactions. However, there are some exceptions. For example, an investor may provide an advisor with discretion to trade the account using pre-agreed upon strategies or investment objectives. An advisor who trades with discretionary authority owes the client a fiduciary duty to always act in a client’s best interest.

Unauthorized transactions may occur even if the stockbroker truly believes that the transaction is in the best interest of the investor. A violation may also occur if the stockbroker makes a transaction and, after the fact, attempts to convince the investor to approve the transaction. One of the reasons why a stockbroker may engage in unauthorized transactions is because they generate commissions on each sale or purchase they make. In other words, the more transactions the stockbroker is able to complete, the more compensation they will receive.

Preventing Unauthorized Transactions

There are numerous steps an investor can take to help lower the risk that their stockbroker will engage in unauthorized transactions, including, but not limited to, the following:

  1. Repeat instructions to the stockbroker, which increases the likelihood that a definite and clear understanding of the investor’s desired action is conveyed;
  2. Document all communication and interaction with stockbrokers;
  3. In a timely manner, read all account statements, transaction confirmations, and other information received related to transactions. In addition, retain all of these documents for future reference; and
  4. Immediately act when you realize there are transactions you do not recognize.

Detecting when an unauthorized transaction has been completed can be difficult due to the fact that frequently transactions do not require any client payment because they involve assets already existing in the account. Alternatively, unauthorized transactions may involve the liquidation of an existing asset in order to purchase a new security. Therefore, it is important to read all transaction confirmations and account statements immediately upon receiving them.

Unauthorized trading is frequently seen in cases involving excessive trading or churning. Also, many brokerage firms encourage their stockbrokers to sell proprietary or alternative investments which can pay the financial advisor high commissions.

Help for Investors

If you are an investor who has suffered financial loss as a result of stockbroker misconduct, it is important to speak with an experienced securities law attorney today. At the Silver Law Group, we provide investors who have become victims of stockbroker’s sales practice violations assistance in seeking recovery, including through the FINRA arbitration and mediation processes. We look forward to discussing with you how we can help.

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