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What constitutes unauthorized trading?

On Behalf of | Jun 3, 2024 | Securities Litigation

Unauthorized trading happens when a broker buys or sells a security for a client’s account without the client’s permission. This kind of trading violates the trust between a broker and a client.

A client must give clear consent for each trade, either through written instructions or verbal agreement. If a broker acts without this consent, it is an example of unauthorized trading.

When will FINRA take action against unauthorized trading?

The Financial Industry Regulatory Authority monitors and regulates the actions of brokers and brokerage firms. FINRA has rules in place regarding the proper handling of discretionary accounts. FINRA takes action against unauthorized trading when it receives a complaint or discovers evidence of a violation of these rules.

A client can file a complaint with FINRA if they notice trades on their account that they did not authorize. FINRA will then investigate the complaint to determine if unauthorized trading occurred. FINRA also conducts regular examinations of brokerage firms to ensure compliance with regulations. During these examinations, if FINRA finds unauthorized trading, it will take action against the broker involved.

What consequences are there?

Unauthorized trading carries severe consequences for brokers and brokerage firms. FINRA can impose fines and suspensions on brokers who engage in unauthorized trading. In severe cases, FINRA can bar a broker from the industry altogether.

For the affected clients, unauthorized trading can result in financial loss. Clients may have to sell unwanted securities at a loss or miss out on potential gains. If FINRA finds that a broker engaged in unauthorized trading, the broker might have to compensate the client for any financial losses.

Ultimately, unauthorized trading undermines the integrity of the financial markets. FINRA takes this issue seriously and acts promptly to protect investors. Brokers and brokerage firms must follow strict rules to ensure that all trades have the client’s explicit consent. This protects clients and maintains trust in the financial system.