Your Stamp of Approval Required

By Benjamin Stubbs, Spring 2014 Student Intern

stampGenerally speaking, investment accounts are either discretionary or nondiscretionary.  Discretionary accounts give brokers discretion to make trades without an investor’s prior authorization.  A nondiscretionary account, on the other hand, requires brokers to get the customer’s authorization before the broker can make any trade related to that account.  In a nondiscretionary account, if a broker makes a trade without first getting your permission, you may have a claim against the broker for unauthorized trading.

What is Unauthorized Trading?

According to FINRA, unauthorized trading is the “sale or purchase of securities without the investor’s prior knowledge and authorization.”  The S.E.C. defines it similarly: “Unauthorized transactions are trades that a broker makes for a customer without the customer’s permission or authorization.”  FINRA explains further that even if a broker believes a trade is in your best interest, he or she cannot make the trade unless you approve it beforehand or the broker otherwise has authority to make it, even if the trade ends up being profitable.

What can you do to prevent and spot unauthorized trading?

keep trackTo prevent unauthorized trading in your account, make sure your instructions for your account are clear to your broker, which will ensure mutual understanding of transactions and that you are generally on the same page.  Document your conversations with your broker.  It’s a good idea to keep a notebook in your files with accounts of conversations, detailing what was discussed, what your instructions were and any agreements you and your broker reached.  For example, when you talk with your broker and approve a trade, write down the date of the conversation and the details of the trade, and keep the notes in your file.  If your instructions were written, keep a copy and add them to your file.

Further, study and keep your account statements, trade confirmations and all other information you receive about your investment transactions.  As you study them, look for any trades you did not authorize or are unfamiliar, comparing these documents with your notebook.  Reading confirmations and account statements is the most common way that unauthorized trading is detected.

checkFinally, if you see a transaction you don’t recognize, try to reconcile it immediately.  Call your broker and ask about it.  Call the firm’s branch manager and send an overnight letter to the firm’s compliance department stating that you refuse the unrecognized transaction.  Follow up on the letter with a call to the compliance department, keeping in mind that the sooner you call the better.  It is important to take these steps even if your broker tries to convince you that the trade was in your best interest.

Invest how you want.

Remember, it’s your money.  Get advice and ask for guidance, but invest it how you want.  To maintain control over your investments, be clear with your broker about what you expect, pay close attention to your account and keep records of conversations.  If you do see something strange, don’t be afraid to speak up and get answers because if you didn’t approve it, your broker shouldn’t have done it.