In the brokerage industry, there are two types of customer accounts: discretionary and non-discretionary. In a discretionary account, also known as a managed account, an investment professional may trade the account without seeking client approval before executing the trade. The trading must be done within the parameters formally agreed upon in writing between the customer and the investment professional. When the investment professional exceeds the authority granted, he/she has engaged in unauthorized trading.
In a non-discretionary account, the most common type of retail brokerage firm account, a broker must obtain the approval of the customer prior to executing a trade of a security. Unauthorized trading occurs when a broker, financial advisor, or other investment professional purchases or sells a security without first obtaining the customer’s permission.
Unauthorized trading occurs under many fact patterns. Although the fact patterns vary from case to case, the following are the more typical scenarios:
- Your investment professional tries to disguise a pattern of unauthorized trading by entering the trades as “unsolicited” orders. Under industry rules, all orders must be marked as either solicited or unsolicited. A solicited order is one that was recommended by the investment professional. Conversely, an unsolicited order is one that was requested by the customer.
- Your investment professional places transactions in your accounts without authorization, and then calls you to explain what a great trade he/she has just made, or that there was no time to call because of the market, and seeks to gain your “consent” after the fact.
- You and your investment professional discuss and/or agree on an investment strategy, but the investment professional then purchases some or all of the securities or funds, without first gaining your consent for each purchase. It does not matter whether the unauthorized trades were for gains or losses; the conduct is still illegal.