Unauthorized Trading

Stock brokers and other financial professionals may not place trades in a client’s account without the customer’s permission. Most brokerage accounts are non-discretionary, meaning that the broker must contact the customer and obtain their permission prior to each and every trade. An exception to this rule is where the firm sells securities in the customer’s account due to a margin call. Unauthorized trading occurs when the broker, in a non-discretionary account, executes trades without the customer’s knowledge or consent.

An unscrupulous broker may try 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 broker. Conversely, an unsolicited order is one that was requested by the customer.

When the customer gives the broker written authorization to place trades in the account, this is referred to as a “discretionary account.” Discretionary accounts are also known as managed accounts. Brokers and investment advisors have a much higher fiduciary duty when they accept discretionary authority.