Watch Out for Unauthorized Trading in Your Account
Unauthorized trading occurs when your broker buys or sells a security in your account without your prior approval. Unless you have previously agreed that your broker has discretion to manage your account without seeking prior approval for each transaction, your broker must follow rules designed to assure that you, in fact, approved each transaction on the day the transaction occurs. If not, the transaction may be unauthorized, or it may be considered to be a failure to complete required discretionary authority.
Discretionary Trades in a Customers’ Non-Discretionary Accounts is Prohibited
Industry Rules explicitly prohibit brokers from making discretionary trades in a customers’ non-discretionary accounts. The SEC has also found that unauthorized trading violates just and equitable principles of trade and constitutes violations of Rule 10b and 10b-5 due to its fraudulent nature. There are certain exceptions however. For instance, if a customer has a margin account and the value of the account falls below the brokerage firm’s or regulator’s requirements, the broker may be able to sell the customer’s securities without consulting the customer beforehand.