Client Approval Required for Securities Transactions

The brokers who seek your investment dollars must always tell the truth about their businesses and must treat the customers fairly and honestly, putting the customer’s interests first as said by the Securities Exchange Commission (SEC). The New York Stock Exchange (NYSE) and also the National Association of Securities Dealers (NASD) have both strict rules which prohibit unauthorized transactions: NYSE Rule 408(a) and NASD Rule 2310-2(b) (4) (iii).

The brokers must obtain authorization for all their transactions and may not execute the trades in a customer’s account unless the customer has approved and authorized the trade in advance, or he has given the broker a discretionary trading authority which is the power for the broker to make trading decisions. A broker may not engage in any unauthorized trading. On the other hand, a broker also has an obligation to carry out the instructions of the customer.

Every transaction should be approved in advance by the broker unless an authority in writing is provided to the broker to trade at his discretion. Any verbal instructions do not authorize a broker to trade at his own discretion. A broker may have engaged in unauthorized trading if he did not obtain express approval for every trade in a client’s account. If the value of the account falls below the minimum requirements in a marginal account the broker may be able to sell the securities without prior consultation. if the account agreement allows the broker to sell the securities in order to collect the money borrowed, this would not be called an unauthorized transaction.

Any unauthorized trading involves the sale or purchase of securities in a customer’s account without the customer’s authorization and prior knowledge. This can occur with any security. An example of unauthorized trading would be a broker who believes that a transaction is in the investor’s best interest but proceeds with the trade anyway and cannot or does not contact the investor.

Investors need to pay close attention to the activities in their account for numerous reasons, which include unauthorized trading. NYSE and NASD have Customer Confirmation Rules which state that a broker must provide customers, at or before the completion of a transaction, with certain information which includes:

• The date, identity, time, price, and number of shares.
• Their compensation (commission, fees, etc.) and their capacity (agent or principal).
• The source and amount of any third party remuneration they will or have received.

Some other pertinent information, both transaction-specific and general.

In most cases, unauthorized trading is discovered through regular account statements sent by the brokerage house and reading confirmations. There may be awareness when the customer receives a confirmation in the mail for an unknown trade and also if a notice was sent that an existing asset was liquidated to fund the purchase of a new security.