Concerns Over Unauthorized Trading Increase


The Securities and Exchange Commission has issued an alert warning firms about their supervisory obligations with regard to unauthorized trading by brokers and advisors in customers’ accounts. The SEC’s alert provides guidance to firms in preventing and detecting unauthorized trading. InvestmentNews calls the SEC’s alert a “scoundrel alert” (“Scoundrel alert: SEC warns firms about policing unauthorized trades”).

Absent a written agreement that provides discretionary trading authority, brokers and advisers must obtain the customer’s authorization before buying or selling a security or other investment in that customer’s account. Failure to do that ? unauthorized trading ? is a form of fraud for which the broker or advisor and the brokerage firm may be held liable to rescind the trade and refund the customer’s money.

Red flags of unauthorized trading may include a high volume of trade cancellations, corrections or adjustments. Interestingly, the alert recommends that firms require traders to take vacations without remote access to trading accounts. Firms should use the trader’s vacation as an opportunity to scrutinize the portfolios handled by that broker for any changes in trading patterns or signs of unusual activity, according to the SEC.

“Unauthorized trading is not a new problem, and the risks it poses should be a perennial concern to financial firms as well as to regulators,” Carlo di Florio, Director of the SEC’s Office of Compliance Inspections and Examinations, was quoted as saying.

The alert is the second one issued by the SEC this year and the fourth in a continuing series that the SEC says it expects to issue.

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.