Pursuant to several securities laws and rules, brokers and their firms must obtain express permission from their clients before making decisions for their clients. For instance, NASD Rule 2510, enforced by FINRA, prohibits brokers from exercising “any discretionary power in a customer’s account unless such customer has given prior written authorization.” Violating this requirement constitutes unauthorized trading that can give rise to an investor’s claim for losses.
Other rules also require firms to maintain strict supervision over accounts in which brokers have been granted discretionary authority. For example, Rule 2510 requires firms to “approve promptly in writing each discretionary order” made by brokers on behalf of their investment clients, as well as to “review all discretionary accounts at frequent intervals.” A firm failing to properly supervise unauthorized trades is also a violation that may be the basis for an investor’s claim to pursue financial losses.
It is important for investors to monitor their account statements and the transactions in them to be vigilant of unauthorized trades. Unauthorized trades in a customer’s account indicates a broker’s breach of trust and disregard for rules and standards of care, which are red flags. Brokers exercising discretion, even when unauthorized, make them fiduciaries who must act only in their customers’ best interests.