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Unauthorized Trading and Churning

  1. What Is Unauthorized Trading?
  2. What Are the Different Types of Investment Accounts?
  3. What Are the FINRA “Best Execution” Requirements?
  4. What Is Churning?
  5. What Should I Do if I Notice Unauthorized or Excessive Trading in My Brokerage Account?

What Is Unauthorized Trading?

A broker engages in unauthorized trading when he/she makes trades in a customer’s account without the customer’s express and unequivocal permission. Your discussions with your broker as well as the type of account you own will dictate when a broker may make trades on your behalf.

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What Are the Different Types of Investment Accounts?

In terms of the control your broker can exercise over your account, there are two types of accounts to know: discretionary and nondiscretionary. With discretionary accounts, a broker can typically make trades in your account without your express permission as long as the trades are in line with your stated investment objectives. With nondiscretionary accounts, a broker is required to get your express consent before executing a trade in your account.

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What Are the Finra “Best Execution” Requirements?

FINRA Rule 5310 dictates that a broker must use reasonable diligence to ensure that he/she obtains the best market when trading a security in your account. The best market requirement means that the broker must seek the best possible terms for a trade on behalf of a customer.

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What Is Churning?

Churning occurs when a broker conducts extensive trading in an account for the sole purpose of generating commissions. Essentially, the broker prioritizes his/her own profits to the detriment of the customer’s portfolio performance. Churning can also occur if a broker only engages with high-commission products.

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What Should I Do if I Notice Unauthorized or Excessive Trading in My Brokerage Account?

If your brokerage account statements show that your broker has made trades without your consent or has made more trades than you authorized, it is possible that your broker violated FINRA rules and you may be entitled to damages. If the above conduct sounds familiar, we encourage you to discuss your claims with the experienced Securities Fraud lawyers at Malecki Law.

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