Your brokerage statements should reflect decisions you understood and approved. When they show trades you never authorized or a pattern of frequent buying and selling that generates commissions without serving your goals, something may be wrong. Unauthorized trading and churning are two forms of stockbroker misconduct that can quietly erode an account, and both can be difficult to spot without knowing what to look for.
Understanding the warning signs can help you recognize a potential problem early and take steps to protect your account. At Scott Hirsch Law Group, PLLC, we represent investors in Florida and nationwide in claims against brokers and brokerage firms. Contact us to schedule a free virtual consultation.
What Is Unauthorized Trading?
Unauthorized trading occurs when a broker buys or sells securities in your account without your permission. In a non-discretionary account, the most common type of retail brokerage account, a broker generally must obtain your approval before executing each trade.
FINRA rules require a customer's prior written authorization and the firm's acceptance of the account as discretionary before a broker can exercise discretion over it. Without that authorization, a broker who places trades on their own initiative may be violating industry rules, even if the broker believed the trades would benefit you.
Unauthorized trading can take several forms. It may involve trades placed without contacting you, purchases of securities you never discussed, transactions in different amounts than you approved, or trades made after you told the broker not to proceed.
Warning Signs of Unauthorized Trading
Most investors discover unauthorized trading by reviewing trade confirmations and monthly statements. Transactions you do not recognize, securities you never discussed, and unexplained changes in your cash balance or margin use all deserve a closer look.
A broker's conduct can also be telling. A broker who becomes difficult to reach, discourages you from reviewing statements, or explains trades only after they occur may warrant attention.
Brokers sometimes argue that a customer accepted a trade by not objecting. For that reason, raising concerns promptly and in writing matters. If a trade looks unfamiliar, contact the firm, ask for an explanation, and keep a record of the communication.
What Is Churning?
Churning is excessive trading in an account, typically to generate commissions or fees for the broker rather than to benefit the investor. Unlike unauthorized trading, churning can occur even when you approved each trade, particularly when you relied heavily on your broker's recommendations.
FINRA's suitability rule and the SEC's Regulation Best Interest both address excessive trading. Under these standards, a series of recommended transactions must not be excessive in light of the customer's investment profile, even if each transaction might seem reasonable on its own.
How to Recognize Excessive Trading
Churning usually shows up in patterns rather than individual trades. Frequent in-and-out trading, buying and selling securities within short periods, is a common indicator. So is heavy trading in an account opened for long-term or conservative goals.
Regulators and experts often examine the turnover rate, which reflects how many times the account's holdings are replaced in a year, and the cost-to-equity ratio, which estimates how much the account must earn just to cover commissions and fees. No single number proves churning, but unusually high figures can suggest trading costs are working against you.
Other red flags include rising commissions or fees, increased margin use to support trading, and performance that lags despite constant activity.
Review Your Account Records Carefully
Your account records are often the most important evidence of misconduct. Account opening documents show your stated objectives, risk tolerance, and whether you granted discretionary authority.
Trade confirmations, statements, and communications with your broker can show what was recommended, what was approved, and how the account changed over time.
How Long Do You Have to Act?
FINRA generally bars a claim from arbitration when six years have elapsed from the occurrence or event giving rise to it. That rule does not apply to all statutes of limitation, and some claims have shorter deadlines.
Because churning and unauthorized trading can unfold over months or years, determining when a claim arose may be complicated. Waiting to see whether the account recovers can create timing problems.
Recovering Losses Through FINRA Arbitration
Most brokerage customer agreements require disputes to be resolved through FINRA arbitration rather than in court. In a claim involving unauthorized trading or churning, investors may seek to recover losses and, depending on the circumstances, commissions and fees paid on the improper trading.
These cases depend heavily on how trading patterns, account documents, and communications are developed and presented to the arbitrators.
Talk to Scott Hirsch Law Group, PLLC, About Your Account
Recognizing the warning signs is a first step. Determining whether your account activity supports a claim requires a closer look at the trading, the documents, and your investment profile.
Scott Hirsch, our attorney at Scott Hirsch Law Group, PLLC, has more than 17 years of experience helping investors and has represented thousands in FINRA arbitrations across the country. If you are an investor in Florida or elsewhere in the United States and suspect unauthorized trading or churning in your account, contact us to discuss your situation. We can review your circumstances.
