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SEC Issues Risk Alert to Firms About Unauthorized Trading

The Securities and Exchange Commission (“SEC”) has issued an alert to broker-dealers and investment advisers to be more vigilant regarding the detection and prevention of unauthorized trading in customer accounts. Unauthorized trading is not limited to unapproved trades executed in customer accounts, it can also include trades that exceed firm limits on position exposures, risk tolerances and losses; deliberate mis-marking of positions; and fabrication of records showing nonexistent transactions.

In addition to improper trades by rogue brokers, unauthorized trading can be done by traders, trading desk assistants, portfolio managers, risk managers or other firm employees, including those in administrative positions in the firm’s back office.

The alert suggests that firms should:

• review changes in trading patterns;
• investigate any unusual or high volume of trade cancellations or corrections in a customer’s account;
• scrutinize manual trade adjustments;
• examine any unexplained profits for a particular broker;
• analyze frequent requests for trade limit increases;
• evaluate patterns in employee remote access to trading accounts; and
• revise, if necessary, compensation and promotion policies to avoid potential incentives for unauthorized trading.

If anomalies are detected, firms should investigate further. The alert also suggests various compliance measures that firms might want to use to protect themselves and their clients from unauthorized trading, such as mandatory vacations for brokers, during which a full review of the trading in their customers’ accounts can be undertaken.

The full alert can be found at https://www.sec.gov/about/offices/ocie/riskalert-unauthorizedtrading.pdf

Investors nationwide who have incurred recoverable investment losses due to specific failures by stockbrokers and brokerage firms, and who may have a FINRA arbitration claim, may contact the Florida securities lawyers at McCabe Rabin, P.A. for a free and confidential consultation by calling toll free at 877.915.4040 or by e-mail to kelly@mccaberabin.com.

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