Ideally, hiring a skilled broker takes some of the risk out of investing. Unfortunately, however, some brokers fail to act with the appropriate level of integrity.
As an investor, it’s very important to understand the difference between solicited and unsolicited trades.
The distinction has significant consequences on your ability to recover losses from a bad trade.
In regards to solicited trades, the broker is ultimately responsible for the consideration and execution of the trade because he or she brought it to the investor’s attention. The responsibility for unsolicited trades therefore lies primarily with the investor, while the broker merely facilitates the investor’s proposed transaction.
Why does the Difference Between an Unsolicited and Socilited Trade Matters?
The status of a trade as solicited or unsolicited is hugely important when an investor claims unsuitability. An investor who wants to recover losses may be able to do so if the broker is the one who initially suggests the transaction.
Take the following example. You purchase $150,000 of stock in a new company. Shortly after the trade is complete, the stock loses nearly all its original value. As an investor, you will want to recover as much of that loss as possible. One way is to file a claim against your broker on the basis that the stock was an unsuitable investment. When you say that an investment was unsuitable, you are essentially saying that based on the information your broker had about you as an investor, the broker should not have made the trade in the first place.
If the stock purchase was at your request—that is, it was unsolicited—then it’s unlikely you’d be able to hold your broker liable for your losses. After all, the trade was originally your idea.
IMPORTANT: If the stock was suggested to you as a good investment by your broker, however, then you may have an argument that you were pushed into a solicited trade that was not in your best interests. If this is the case, you would have a much stronger argument for holding your broker liable.
What Is Suitability?
The Financial Industry Regulatory Authority (FINRA) imposes rules on registered brokers to protect investors against broker misconduct. Under FINRA Rule 2111, brokers are generally required to engage in trades only if the broker has “a reasonable basis to believe that the recommended transaction or investment strategy involving a security or securities is suitable for the customer.” Whether an investment is suitable depends on diligent consideration of several aspects of a client’s investment profile, including:
- The investor’s age;
- Other investments, if any;
- The investor’s financial situation and tax status;
- The investor’s individual investment objectives;
- The level of investing experience or sophistication of the investor;
- The investor’s risk tolerance; and
- Other relevant information the investor discloses to their broker.
When a broker makes a trade without a reasonable basis for believing that the trade is suitable, the broker violates FINRA Rule 2111. Investors may then be able to recover losses from the broker, and FINRA may impose sanctions, suspension, or other penalties on the broker.
Broker Obligations to Their Clients
When a broker conducts a trade on behalf of an investor, the broker uses an order ticket with the details of the trade. Brokers mark these tickets as “solicited” or “unsolicited” to reflect the status of the trade. For the reasons explained above, this marking is very important. On one hand, it protects a broker from unsuitability claims following a trade suggested by the broker’s client. On the other, it provides an avenue to recover losses in the case of a solicited trade that turns out poorly.
FINRA Rule 2010 covers properly marking trade tickets. This rule requires brokers to observe “high standards of commercial honor and just and equitable principles of trade” in their practice. If a broker fails to properly mark a trade ticket, that broker violates Rule 2010. As an investor, you should always receive a confirmation of any trades your broker conducts on your account.
FINRA has found that abuse of authority by mismarking tickets is an issue within the securities industry. The 2018 report found that brokers sometimes mismarked tickets as “unsolicited” to hide trading activity on discretionary accounts. If your broker feels the need to hide a trade from you, that trade is likely unsuitable.
How to Protect Yourself Against Trade Ticket Mismarking
Whether your account is discretionary or non-discretionary, and whether you’re new to investing or a skilled tycoon, you should always pay close attention to your investment accounts. Carefully review your trade confirmations to make sure that all trades are properly marked.
If you find a mistake, immediately report it to your broker or the compliance department of their brokerage firm. It’s their job to correct these mistakes and make sure they don’t happen in the future. Negative or suspicious responses to a legitimate correction request are red flags that should not be ignored. If you discover your broker intentionally mismarking your trade tickets, contact an investment fraud attorney immediately.
Concerned About a Solicited Trade?
The Law Offices of Robert Wayne Pearce, P.A., have been helping investors recover losses for over 40 years. We have extensive experience representing investors and have helped our clients recover over $160 million in total. If you’ve become the victim of unsuitable or fraudulent investing, we can help you. Contact us today or give us a call at 561-338-0037 for a free consultation.