SEC Calls on Firms to Ramp Up Scrutiny of Unauthorized Trades

The Securities and Exchange Commission (SEC) has just issued a risk alert that essentially warns advisory firms and brokerages to improve their supervisory oversight to prevent and detect unauthorized trading in brokerage and advisory accounts. It is the second alert released this year.

Unauthorized trades might encompass a range of activities, including “rogue” trades in customer or proprietary accounts; position mismarking; exceeding trading limits; personal trading activities of associated persons or other employees; and creating records of non-existent or sham transactions.

Perpetrators of unauthorized trading also run the gamut. They could include traders, assistants, order placement staff, portfolio managers, brokers, risk managers, advisers and back-office personnel, the SEC says.

The new alert notes that although broker/dealers and investment advisors are subject to different regulatory requirements, both face similar risks of financial and reputational losses arising from unauthorized trading.

Of note is the fact that the SEC is taking on the issue of unauthorized trading, which has typically been addressed by the Financial Industry Regulatory Authority (FINRA).