Trade confirmations often indicate whether a trade is “solicited” or “unsolicited.” Investors should review their trade confirmations carefully and verify that trades are properly categorized.
The distinction is important. FINRA Rule 2010 requires that financial advisors observe high standards of commercial honor and just and equitable principles of trade. A financial advisor who mismarks a trade as “unsolicited” when the trade is, in fact, solicited violates FINRA Rule 2010.
Suppose a customer loses money in connection with an investment purchased and held in their brokerage account. One of the issues may be whether the broker recommended the transaction in the customer’s account. To help determine whether or not the broker recommended the transaction, the parties will refer to the trade confirmation statement to see whether the transaction is marked “solicited” or “unsolicited.”
Moreover, if a financial advisor mismarks a customer order, another issue may be whether the broker’s firm took action to identify trades that were inappropriately marked as “unsolicited.”
But what is the difference between a “solicited” and an “unsolicited” trade?
What is a Solicited Order?
A “solicited” trade is a trade that was the broker’s idea. It is a trade where the financial advisor initiated and recommended the buy or sell transaction to the client.
Under FINRA rules, a solicited trade must be marked as such. The trade confirmation in this scenario should indicate “solicited.” Alternatively, the trade confirmation statement may not include either the word “solicited” or “unsolicited.” In that case, the trade is understood to be a solicited transaction.
A trade confirmation reflecting a “solicited” trade as “unsolicited” is a red flag to investors.
What is an Unsolicited Order?
An “unsolicited” trade is a trade that the customer initiated. It is a trade made by the client on their own initiative, without recommendations, suggestions, or prompting from the broker.
Customer-initiated trades may be “unsolicited” irrespective of whether the customer invests new or additional funds into securities that they already held in their accounts. They are “unsolicited” as long as they are not the broker’s idea.
The trade confirmation in this scenario must indicate “unsolicited.”
Separately, the fact that a broker recommended all or nearly all the securities a customer purchased does not necessarily prove that the broker controlled the customer’s account. For more information on this, read our Unauthorized Trading section here.
Mismarked Trade Confirmations
A financial advisor who marks order tickets as “unsolicited” even though the trades were the financial advisor’s idea violates FINRA Rule 2010. Mismarked trade confirmations are, unfortunately for investors, not that uncommon. More egregious cases may arise where a financial advisor marks order tickets as “unsolicited” despite not discussing the trades with the customers.
Rule 2010 is a broad-encompassing rule that allows FINRA to take disciplinary action against brokers and broker-dealers for such violations, which an unprincipled broker may otherwise falsely attribute to a clerical error.
FINRA Rule 4511
FINRA Rule 4511 requires members to “make and preserve books and records as required under the FINRA rules, the Exchange Act, and the applicable Exchange Act Rules.” These rules also require that firms make and keep books and records, including a “memorandum of each brokerage order.” A broker who mismarks transactions causes a broker-dealer to make and maintain inaccurate books and records.
A registered representative violates FINRA Rule 4511 by causing a member firm to maintain inaccurate books and records.
A mismarked transaction gives rise to other customer issues, including whether the broker’s firm took action to identify trades inappropriately marked as “unsolicited” and whether the firm violated its duty to supervise its registered representatives.
A Note on Regulation Best Interest (Reg BI)
Reg BI does not apply to self-directed or unsolicited transactions, whether or not the customer also receives separate recommendations from the broker-dealer.
Accepting Customer Orders
Under FINRA Rule 1230.01, unregistered persons are not permitted to accept customer orders for any reason. If a customer wishes to place an unsolicited order and a registered person is not available, an unregistered person may only record the order information. Before the order is considered accepted, a registered person must contact the customer and confirm the order’s details.
The Rule makes clear that accepting orders is not a clerical or ministerial function.
