You log on to your brokerage account and notice that some of your holdings have been sold. Should you panic? Well, if your brokersold securities out of your investment account without permission, then these actions may not be legal. However, chances are that your broker did nothing wrong at all.
Instead, you may have been subject to selling in an account where the broker had discretion to place trades, or you had a margin account that experienced sufficient losses to warrant an unmet margin call.
Below, we will go over both situations in which your broker has sold some of your positions.
Key Takeaways
- If a broker sells stock positions from your brokerage account, there will generally be a valid reason why this occurred.
- Brokers may buy and sell stocks as they see fit in a discretionary account, as long as the trades are in line with your investment policy statement and risk preferences.
- A brokerage may also sell stocks automatically in your margin account to satisfy an unmet margin call.
- If you disagree with certain trading activity, consider contacting your brokerage or financial adviser via written communication to lay out the facts.
- If you believe the matter to be serious and contrary to your investment goals, risk tolerance, and the investment policy statement, you can also file a complaint with the SEC.
Discretionary Accounts
A discretionary account (also known as a managed account) allows your broker or financial adviser to make trading decisions on your behalf, without obtaining explicit permission for each decision.
Instead, the account owner will have signed documents giving the broker the discretion to buy and sell securities for your portfolio based on an investment policy statement (IPS) to which the owner has agreed.
Thus, anytrades made by the broker must be within the guidelines set out in the IPS or account contract. They must align with your risk tolerance and investment goals.
What If You Disagree with Selling Done in a Discretionary Account?
If you believe the broker’s actions did not satisfy the IPS or guidelines set out in your brokerage agreement, the first thing you should do is send a written communication to the broker’s firm and their manager discussing the facts of the situation.
It is possible that the broker and the firm were unaware of the details and will deal with it accordingly,once it’s brought to their attention. The correspondencealso provides you with written proof of your claim.
You should also file a complaint if the trades were transacted in a nondiscretionary account, where the broker did not have such permission.
You may also choose to contact the U.S. Securities and Exchange Commission (SEC)and file a complaint for a more serious review. If the firm and broker have either, not dealt with the matter in a satisfactory manner or, not explained the situation, the SEC can investigate further.
Portfolio managers and financial advisers are bound by a fiduciary duty. This involves a legal requirement that they always act in their clients’ best interests. Some brokers may be fiduciaries, as well.
Margin Calls
If you have a margin account, you have the ability to use leverage to increase the purchasing power of the cash in your account. Effectively, this means that you can buy more securities than you can actually afford, with the extra funds coming from your broker in the form of a loan.
If your leveraged long positions start to lose money and your margin equity level has fallen below the firm’s maintenance margin requirements, the brokerage has every right to sell your securities without contacting you or obtaining your permission.
This is done to cover the outstanding loan to the broker. Often, brokerage firms are not actually required to provide a formal notice of a margin call. So if they give you one, they are doing so as a courtesy.
The best thing you can do to avoid such a situation is to make sure that you always have enough cash in your account to meet the maintenance margin, and that you quickly transfer more funds in if it falls below. You can also close some open positions yourself, generating such cash for your account.
When Might a Broker Be Forced to Sell Securities?
The conditions leading to a forced liquidation of your securities will be spelled out by your broker in the margin account agreement that you signed upon opening the account. To ensure that the broker receives the money (and interest) you borrowed, they will sell your securities regardless of whether you lose money on the trades.
Note that your broker may not use a specific method when picking the stocks to sell out of your account. Instead, the stocks that are sold to cover the entire deficit in the equity level may, for example, be picked in alphabetical order. To top it off, when selling such securities, thebroker may chargefull commission for the transactions.
A broker will only sell enough securities to satisfy the margin call, but may be forced to sell again if losses continue to mount.
The Bottom Line
If you find that your broker has sold securities in your account without express permission, chances are that they’ve done nothing wrong. If you have given a broker discretionary power to trade for you, they may do so without contacting you first.
As long as the activity fits your investment goals and risk profile, and doesn’t involve illegal or unethical activities such as churning (overtrading for the purpose of generating excess commissions), it's legal.
If you have a margin account and your broker sells securities in your account, it’s likely that the value of your positions has lost sufficient money to drop below your broker's maintenance margin requirement, initiating a margin call. If the margin call is not met, they can sell securities to obtain the cash owed to them.
