If your broker sold securities out of your investment account without getting permission first, then your broker’s actions are not legal unless the transaction was made under certain conditions.
Two Instances In Which Your Broker’s Actions Are Legal
1. If you have a type of discretionary account for which you have signed documents giving the broker permission to buy and sell securities for your portfolio on your behalf, then your broker may sell from the account. However, any trades made by the broker must be within the guidelines set out in the account contract, which describes your risk tolerance and your investment goals.
If you believe the broker’s actions did not satisfy the guidelines set out in your contract, the first thing you should do is send a written communication to the broker’s firm and 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 correspondence also provides you with written proof of your claim. You may also choose to contact the Securities and Exchange Commission (SEC) and file a complaint for review. If the firm and broker have not dealt with the matter in a satisfactory manner or have not explained the situation, the SEC can investigate further.
2. If you have a margin account and your 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. Most often, firms are not required to give you a margin call, so if they give one, they are doing so as a customer courtesy.
The actions you can expect from your brokerage are spelled out in the margin account agreement that was signed upon opening the account. To ensure it receives the money you borrowed, the brokerage will sell your account’s securities regardless of whether you lose money on the trades, but the broker may not necessarily use a strict 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 all off, when selling your securities, the broker may even charge a full commission for the transaction.
(To learn more, read Is Your Broker Acting in Your Best Interest?)