Proper Marking of Transaction Orders

Please note that, while this article accurately describes applicable law on the subject covered at the time of its writing, the law continues to develop with the passage of time. Accordingly, before relying upon this article, care should be taken to verify that the law described herein has not changed.

I. Introduction.

When a stockbroker or financial advisor enters trades on behalf of a client, they must mark order tickets as “solicited” or “unsolicited” to indicate the nature of the order. Solicited trades require greater diligence from stockbrokers and financial advisors, such as ensuring the suitability of the trade to their clients. However, securities regulators have not provided clear guidance on what constitutes a solicited or unsolicited trade, and sometimes the nature of the transaction can be somewhat unclear.

The following analysis will explore recent decisions from regulators to provide a better perspective on what trades should be marked “solicited” and what trades should be marked “unsolicited.”

II. Issues.

1. What constitutes a “solicited” or “unsolicited” trade?
2. If a client asks for information about a particular investment, and the stockbroker or financial advisor only gives information requested by the client, does the trade have to be marked as solicited?

III. Brief Answers.

1. No bright-line rule defines “solicited” or “unsolicited.” A possible rule of thumb would be to consider whether a client conducted a trade as a result of the stockbroker or financial advisor’s action or advice. If so, it should be marked “solicited”.
2. No, but the trade should be marked as solicited if information given by the stockbroker or financial advisor is reasonably believed to have caused the client to do the trade.

IV. Relevant Rules.

1. FINRA, Rule 2010 (2008).

A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade. FINRA, Rule 2010 (2008).

2. FINRA, Rule 4511 (2011).

FINRA Rule 4511 provides that “[m]embers shall make and preserve books and records as required under FINRA Rules, the Exchange Act, and the applicable Exchange Act Rules.” This rule applies to both members and associated persons.

3. Securities Exchange Act Rule 17a-3(a)(6)(i).

Securities Exchange Act Rule 17a-3(a)(6)(i) requires broker-dealers to make and keep current “[a] memorandum of each brokerage order, and of any other instruction, given or received for the purchase or sale of securities, whether executed or unexecuted,” which shall include “the terms and conditions of the order or instructions.”

V. Legal Analysis

Security regulators such as the SEC, NYSE, and FINRA, have not provided clear guidance on when a trade should be marked “solicited” or “unsolicited”. Instead, the requirement to mark trades stems from general requirements to maintain books and records. See FINRA, Rule 4511 (2011); 17 C.F.R. § 240.17a–3. Proper maintenance of such records, in turn, allows firms and regulators to better monitor compliance with rules such as suitability and conflicts of interest. 

Many stockbrokers and financial advisors understand solicited trades to be trades recommended by them or if the trade was their idea. See, e.g., Investor Info, Understanding Brokerage Account Statements and Trade Confirmations, 2, FINRA, Nov. 2024.  Unsolicited trades, on the other hand, are understood to be trades brought by a client to the stockbroker (i.e. the stockbroker only acts as an agent of the client and makes no recommendation). However, no regulators have created a bright-line rule for determining whether a trade should be marked solicited or unsolicited. Furthermore, regulators have made no public announcement or changes to their definitions of “solicited” and “unsolicited.”

1. Definitions of Solicited Trades vs. Unsolicited Trades.

Though the terms “solicited” and “unsolicited” are not well defined, some court cases and FINRA decisions may provide guidance on the terms. Some state courts have defined a solicited sale as one “in which the salesman actively encourages the purchase or sale of a security by a client.” Home Indem. Co. v. Reynolds & Co., 38 Ill. App. 2d 358, 368, 187 N.E.2d 274, 279 (Ill. App. Ct. 1962); see also Schmid v. Langenberg, 526 S.W.2d 940, 944 (Mo. App. 1975). In an unsolicited sale, “a customer requests that a security be purchased for him and the salesman just takes the order and acts as agent for the purchaser.” Id. A federal court held that when a broker merely “checked the deal out” upon client request and provided specific information without recommendation, the broker did not solicit the trade Canizaro v. Kohlmeyer & Co., 370 F. Supp. 282, 289 (E.D. La. 1974), aff’d, 512 F.2d 484 (5th Cir. 1975). Still, none of these isolated state and federal cases provide useful guidance on what the SEC or FINRA deems as mismarked orders.

FINRA’s Department of Enforcement routinely brings cases against firms and registered representatives for mismarking trades as unsolicited. See, e.g., Carl Ayers, Marked reps: FINRA Bringing more cases for mismarking solicited trades, Regulatory Compliance Watch, Aug. 30, 2018. These cases are usually brought in conjunction with other claims, such as recommending unsuitable trades. See, e.g., Department of Enforcement v. D. Allen Blankenship, Disciplinary Proceeding No. 2019064333401, Complaint at 8-11. Some of these cases eventually reach FINRA’s office of hearing officers, where an extended hearing panel provides a decision. These decisions reach different results on whether a stockbroker mismarked a trade, without enunciating a bright-line rule or test. Some decisions of note include:

Department of Enforcement v. Craig Scott Taddonio et al., 2017 WL 6034101 (N.A.S.D.R.).

In this case, Edward Beyn, a registered representative, testified that a client directed him to buy gold and silver exchange-traded notes (“ETN”), specifically UGLD and USLV. He subsequently marked these trades as unsolicited. Beyn testified that he advised the client that these investments were not safe and had been created for day trading. Beyn testified he remembered arguing with the client about the purchases, but that the client was really hard-headed and told the registered representative that he was certain gold and silver’s prices would increase. Beyn also testified that he tried to get his client to sell the UGLD and USLV on the purchase day at a small gain, but the client insisted on keeping the investment.

But the client testified that Beyn brought those leveraged investments to him and stated, “if you make any money off of them, they will pay three times as much.” The client also testified that Beyn never explained that he could lose three times as much if the prices of gold and silver fell. The client testified that he only intended to invest in leveraged gold and silver exchange-traded funds (“ETF”), but not ETNs.

FINRA eventually found the client’s testimony credible and deemed the trade to have been solicited and unsuitable. This case highlights the danger of simply providing information to a client, even if the client initiated a call. Assuming the testimonies were truthful, the client only asked about gold and silver ETFs, and Beyn provided information about both gold and silver ETFs and ETNs. Despite not having initiated a call to the client, Beyn was still found to have “solicited” the trade.

Department of Enforcement v. James W. Flower, 2021 WL 3083568 (N.A.S.D.R.).

In this case, James Flower, a registered representative, marked a number of transactions as unsolicited. Here, none of Flower’s clients called him with an investment idea.  Instead, Flower acknowledged that he initiated calls, but that he only provided them with information. This information might include their stock position, news, and current events. When asked to distinguish solicited and unsolicited transactions, Flower defined solicitation as bringing the recommendation to the client, explaining the recommendation, and telling the client why he would like to buy the stock. Flower defined an unsolicited transaction as one where he would provide information without urging a particular course of action.

For example, Flower marked the purchase of a certain stock as solicited, because he recommended the stock to his client. But, if Flower called the same client the next day to let them know the stock price was going up or down, and the client directed him to sell the stock, Flower would mark the trade as unsolicited.

The FINRA hearing panel did not accept Flower’s definition of solicited and unsolicited trades. Instead, the hearing panel found that it was the call from Flower that prompted the customers to authorize the transactions, even if he did not explicitly recommend the transaction. 2021 WL 3083568 (N.A.S.D.R.), 47. Given that finding, the hearing panel concluded the transactions marked unsolicited were mismarked, and that it was not credible that the customers would have chosen to trade absent Flower’s intervention. Id.

This decision highlights a particular principle, if a registered representative provides a client with information that changes their decision on whether to trade or not, the trade may be considered solicited even if no explicit recommendation was ever made.

2. A stockbroker should be careful when marking a trade as “unsolicited” when he provides information to the client.

The lack of a bright-line test defining a “solicited” or “unsolicited” trade means a stockbroker should be very careful about marking a trade as “unsolicited” after providing information to the client. If a client asks for information about a particular investment, and the stockbroker only gives information requested by the client, no rule suggests a subsequent trade must be marked as “solicited.” However, the information given could change the analysis.

For example, if the stockbroker gives more information than what the client asked for, then the stockbroker could be deemed to have solicited an investment even if he or she never initiated a call or made an explicit recommendation. See, e.g., Department of Enforcement v. Craig Scott Taddonio et al., 2017 WL 6034101 (N.A.S.D.R.). Alternatively, if a stockbroker provides information that causes a client to make a decision they would not have otherwise made, that might be considered a solicited trade as well. See, e.g., Department of Enforcement v. James W. Flower, 2021 WL 3083568 (N.A.S.D.R.).

VI. Conclusion

After a review of recent materials from FINRA, SEC, NYSE, state courts, and federal courts, nothing suggests securities regulators have changed their view on marking trades “solicited” or “unsolicited.” On the contrary, FINRA appears to have increased the number of cases they bring against registered representatives for mismarking trades. Thus, marking trades as solicited after providing a client with information likely remains the better practice from a compliance perspective. Even if a call was initiated by a client, excessive information provided by a financial advisor or stockbroker may change a subsequent trade into a solicited trade.

This article is meant to serve as a limited introduction to some of the many considerations and issues that arise in the context of solicited vs. unsolicited investment transactions. If you have any questions regarding a possible securities law matter or would like to arrange a consultation concerning your legal matter, please contact Attorney Robert D. Mitchell at rdm@tblaw.com or (602) 452-2730.