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Bucketing: What You Need to Know About This Illegal Brokerage Practice
Definition & Meaning
Bucketing is an illegal practice in the financial sector where a broker accepts orders from clients to buy or sell stocks but fails to execute these orders as promised. Instead, the broker may buy the stock at a lower price or sell it at a higher price, pocketing the difference as profit. This practice violates the broker's fiduciary duty to act in the best interest of their clients, as it prioritizes the broker's financial gain over the clients' needs.
Table of content
Legal Use & context
Bucketing is relevant in the fields of securities law and financial regulation. It is considered a form of fraud and is taken seriously by regulatory bodies like the Securities and Exchange Commission (SEC). Legal actions can arise from clients who have been harmed by such practices. Users may find forms related to reporting fraud or seeking restitution through platforms like US Legal Forms.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1: A client instructs their broker to buy shares of a company at $50. Instead, the broker buys the shares at $45 and keeps the $5 difference as profit without informing the client.
Example 2: A client wants to sell their stock at $60, but the broker sells it at $65, pocketing the extra $5. (hypothetical example)
State-by-state differences
Examples of state differences (not exhaustive):
State
Legal Implications
California
Strict enforcement against bucketing, with severe penalties for brokers.
New York
Regulatory bodies actively monitor and prosecute bucketing practices.
Texas
Similar regulations as California, with a focus on protecting investors.
This is not a complete list. State laws vary, and users should consult local rules for specific guidance.
Comparison with related terms
Term
Definition
Difference
Churning
Excessive buying and selling of securities to generate commissions.
Churning focuses on generating commissions rather than failing to execute orders.
Front-running
Executing orders on a security for one's own account while having knowledge of pending orders from clients.
Front-running involves exploiting client information, while bucketing involves not executing orders.
Common misunderstandings
What to do if this term applies to you
If you suspect that you have been a victim of bucketing, it is important to take action. Consider the following steps:
Document all transactions and communications with your broker.
Contact your broker's compliance department to report the issue.
Consult a legal professional who specializes in securities law for advice.
You can also explore US Legal Forms for templates to report fraud or seek restitution.
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