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Can I trade on behalf of 5 of my friends individual brokerage accounts generating profit for them and collecting commission?

San Diego, CA |

I am very successful in stock trading and bring in a decent size of income every month. I am not a licensed trader. Is it legal and appropriate for me to trade on behalf of 5 of my friends individual brokerage accounts generating profit for them and collecting a mutually agreeable money as my service fee ? And at the end of the year they can send me a 1099 form for my income?

Attorney Answers 3

Posted

In answer to the question "can" you do something, the answer is - of course - "yes." Your real question is "what are the legal consequences of doing so?" First, as long as you are reporting all of the income earned from the trading, then you will not have a Federal or state income tax problem. However, is the 1099 the only income you are receiving? Are you executing the trades in their accounts? Or are you executing the trades in your own account? If the latter, then you are likely going to be viewed as taxable on all of the profits and losses.

Second, of course, as indicated by the other lawyers, you have licensing issues. Since you are not licensed, you are violating state law requirements. Also, you may be guilty of a crime under state law.

Third, you may be violating Federal licensing laws. And, as one of the other lawyers indicated, if you are conducting business with people outside of California, you may be violating yet another Federal law. And there are potential Federal crimes as well.

You should immediately cease your activities and hire a competent securities lawyer.

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Posted

Trading on behalf of others would make you an "Investment Advisor." Unless your business comes within an exemption, you are required to register with the California Corporations Commission before starting your business. The securities business is risky, highly regulated, and complicated. I highly recommend that you retain a good securities lawyer to advise you if you are serious about starting this business. I have 36 years experience in the securities business and would be happy to give you a free consultation.

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Asker

Posted

I know TrdeStation brokerage firm has authorization letter to trade for other people. It has also been clearly mentioned that upto 15 clients or less, one need not be a licenced trader. I know my friends and I can be mutually agreed on a service fee which would be stated on a written document. Funds are not much in individual accounts. They are $5k-$10K at the maximum. Why do you think it is not advisable to trade on their behalf? If it is not advisable how Tradestation brokerage firm has in writing? I am alittle confused. Would you please share more informations?

Posted

One issue you may have is that if your friends are not in CA, you may be running afoul of the state securities laws of other jurisdictions. And do you have any written agreements in place with the people for whom you are trading? Does your brokerage firm know you're trading money for 5 different people? How are you keeping track of funds in and out for performance and management fees?

What you are doing is fraught with numerous risks.

The foregoing is not legal advice nor is it in any manner whatsoever meant to create or impute an attorney/client relationship.

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3 comments

Asker

Posted

I know TrdeStation has authorization letter to trade for other people. It has also been clearly mentioned that upto 15 clients or less, one need not be a licenced trader. I know my friends and I can be mutually agreed on a service fee which would be stated on written document. Funds are not much in individual accounts. They are $5k-$10K at the maximum. Why do you think it is not advisable to trade on their behalf? If it is not advisable how Tradestation brokerage firm has in writing?

Robert V Cornish Jr.

Robert V Cornish Jr.

Posted

You're acting as an investment adviser and depending on the state residences of your friends, you could be exceeding the applicable de minimis rules. TradeStation has agreements in writing of this nature for investment clubs and the like. I don't think they're intended for what you're doing.

Asker

Posted

In Trade station there is a authorization letter that if you want to trade your account or somebody you authorize to trade your account (that somebody could be anybody and they have a clause, that if the authorized person is not a licensed trader, but does trading for ownself, they can still trade for 15 or less without having a license. Anyway, I very much appreciate your time and reply. I think, it is better just to trade for oneself and let other people learn the skill and manage their own money like me.

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