DEFINITION of 'Stuffing'
The act of selling undesirable securities from the broker-dealer's account to client accounts. Stuffing allows broker-dealer firms to avoid taking losses on securities that are expected to decline in value. Instead, client accounts take the losses. Stuffing can also be used as a means to raise cash quickly when securities are relatively illiquid and difficult to sell in the market.
BREAKING DOWN 'Stuffing'
While stuffing is widely regarded as unethical, it can be difficult to prove whether such transactions constitute fraud. Often, broker-dealers are given the power to buy and sell without client consent for "discretionary" accounts. Furthermore, the legal standard for broker-dealers buying securities for these accounts is "suitability," which can be broadly interpreted. Since discretionary accounts provide so much power to broker-dealers, many financial advisors suggest that customers insist on providing consent for all transactions in their accounts.