Selling Away: Did Your Kestra Investment Services Broker Execute Prohibited Transactions?
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When brokers sell investments not approved by their firm, they open up their clients to unexpected risks. Outside investments can have serious financial consequences for investors, but a securities fraud attorney can help.
Investment fraud lawyers can examine your documentation for signs of misconduct and help you prepare for FINRA arbitration. Kestra Investment Services broker fraud investigations involving selling away may also find evidence of firm liability.
The securities fraud attorneys at Kurta Law can evaluate your broker fraud claim through a structured account review.
Selling Away and FINRA Rule 3280
Brokerage firms conduct due diligence on investment offerings before making them available to their clients. This research process provides investors with a layer of protection against fraudulent or extremely risky investments.
When a broker sells an investment not approved by their firm, they expose their client to unnecessary risk.
Selling away violates FINRA Rule 3280, which prohibits brokers from engaging in private securities transactions without firm approval.
“Private securities transactions” are transactions that fall outside the scope of a broker’s business with their firm. Brokers comply with FINRA Rule 3280 by seeking and obtaining approval for these transactions in advance.
When brokers sell away from their firm, they evade firm supervisory measures designed to protect investors, which can allow other misconduct to go unnoticed. For example, brokers may cover their tracks with falsified documents or misleading communications with their clients.
FINRA arbitration provides investors with a path to recovery in selling away claims.
What are Outside Business Activities?
Outside business activities (OBAs) are any activities brokers receive compensation for outside the scope of their firm. Cases of selling away don’t always involve a broker’s OBAs, but these activities can create conflicts of interest in some transactions.
Common examples of OBAs include:
- Self-employment
- Contracting
- Employment at another business
- Other business activities resulting in compensation
Failure to disclose an OBA to Kestra Investment Services violates FINRA Rule 3270. Brokers must also disclose their OBAs on their BrokerCheck record, a public database where investors can review their broker’s regulatory history.
A structured case evaluation by Kurta Law’s investment attorneys can reveal patterns of misconduct in your broker’s trading activity.
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Why Do Brokers Sell Away from Their Firms?
If an investor wants to purchase an asset not offered by the firm, their broker may facilitate the transaction to keep up their relationship and avoid losing a customer. But brokers may also recommend unapproved investments to clients without prompting.
Other reasons a broker may sell away from their firm include:
- Commission incentives
- Compensation from third parties
- Compensation through outside business activities
- Avoiding firm supervision
Some investments may be sold away because they are not publicly traded and therefore not available through some brokerage firms. Private placements are investments in private companies, and are typically only suitable for sophisticated investors because of their reduced disclosure obligations and potential risks.
Excessive risk, lack of liquidity, and other aspects often make outside investments unsuitable for the investors who purchase them. Their brokers may believe that an investment will work out despite the risks, and circumvent firm supervision to avoid getting caught.
Worst of all, some outside investments may be fraudulent. Unethical brokers recommend fraudulent products in service of pyramid schemes or hype up an outside investment in a pump and dump schemes to elevate its price.
The Role of Firm Supervision in Selling Away
Under FINRA Rule 3110, brokerage firms have an obligation to establish supervisory systems reasonably designed to identify and prevent broker misconduct. This generally includes regular monitoring of investors’ accounts, trading activity, and broker-client communications.
When evaluating Kestra Investment Services and Kestra Advisory supervisory claims, FINRA arbitrators consider whether the firm:
- Established adequate supervisory procedures
- Identified signs of potential selling away
- Responded to these red flags appropriately
Firms may fail to prevent brokers from misrepresenting investments to their clients, executing unauthorized transactions, or engaging in other misconduct in conjunction with selling away.
Your broker may be dual-registered as both a broker with Kestra Investment Services and a registered investment advisor (RIA) with Kestra Advisory. While FINRA does not oversee the conduct of RIAs, the SEC has its own regulatory standards concerning RIA supervision.
Depending on the specifics of your case, either firm may be held liable for supervisory failures in arbitration.
How Investors Can Achieve Recovery in Selling Away Claims
Investors who suspect they have been sold an outside investment should seek out a securities fraud attorney for a structured account review. An investment fraud lawyer can examine your account documentation, such as trading records, investment prospectuses, and risk disclosures for signs of broker misconduct.
Most often, brokerage firms require investors to pursue claims through FINRA arbitration. This lower-cost alternative to civil court allows you to present your evidence to a panel of arbitrators, rather than a jury.
FINRA arbitration typically provides resolution in 12 to 18 months in the form of a written award. This is a legally binding and enforceable agreement between you and the other party. You may be awarded damages based on your out-of-pocket losses and other factors.
Kestra Investment Services or Kestra Advisory may make settlement offers at any point during arbitration, and your attorney can negotiate these offers with the firm. However, it’s important to remember that settlement offers are not admissions of liability on the part of the firm or your broker.
Do You Have a Kestra Investment Services Broker Fraud Claim?
If you believe that broker fraud played a role in your losses, it’s vital to reach out to an investment fraud lawyer today. At Kurta Law, we use our years of litigation experience to identify patterns of broker misconduct and rigorously advocate for our clients in arbitration.
Reach out to Kurta Law today for a confidential, no-cost case evaluation and take the first steps on your path to recovery.