What Investors Should Know About Selling Away in the Securities Industry
What is “Selling Away” in the securities industry? Selling away is a type of financial misconduct that occurs when a broker sells investments not offered by their registered member firm.
FINRA requires brokers only to sell investment products their member firm has approved. Typically, brokerage firms have lists of approved products that brokers are permitted to offer to the firm’s clients. The approved products usually undergo due diligence screenings, which consist of a comprehensive analysis that assesses potential risks.
Selling away happens when a broker decides to sell a security outside of their scope of business with their registered firm. FINRA forbids this activity because it makes it possible for brokers to sell overly risky investments to clients without the supervision of their firm. FINRA Rule 3270 prohibits brokers from selling any security away from their firm without the firm’s authorization of the transaction.
This is a common problem in the securities industry, and approximately 20-30% of the legal issues brought to Kurta Law result from brokers selling away from brokerage firms. If you lost money on an investment because of selling away, you may be able to recover your losses through FINRA arbitration.
Selling Away Definition
According to FINRA Rule 3270, no FINRA broker is allowed to “be an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm, unless he or she has provided prior written notice to the member, in such form as specified by the member.”
In some cases, brokers might be tempted to sell away from their firm if they are closely involved with an undisclosed outside business that sells securities. Investment advisers and stockbrokers must report any outside business even if it is not securities-related, but this rule does not pertain to passive investments. These outside business activities are listed on their detailed BrokerCheck report which is publicly available.
Why Do Brokers Sell Away From Their Member Firms?
Why would a broker engage in selling away? There are many possible explanations. A broker may be eager to earn an especially high commission, and high commissions are often associated with high-risk investments that might struggle to get approved by a brokerage firm. They may also want to maintain a strong business relationship with clients who want securities not yet approved by the firm. Along similar lines, the broker may simply seek to avoid scrutiny on their recommendation of a controversial investment product.
Can a Broker Ever Sell a Security Outside of Their Firm?
Usually, brokerage firms also have in-house policies prohibiting selling away activities and various procedures for preventing it. Under certain circumstances, a broker may sell a security outside of their firm—as long as they notify their firm and comply with their firm’s requirements.
FINRA Rule 3280 requires the associated person or broker to provide the brokerage firm with notice of any private securities transaction in writing to the firm.
- If the transaction comes with compensation for the broker, their firm must approve the transaction in writing.
- If there is no compensation, the firm may still require the broker to adhere to specified conditions in connection to the transaction.
Example of Selling Away Financial Misconduct
As of November 2, 2021, a broker consented to the FINRA findings that they participated in private securities transactions totaling $607,730 without approval from their member firm. The broker allegedly received $24,309 in commission for shares of Future Income Payments. In addition to a disgorgement payment of $9,723, the broker also agreed to a seven-month suspension and a fine of $5,000.
Investor Recovery from Selling Away Losses
Brokerage firms may be held liable for their brokers’ private securities transactions. For example, a firm may be liable for their failure to supervise a broker who participated in outside businesses. In these cases, arbitration panels point to an important factor–knowledge. When evaluating a brokerage firm’s liability, an arbitrator will focus on whether the firm knew or should have known about the broker’s transactions outside the firm’s pre-determined list.
Even if a firm did not know the particulars of an associated person’s transactions, if the firm possesses enough information to figure out what’s going on, this could suffice as evidence that the firm should have known. For instance, brokerage firm Oppenheimer faced regulatory consequences after failing to stop their registered brokers from perpetuating an alleged Ponzi scheme, Horizon Private Equity III. One of their brokers ran the alleged scheme using an outside business, out of offices next door to Oppenheimer. The broker allegedly regularly traveled between the two offices. He also allegedly transferred client money from Oppenheimer accounts into the Horizon Private Equity “fund.” These facts compelled the SEC to allege that Oppenheimer should have known about the alleged financial misconduct.
In these cases, regulators might scrutinize a firm’s supervisory policies, and whether the brokerage firm has failed to establish and/or implement reasonable supervisory procedures.
What Do Investors Need to Know About Selling Away?
The takeaway: Selling away occurs when a broker solicits a client to purchase securities not offered by the executing brokerage firm. Investors could hold brokerage firms liable when a claimant can demonstrate the firm knew about the conduct, failed to follow up on any red flags, or lacked adequate supervisory procedures.
If you believe you lost money after your broker engaged in selling away, contact one of the securities attorneys at Kurta Law right away. They can evaluate your claim for free and help you figure out the next steps for pursuing FINRA arbitration. Call 877-600-0098 or email firstname.lastname@example.org