What Is Selling Away?
There's no shortage of laws, rules, and regulations when it comes to the securities industry. Due to market crashes, Ponzi schemes, and other securities fraud, the number of rules only increases as time goes on.
Legal regulations for the securities market seek to protect investors and the market. Many types of investments are subject to securities laws, rules, and regulations. Some of these rules relate to a practice called “selling away."
Selling away transactions involve investment professionals selling securities that aren't offered by their brokerage firm. These investments are sold without the firm's approval, knowledge, or supervision.
These transactions are often prohibited because such investments are high-risk. A firm's approved products undergo due diligence. This is not always the case with products not offered by the broker's firm.
Read on to learn more about selling away and why it's prohibited in general.
What Is Selling Away?
Selling away fraud refers to the practice of a broker selling securities that aren't offered or approved by the investment professional's firm. It occurs when a broker sells you a product that isn't approved in the regular course or scope of business of one's firm.
Selling away can be legal. The broker can give notice of the transaction to the firm and it must sign off on the transaction. Once the firm approves the unregistered transaction, the firm must supervise the transaction. Otherwise, the broker might bypass the brokerage firm's compliance department and engage in risky investments.
FINRA rules generally prohibit a registered representative or associated person from selling any security away from the member firm unless it is authorized by the firm. Any investment professional, such as brokers or financial advisors, who sells or solicits the sale of securities that the firm doesn't or cannot offer may be guilty of selling away from the firm. Such transactions are excluded from account statements and records of the brokerage firm.
Prohibition of Selling Away
Selling away is a common occurrence in the securities industry. In general, selling away is prohibited because of its susceptibility to fraud, deception, and increased risk to investors. One danger with selling away is that an investor may be misled.
In selling away cases, an investor can be led to believe that the broker's firm endorses the unapproved investment product. This can give the investment a false sense of legitimacy and security.
Examples of selling away include:
- A client desires to purchase an interest in a risky private security transaction or real estate investment, but this investment would not be approved by the broker's firm. For a broker trying to make a sale any way they can, the broker could sell products without the firm's approval. In this case, a broker might engage in selling away fraud to bypass their firm's supervisory procedures.
- Another example of selling away occurs when a broker is closely involved with undisclosed outside business activities that involve selling securities. In these cases, brokers might be tempted to sell away from the firm to make the sale.
- A broker may engage in selling away if they want to earn a high commission that may be available for the sale of a high-risk investment, including unapproved private placements
- A broker may want to maintain a business relationship with clients who want to purchase securities that are not approved by the firm. The broker sells away from the firm in order to appease clients despite the failure to receive approval from the firm.
Because the firm is not supervising the sale according to certain rules, investors are more at risk of incurring investment losses. It's important to conduct research before making any investment decisions. This will help you identify any red flags to avoid investment fraud.
Who Can Sell Securities?
The buying and selling of securities is a highly regulated industry. FINRA, or the Financial Industry Regulatory Authority, requires firms and individuals to be registered. Brokers must meet certain requirements in order to conduct securities transactions. Stockbrokers must pass qualification exams in order to sell different types of securities. Not all brokers are authorized to sell every type of security. Some firms only offer certain categories of securities.
Regulations Pertaining To Selling Away
As the lead organization that oversees all stock market operations, brokerage firms, and securities representatives, FINRA enforces the SEC rules and regulations. In that role, FINRA provides rules and guidance for complying with securities regulations. The key rules pertaining to selling away are the following:
- FINRA Rule 3280: With certain exceptions, an associated person (investment professional) may not engage in private securities transactions (i.e. selling away). In some circumstances, these transactions are allowed if the professional provides written notice to the firm first and discloses whether or not they will receive compensation for the proposed transaction. (FINRA Rule 3280 superseded FINRA Rule 3040).
- FINRA Rule 4530: This rule requires firms to report specified events. These disclosure requirements include summary information regarding written customer complaints and copies of specified criminal and civil actions. A firm must report within 30 days any broker or other associated professional of the firm if they have violated any securities, insurance, commodities, financial or investment-related laws, rules, regulations, or standards of conduct.
Potential Punishments for Selling Away
An investment professional who engages in selling away can be sanctioned, suspended, or barred from selling securities altogether. The extent of the penalty varies depending on a number of factors, including:
- The volume of sales
- The number of customers
- The length of time over which selling occurred
- The financial benefit to the professional
- Whether the sales injured investors
- Whether the professional tried to conceal the sales from the firm
Firms can also be sanctioned if they receive notice of the sale but fail to provide written approval, disapproval, or acknowledgment of the notice.
Understand Your Options With the Help of a Local Securities Fraud Attorney
After working hard and investing your money through a trusted broker-dealer or registered representative, the last thing you want to hear is that you've been deceived into throwing that money away.
With so much at stake, it's prudent to consult an experienced investment fraud attorney. They can advise you of your rights and help protect your interests.
You Don’t Have To Solve This on Your Own – Get a Lawyer’s Help
Meeting with a lawyer can help you understand your options and how to best protect your rights. Visit our attorney directory to find a lawyer near you who can help.
Contact a securities lawyer to assist with any issues related to securities laws and financial instruments.