Selling away is when a broker sells a security that is not offered or approved by their firm to a customer. When selling away happens, investors are exposed to unnecessary risks. It is also a violation of securities regulations.
At Shepherd Smith Edwards and Kantas (SSEK Law Firm at investorlawyers.com), our experienced securities fraud attorneys have helped investors recover losses sustained because a broker sold unapproved investments or engaged in other outside business with them.
SSEK Law Firm has law offices all over the United States and we represent retail investors, senior investors, retirees, high-net-worth individual investors, ultra-high-net-worth individual investors, and institutional investors.
Call our securities law firm today at (800)-259-9010. You may have grounds for filing a Financial Industry Regulatory Authority (FINRA) arbitration claim for damages.Why Do Brokers Sell Away and Why is This Risky For Investors?
There are two primary reasons that a stockbroker might engage in selling away: to earn high commissions from very risky investments that their member broker-dealer is not selling and/or to avoid oversight by their firm’s compliance department.
Often, products involved in this type of securities fraud tend to be illiquid, non-public, and even obscure securities that are not highly regulated and do not offer much transparency. This can be risky for investors and may make them vulnerable to fraudulent scams that might otherwise have been detected if only the proper due diligence were conducted.
A brokerage firm is only supposed to place a financial product on its approved list of investments to sell to customers after it has conducted the necessary vetting to make sure that the security is in compliance, legitimate, and safe.
An investment that wasn’t properly scrutinized and researched could expose investors to potential fraud and losses. Not only that, but non-public investments are usually unsuitable for many kinds of investors, especially retail investors, retirees, and other conservative investors.Some Examples of Investments That Have Been Sold Away to Customers
- Private placements
- Oil and gas investments
- Unregistered securities
- Real estate investments
- Promissory notes
- Shares in small businesses and startups
- FINRA Rule 3270: A broker must notify the firm in writing in advance if they plan to do any business outside of the firm. This rule also bars financial advisors from getting paid for such activities.
- FINRA Rule 3040: Related to private securities transactions, this rule defines this type of transaction as one that is beyond the scope of an associated person’s job with a member firm. Under Rule 3040, a registered representative must notify the firm in advance of involvement in any private securities transaction and receive approval first.
- FINRA Rule 3010: Brokerage firms have a responsibility to properly supervise its employees through the implementation of internal supervisory controls, policies, and procedures, as well as with actual oversight.
Selling away isn’t always prohibited. The Financial Industry Regulatory Authority (FINRA) will allow a broker to engage in a private securities transaction as long as they notify the firm and its compliance department ahead of time, which must then vet and approve it.
The broker-dealer may also deny approval, in which case the broker is not allowed to sell the investment to customers. If the broker-dealer approves the transaction, it assumes liability in the event of investor losses caused by fraud or negligence.Broker-Dealers And Their Duty To Prevent Selling Away
Even if the broker-dealer did not know that selling away occurred or it did not approve of the private securities transaction and the broker disregarded this, a firm can still be held liable if there are related investor losses.
Per FINRA Rule 3010, brokerage firms have a duty to properly supervise their registered representative and their activities. They should have known the unauthorized transaction happened or had the proper systems and procedures in place to prevent or detect and stop it.
One way in which a firm can prevent selling away is by conducting the proper due diligence when hiring their brokers, making sure that none of these individuals already have a record of violations or fraud and refraining from hiring those that do.
Unfortunately, there are broker-dealers that continue to bring in financial advisors with questionable track records, allowing these repeat offenders to continue harming investors.
A broker may try to conceal that they are selling away, perhaps even lying to both their firm and their customers by making misrepresentations and omissions. They might even generate fake account statements or set up a self-directed account that can allow for the transactions to happen with minimal detection.Securities Law Firm Experienced in Selling Away Cases
It is important that you have skilled selling away attorneys on your side fighting for your financial recovery while protecting your legal rights. If you believe that your broker unsuitably sold you investments that were not authorized by the brokerage firm, contact our securities lawyers today. We have successfully recovered investment losses for thousands of investors.
Call SSEK Law Firm at (800) 259-9010 or contact us online.