Selling away is when a broker sells investments or securities that aren’t authorized by the firm they work for.
It’s illegal, and it almost always means you have no recourse through that firm if the investment goes wrong. The securities industry is one of the most regulated precisely because of how much damage broker misconduct can do. Various securities regulations protect investors by imposing requirements on securities transactions and the people who facilitate them.
Individual brokers, broker-dealers, and financial advisors must be registered and licensed with the Financial Industry Regulatory Authority (FINRA) before they can conduct securities transactions. FINRA licenses registered representatives and administers exams that certify them to sell specific types of investment products.
All of these regulations exist to protect investors from fraudulent conduct by brokers. Nevertheless, brokers occasionally attempt to skirt the rules and offer private deals to their clients. These transactions violate FINRA rules and also pose additional risks for investors.
If you suspect you’ve been a victim of selling away, contact a selling away attorney at once.
What Is Selling Away?
Selling away occurs when a registered person sells securities outside the regular course of their firm’s business, away from the firm’s oversight and approval process. These are typically non-public investments that the broker-dealer has never reviewed or approved.
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Brokerage firms maintain a list of approved securities that their brokers are allowed to offer. Before a broker-dealer approves any investment products for sale, the firm runs those products through its supervisory and compliance procedures.
Brokerage firms make sure that their brokers sell only securities that are vetted and verified as legitimate products. Skipping that process means you’re putting money into unapproved investments with no institutional due diligence behind them.
Brokers sell away when they offer their clients securities not on the firm’s approved product list.
The most common driver for this is a broker’s desire for extra compensation outside the firm. Outside business activities like these let a broker pocket the full commission.
But not every selling-away case involves a broker trying to steal from you. Sometimes a broker genuinely believes in an investment but can’t offer it through their firm’s approved channels, so they go around the system. Good intentions don’t make it legal, and they don’t protect you if the investment fails. Regardless of the broker’s intent, however, FINRA prohibits selling away and sanctions brokers for doing so.
How Can You Tell If a Broker Is Selling Away?
You can tell a broker is selling away when the “investment” does not show up on your official brokerage statements or trade confirmations. That’s because they offered it outside the firm’s approved, supervised platform. Red flags include checks or wires to an individual, LLC, or “escrow,” a private placement subscription packet or promissory note delivered by email, and pressure to keep the deal “off the books.”
When your broker makes a legitimate recommendation, you get a trade confirmation, it shows up on your monthly statement, and the firm’s compliance team reviews it. Selling away skips all of that, which is exactly what makes it so dangerous. In legal terms, the broker is the associated person, the product is the unapproved security, and the firm is the supervisor that may have missed or ignored the warning signs.
If you suspect selling away, message or contact the firm’s compliance department in writing and ask whether the product is authorized and whether the broker disclosed the proposed transaction as required. Brokers are supposed to give prompt written notice and obtain prior notice approval before engaging in any private securities transaction. If they skipped that step, that’s a violation of securities regulations.
Even if you have a self-directed account, your broker still has obligations to you. Preserve everything, including the messages, offering materials, wire instructions, and bank records, so you have proof.
Common Examples of Selling Away
While there is no specific form that a selling-away transaction takes, they frequently involve certain types of investments. These investments include:
- Private placements involving unregistered securities;
- Private deals involving promissory notes; and
- Real estate deals conducted privately and away from the broker’s regular business.
Deals that involve selling away often exhibit the same red flags as other types of investment fraud, like Ponzi schemes. Excessively high or consistent returns are indicators that the deal is probably too good to be true.
What Are the Risks of Investing in Securities That Are Sold Away?
Selling away deals often involves risky investments that expose investors to losses with no safety net. If there are no compliance procedures in place, there’s no check on whether the investment is legitimate or suitable for you.
Lack of screening
First, selling-away deals involve securities that are not screened by the brokerage firm. Brokerage firms screen the products they offer for a reason. This is to make sure that their customers have access to solid investments. Without these safeguards, investors are taking on significantly higher risk.
Lack of disclosures
Second, selling away deals rarely include the formal risk disclosures found with approved brokerage products. There is no review of the investment by the brokerage’s compliance department, and the exact nature of the risk involved may be unclear.
Less accountability
Finally, it may be harder to recover losses. When a broker engages in an approved transaction, the brokerage takes on liability for the broker’s activity. Because brokerages are often completely unaware of selling-away transactions, it is much harder to prove liability on the part of the brokerage. In the case of significant investor losses, this can mean less money recovered overall.
Selling-Away FINRA Regulations
There are two main FINRA regulations that cover selling away: Rule 3270 and Rule 3280.
FINRA Rule 3270 prohibits brokers from engaging in outside business activities outside of their relationship with their firm unless they give written notice first.
FINRA Rule 3280 is similar and prohibits brokers from engaging in private securities transactions (including selling away) without first providing written notice to their firm. After receiving that notice, the member firm may approve or disapprove the transaction. If the firm approves, then the firm supervises and records the transaction. Disapproval, on the other hand, prohibits the broker from participation in the transaction either directly or indirectly.
These rules exist to prevent selling away before it can harm investors. When brokers bypass them, they’re in violation of securities regulations, and the consequences reflect that.
What Are the Penalties for Selling Away?
Both brokers and brokerage firms can be held liable when a broker sells away. FINRA regulations require brokers to offer securities products suitable for each of their clients’ needs. Brokers must account for their clients’ objectives, level of investing sophistication, and risk tolerances.
When a broker fails to fulfill this obligation, FINRA may sanction, suspend, or bar the broker from the financial industry. According to FINRA’s Sanctions Guidelines, Brokers who engage in selling away open themselves up to monetary sanctions. For serious violations, FINRA may suspend the broker for up to two years or permanently bar them from practicing as a broker.
The severity of the penalty depends on several factors:
- Whether the selling away involved customers of the broker’s firm;
- How directly the selling away relates to the injury caused to investors;
- How long the outside activity occurred;
- The amount of money involved in the sales;
- Whether the broker misled their firm or clients with respect to the transactions; and
- How important the broker was in facilitating the transaction.
Repeat offenders face the steeper end of those penalties. FINRA’s review of a broker’s conduct also factors in whether they misled their firm, how long the outside business activity went on, and how much investor money was at risk. These cases often result in disciplinary actions that follow a broker permanently.
Because selling away involves transactions outside of a broker’s relationship with their brokerage firm, holding the firm responsible for investor losses is more difficult. Nevertheless, a brokerage firm may still be liable for the conduct of its brokers under FINRA regulations. Brokerage firms have an obligation to supervise the brokers with which they are associated. Failure to do so may result in the firm’s liability to the investor.
How Do I Recover Losses from Selling Away Deals?
Investors can pursue recovery through several formal and informal channels, but there’s no guarantee of a specific outcome. Every case turns on its own facts, and the right path forward depends on details like how the investment was sold, what the broker represented, and whether the firm had any knowledge of the activity.
If you need to recover losses, speak with a selling away lawyer to understand what options are available for your case.
FINRA Arbitration
Many brokerage firms require their customers to sign mandatory arbitration clauses. If this is the case, then the investor must use FINRA’s arbitration process rather than filing a lawsuit.
Arbitration starts when the investor files a claim. From there, the parties go through similar procedures to those in the regular court system. Each side will engage in discovery and present its case at a hearing before an arbitrator. The arbitrator is responsible for reviewing the evidence and ultimately issuing a decision and award.
Contacting Your Brokerage Firm
A brokerage firm’s compliance department may be interested in reaching a resolution without involving the courts. In some cases, investors recover losses from their broker’s selling away deals through mediation. FINRA provides access to informal mediation to facilitate a mutually acceptable agreement between the investor and the broker or firm.
Filing a Lawsuit
If there is no mandatory arbitration clause and mediation is unsuccessful, the investor can file a lawsuit. As with all lawsuits, this can be expensive and, depending on the amount of losses suffered by the investor, may not be the best option. An investment fraud attorney can review your case and provide advice on the best way to proceed.
Related Read: Can You Sue a Brokerage Firm for Investment Losses?
Why You Need a Securities Fraud Attorney in Selling Away Cases
No matter which method of recovery you choose, you should hire a securities law attorney experienced with recovering money for investors to represent you. A securities fraud attorney can advise you on the best way to recover your losses from a brokerage firm.
This is especially true because many selling away cases involve several different legal claims at the same time. A securities fraud attorney can attempt to reach a settlement with the brokerage firm and, if necessary, help you with the FINRA arbitration process.
Did You Experience Losses From a Selling Away Deal?
If you have suffered investment losses due to your broker’s negligence or mistreatment, you should speak with a selling away attorney.
The Law Offices of Robert Wayne Pearce, P.A., specialize in helping investors get their money back from bad investments. We have over 45 years of experience resolving all kinds of investment disputes.
Contact us today for a free consultation about your case.
