Selling Away: What Is It and Who Is Responsible?

By January 2, 2019 Selling Away

“Selling away” is when a broker or investment professional sells, or solicits the sale of, investment products not offered by his or her respective brokerage firm. The sale occurs “away” from the brokerage firm. Most firms have an “approved product” list that contains the names of products that the firm’s representatives are allowed to sell to their clients because the products have undergone some form of due diligence by the firm or by a third party on behalf of the firm.  A broker is generally engaging in “selling away” if he or she sells or tries to sell a product that is not on the firm’s approved product list.

The types of products that are typically sold away from a firm are private placements or other non-public investments, such as investments in real estate developments or alleged start-up companies.  Sometimes the investments are legitimate and other times they are a part of a fraudulent scheme designed by the broker or a third party.

 

Selling Away is Prohibited

There is a high risk in purchasing products from a broker or financial advisor that have not been approved by the firm for which the broker is working.  Accordingly, both FINRA (the Financial Industry Regulatory Authority) and brokerage firms have rules designed to prevent selling away. FINRA is overseen by the U.S. Securities and Exchange Commission (SEC) and regulates the securities industry by focusing on investor protection and ensuring market integrity. FINRA provides guidance and rules to help groups properly comply with securities regulations. FINRA rules make clear that brokers or investment advisors are prohibited from engaging in selling away activities.  In addition, most firms have internal rules and policies that prohibit their representatives from engaging in selling away.

 

Why do Brokers Engage in Selling Away?

Brokers may be selling products away from their firm for a number of different reasons.  It is possible that the broker’s misconduct is not intentional or deliberate. For example, the broker could have mistakenly believed that a product had been approved or did not understand that the product he or she was selling needed to be approved.  But most of the time, the broker or financial advisor knew exactly what he or she was doing and was intentionally hiding the activities from his or her firm. Brokers tend to hide their activities to avoid sharing commissions with their firm or because they know that the firm will not permit the sales or fraudulent activity to continue.

 

Liability and Penalty

Regardless of their intent, brokers may be held liable for sales of investments away from their firm in the same fashion that they can be held liable for products that are offered by their firm.  Brokers have obligations to sell to their clients only products that are suitable for their clients based on their objectives, needs, sophistication, risk tolerance, and other factors.

But firms can also be held responsible for damages suffered by customers as a result the selling away activities of their representatives—even if they did not know about the activities.  Indeed, brokerage firms have an obligation to establish and maintain a supervisory system that is reasonably designed to achieve compliance with FINRA’s rules, including the rule prohibiting selling away activities.  A firm’s supervisory system may include office inspections, email or correspondence reviews, background checks, etc. If a firm did not properly perform its supervisory functions, it can and should be held responsible for any damages suffered by the customer.

In addition to being held liable for damages to their customers, brokers and firms may also be subjected to penalties from FINRA. Brokers and firms can be sanctioned, suspended, or even barred from selling securities by FINRA. The degree of the penalty can hinge on a number of factors, including the number of sales, the amount of customers affected, and the length of time over which the selling took place. Moreover, the financial benefit and whether the sale caused injury to investors will likely be included in a final penalty determination.

 

Protect Your Investments

The mere nature of selling away lends itself to fraud and deception by brokers and brokerage firms. They are unlikely to inform clients about the practice and many will intentionally mislead investors about the selling away. Investors should review all account statements and look closely for any discrepancies with their investments.

If you have reason to believe that your investments may be part of a selling away scheme, you should consult a qualified and experienced attorney that can help navigate the nuances of securities law and help determine who may be liable for your financial loss.

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