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August 1, 2019

Selling Away

One of the most dangerous things a broker can do to an investor is selling away. In layman terms, selling away is a private transaction whereby a broker sells a product that is not offered or approved by his or her firm. In other words, the broker is selling an investment for which the firm did give prior approval. This type of outside business activity is illegal, and it doesn’t comply with rules and regulations of securities regulators.

The Dangers of Selling Away

Most brokerage firms only offer or recommend approved investment products that have been vetted by the firm’s compliance department. If an investment product is not approved, it is generally because it is high risk or insufficient information is known about the issuer of the investment. The broker may be soliciting the sale in order to obtain a large commission or to avoid supervision by the firm’s compliance department. Selling away is dangerous because it often involves high risk investments that have not been vetted. The client does not have the benefit of the firm’s compliance department overseeing the investment.

Brokers can get away with selling away due to the trust some investors put in them. Selling away will rarely lead to a high profit for the investor. There’s a good reason why all brokerage firms complete their due diligence. Alternative investments, not on the approved list of products, are usually either high-risk or even fraudulent. The supervisory procedures are there so the investment professionals can filter them out.

Why Do Brokers Sell Away?

Brokers sell away for several reasons:

• In some instances, brokers may steer their clients to an investment in which the broker has a personal financial interest. For example, a broker who is also serving as a manager of a private fund that is in need of new investors solicits his customers to invest in that fund.
• A broker may solicit the sale of an investment product that pays a large commission.
• A broker may want to avoid sharing the percentage of the commission with their firm.

Permitted Private Securities Transactions

Selling away means selling securities not approved by the firm. However, not all transactions that weren’t vetted by the company are fraudulent or illegal. Some firms approve of their brokers selling ”off the list.”

As per FINRA rules, private securities transactions aren’t always illegal. However, the broker must provide prior written notice to the firm and the firm must approve the transaction before it takes place. The broker and firm must process the commission as they would with any other approved product.

If a broker does not provide notice, the firm is essentially renouncing any participation in the transaction. There are cases where a firm turns a blind eye to a broker’s selling an unapproved product without providing written notice, and then deny any involvement when investments are lost. These firms may be liable for failing to supervise.

Selling Away — How to Recognize the Red Flags

As an investor, there are a few things to be on the lookout for when it comes to selling away:

Private Placements and Other Non-Public Investments

Selling away usually includes a private placement. Companies that are selling their stock through agencies that distribute private placements and underwrites them, probably won’t be on the list of approved products of a brokerage firm. However, a broker looking to earn commission might still sell them to their client and thus sell them away from his company.

Time-Sensitive or Special Offers

Selling away is basically a shot in the dark and, per FINRA rules, an illegal activity. So, brokers will try to get it done quickly. That’s why they may present it as a “special” or “secret” offer. A good rule of thumb with anything is that if an offer is too good to be true — it probably isn’t true.

Selling away usually won’t include official, firm stamped documents. Therefore, brokers will handle all “confirmation” documents, communication, and payments outside of the proper company channels. Transactions done in private are typically a big red flag for investors.

Promissory Notes

Another potential red flag are the promissory notes. This type of loan usually goes hand in hand with selling away. Promissory notes imply that an investor will loan the money with the promise of high-interest rates. However, more often than not, the payments never arrive, or they abruptly stop after a short while.

The investors trust their investment companies and the associated person in charge of their accounts. Thus, they believe that the loan will be profitable. However, the broker knows better, which is why these types of actions are illegal.

FINRA BrokerCheck

To avoid having doubts in your financial advisor, always run a background check on your broker. Selling away isn’t a type of thing a broker would do out of nowhere. Often repeat offenders that might leave investors burned. Check if a broker has securities violations or prior complaints regarding selling away. FINRA maintains a database called BrokerCheck which contains a lot of information about brokers such as employment history, licensing information, regulatory actions, arbitrations and customer complaints.

Brokers who violate the FINRA rules can be barred from selling securities, suspended, or sanctioned. Furthermore, FINRA can sanction entire brokerage firms because of failure to supervise. If they receive a prior written notice but fail to take action, FINRA can sanction them as well.

Securities Lawyers — Protecting the Interest of Investors

A securities law firm that specializes in selling away and other broker misconduct might be the ideal solution when it comes to gathering more information. They can help provide restitution when it comes to fraudulent brokers. Taking a closer look and informing yourself can protect your interests and notify you of your rights and options.