Recovery from Sales of Unapproved Securities or “Selling Away”
Can your brokerage firm be held responsible for investment losses due to unapproved securities transactions?
When a licensed securities agent sells an investment to his/her client that was not approved by their employer, this is referred to as “selling away” and it is in violation of FINRA Rules and Regulations.
Typically, when a broker is “selling away,” the investments are in the form of private placements or other non-public investments, and often these are investments that the broker has some pecuniary interest in. Such an investment is generally a violation of securities rules because the brokerage firm has not researched the risks of the investment or approved the investment for sale to its clients, and the broker is selling the investment without the knowledge of his employer.
Even if the representative didn’t receive a typical finder’s fee or commission, it’s quite possible that the individual is receiving some sort of indirect compensation.
Nonetheless, a broker-dealer can be held liable for a financial advisor’s “selling away” for failing to adequately supervise its employees and protect its clients.
What are the Official Regulations Governing Selling Away/Private Securities Transactions?
With certain exceptions, financial advisors may not engage in private securities transactions (“selling away”). In some circumstances, these transactions are allowed if the professional provides written notice to the firm first and discloses whether or not he or she will receive compensation for the proposed transaction.
FINRA Rule 3270
Financial advisors registered with FINRA may not engage in any outside business activity and private securities transactions unless they have provided written notice to the firm first. The rule also governs the duty of brokerage firms to supervise disclosed outside business activities:
A registered representative must evaluate the proposed activity to determine whether the activity properly is characterized as an outside business activity or whether it should be treated as an outside securities activity subject to the requirements of Rule 3280.
FINRA requires broker-dealers to supervise members activities in addition to giving approval of disclosed outside business activities. Further, FINRA brokerage firms have a general obligation to supervise their agents activities regardless of whether they are disclosed or not.
SEC Rule 206(4)-7(a)
The Securities and Exchange Commission’s rule governing “selling away” says that an registered investment advisory (RIA) firm is under an obligation to have policies and procedures in place reasonably designed to prevent violation of the Act or SEC rules adopted under the Act.
This duty would therefore apply to outside business activities that could present opportunities to engage in fraudulent activity, or violations of the fiduciary duty. Accordingly, the rule does seem to require RIAs to supervise any activity that could cause a violation, which would include selling investments regardless of whether they are approved or not or disclosed or not.
What are the Consequences for Selling Away?
Sanctions for financial professionals who get caught selling away from their member firm may include dismissal, suspension, a bar from the securities industry and possible monetary fines, depending on the severity of the offense and the harm that may have been done to investors.
Firms can also be sanctioned if they received notice of the sale but failed to provide written approval, disapproval, or acknowledgment of the notice.
If you are concerned about your investment losses due to financial advisor fraud such as “selling away,” the securities attorneys at The White Law Group may be able to help you. For a free consultation with a securities attorney, please call our offices at 888-637-5510.
This information is being provided to you by The White Law Group. The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Vero Beach, Florida.
For more information on The White Law Group, please visit our website at https://www.whitesecuritieslaw.com.