Selling away from a brokerage firm is a critical issue in the securities industry that can have serious implications for both brokers and investors. It involves a broker selling securities that are not approved by their employing firm, often bypassing necessary due diligence and regulatory oversight. This comprehensive guide, developed by Bakhtiari & Harrison, aims to shed light on the intricacies of selling away, the motivations behind it, the legal framework governing it, and the best practices to prevent and address it. By understanding these elements, brokers and investors can navigate the complex landscape of securities transactions more safely and effectively.
What is Selling Away?
Selling away occurs when a broker solicits a client to purchase securities that are not held or offered by their employing brokerage firm. Typically, brokerage firms maintain a list of approved products that have undergone due diligence screenings to ensure they meet regulatory standards and are safe for clients. Selling away bypasses this process, exposing clients to potentially high-risk investments.
Examples of Selling Away:
- A broker sells shares in a private startup without the firm’s approval.
- An advisor promotes investment in a real estate project not sanctioned by their firm.
Difference Between Selling Away and Selling Outside the Brokerage Firm:
Selling away specifically refers to unauthorized transactions that are outside the firm’s approval, while selling outside the firm can sometimes be sanctioned if the firm is aware but not directly involved.
Why Do People Sell Away from the Brokerage Firm?
Motivations for Selling Away:
- Higher Commissions: Brokers might receive larger commissions from selling products outside their firm.
- Personal Investments: Brokers may have personal investments in products they promote.
- Client Requests: Clients may request investments in specific products not offered by the firm.
Potential Benefits and Drawbacks:
- Benefits: Higher earnings and client satisfaction.
- Drawbacks: Legal risks, loss of reputation, and financial penalties.
Risks Involved for Both Broker and Client:
- For Brokers: Legal action, suspension, or revocation of licenses.
- For Clients: Investments in unvetted, high-risk products leading to potential financial losses.
Regulations and Laws Surrounding Selling Away
Securities and Exchange Commission (SEC) Regulations:
The SEC mandates that all securities transactions must be conducted within the regulatory framework to protect investors.
Financial Industry Regulatory Authority (FINRA) Rules:
FINRA Rule 3280 explicitly prohibits brokers from participating in private securities transactions without prior written notice to their firm. Rule 3040 further requires registered persons to obtain firm approval before engaging in any securities transactions outside the firm.
State Laws and Regulations:
Various states have additional regulations that govern securities transactions and protect investors from unauthorized sales activities.
Consequences of Selling Away
Possible Legal Repercussions:
Brokers engaging in selling away can face legal actions, including fines, suspensions, or bans from the industry.
mpact on the Broker’s Career and Reputation:
Selling away can severely damage a broker’s professional reputation and career prospects, leading to a loss of trust and potential clients.
Financial Consequences for Both Broker and Client:
Clients may suffer substantial financial losses, and brokers may face significant penalties, including restitution and fines.
How to Protect Yourself from Selling Away
Questions to Ask Your Broker:
- Are all my investments approved by your firm?
- How does the firm vet the investment products?
Red Flags to Look Out For:
- Unsolicited investment opportunities.
- Lack of documentation or transparency about the product.
Steps to Take if You Suspect Selling Away:
- Report your concerns to the brokerage firm’s compliance department.
- Consult with a securities lawyer for legal advice.
Key Questions Answered
What is Selling Away from the Brokerage Firm?
Selling away involves brokers selling unauthorized securities outside their firm’s purview. This means the broker engages in transactions for investment products that their employing firm does not approve or supervise, thus bypassing critical due diligence and regulatory oversight.
Selling Away from the Brokerage Firm Legal?
No, selling away is illegal and violates FINRA and SEC regulations. These regulatory bodies require all securities transactions to be conducted under the supervision of the broker’s firm to ensure compliance with legal standards and protect investors from potential fraud and high-risk investments.
How Does Selling Away Differ from Traditional Brokerage Transactions?
Traditional brokerage transactions are conducted within the framework of the brokerage firm’s operations, involving products that the firm has vetted and approved. Selling away, on the other hand, involves the broker independently selling products not approved by the firm, bypassing these safeguards and exposing investors to greater risks.
What are the Potential Risks and Consequences of Selling Away?
The risks and consequences of selling away are significant for both brokers and clients. For brokers, engaging in selling away can lead to legal actions, fines, suspensions, or permanent bans from the industry. It can also severely damage their professional reputation. For clients, the risks include investing in unvetted, high-risk products that could lead to substantial financial losses. Additionally, without the firm’s supervision, there is less recourse for clients if the investment fails.
How Do I Know if I Am Being Sold Away from the Brokerage Firm?
Signs that you might be sold away from a brokerage firm include receiving unsolicited investment offers, a lack of transparency or documentation about the investment, and investments that seem unusually complex or risky. If your broker is reluctant to provide clear, written information or if the investment opportunity appears to be outside the firm’s usual offerings, these could be red flags.
Are There Any Laws or Regulations to Protect Investors?
Yes, there are stringent laws and regulations designed to protect investors from the risks of selling away. The SEC and FINRA have established rules that mandate all securities transactions must be approved and supervised by the broker’s firm. These regulations help ensure that all investment products meet specific standards for transparency, risk, and compliance.
Can I Still Make a Profit by Selling Away from the Brokerage Firm?
While it is possible to make a profit from investments sold away from the brokerage firm, it is highly risky and not recommended. The lack of firm oversight means that these investments may not have undergone proper due diligence, increasing the likelihood of fraud or failure. The potential for legal and financial repercussions further diminishes the attractiveness of such opportunities.
What Should I Do if I Suspect I Have Been Sold Away from the Brokerage Firm?
If you suspect you have been sold away from the brokerage firm, it is crucial to act quickly. Report your concerns to the firm’s compliance department immediately. Additionally, consult with a securities lawyer to understand your legal options and to protect your interests. Keeping thorough records of all communications and transactions related to the investment can also be beneficial.
Are There Any Warning Signs That a Broker May Be Engaging in Selling Away?
Yes, several warning signs can indicate that a broker may be engaging in selling away. These include unsolicited investment offers, a lack of clear documentation or transparency about the investment, pressure to invest quickly, and investments that seem outside the norm for the firm. If your broker is unwilling to provide detailed information or avoids involving the firm in the transaction, these are significant red flags.
Selling away from the brokerage firm is a significant issue in the securities industry, posing risks to both brokers and investors. Understanding the definition, motivations, regulations, and consequences of selling away is crucial for making informed investment decisions. By staying vigilant and informed, investors can protect themselves from the dangers of unauthorized securities transactions. Bakhtiari & Harrison are committed to providing the necessary guidance and legal support to help investors and brokers navigate these challenges effectively.