When investors hand over their money to brokers, it is with an understanding that everything will be completely above board. All investments will of course be approved by the brokerage firm, right? That is how it is supposed to work. However, sometimes brokers conduct “private securities transactions” that have not been approved by the firm with which they are registered. This is referred to as “selling away.”
Why would a broker engage in selling away?
Like most illicit actions, selling away comes down to money. In some instances, a broker may be offered compensation by a company in order to get people to invest in it, which is why they might try to push it on their clients. This is referred to as “selling compensation.” These outside investments may be portrayed to client as “can’t miss” opportunities with low risk and a high rate of return, as well as ones with limited duration, to pressure the investor into action. In the case of an elderly client, especially one with diminished capacity or one who is a less-sophisticated investor, these tactics may constitute elder financial fraud in addition to a violation of securities industry rules.
Common unauthorized investment vehicles include:
- Promissory notes
- Unregistered securities
- Real estate investments
- Oil & gas partnerships
- Multi-level marketing
- Small business and startup investments
- Hedge funds
- Third-party investment advisor services
In addition, brokers are required by their firms to disclose all outside business activity and receive approval to conduct it. This activity is recorded by both the firm and the Financial Industry Regulatory Authority (FINRA). If a broker recommends an outside investment and there is no “outside business activity” mentioned on FINRA’s broker check report, the firm may not know about it and it almost certainly hasn’t been approved.
Brokers aren’t the only ones at fault – firms bear responsibility as well
Brokers and financial advisors may be the ones trying to get clients to invest in outside deals, but their firms are also responsible for this activity. Whatever business activities their members are up to, brokerage firms have a duty to monitor everything their brokers are doing and make thorough efforts, such as by conducting regular audits, to discover unapproved outside activities. If firms are not diligent in overseeing their registered representatives, they could liable for FINRA sanctions and client settlements under the “failure to supervise” rule.
How do you know if a deal would be characterized as selling away?
Selling away can be difficult to spot, but if a broker is using high pressure sales tactics and making it seem as thought you need to act immediately before the deal is gone, this is a red flag. In addition, any transaction that is conducted outside of the typical process for purchasing a security with the firm is unusual. The best thing for someone to do before they make any sort of investment is conduct research on both the investment and the broker – and a simple phone call to a supervisor with the firm can often determine whether the opportunity is indeed a registered security.
Did you lose money as the result of selling away?
Selling away is a common tactic that brokers use to get people to give up their hard-earned money. If you suffered investment losses for this reason, you may be able to get that money back through FINRA securities arbitration. For a free consultation, get in touch with the Silver Law Group. Call us toll-free at 1-800-975-4345 to get started.