Selling Away is the Undisclosed and Unauthorized Sale of Investments by Brokers
When brokerage firms are developing the portfolio of products to sell to their customers, they should go through a painstaking process of researching each one to ensure that they are good investment options for their clients. This process is also known as “due diligence” and intended for investors’ protection. Broker-dealers have this responsibility and know they will be held accountable for their recommendations not vetted by them. Despite the law and the internal policies of the brokerage firm, some brokers and advisors will attempt to sell an investment product that has not been approved by the firm and engage in the unlawful practice known as “selling away.”
Pursuant to FINRA Rule 3270 and NASD Rule 3040, no stockbroker or financial advisor can be employed by or accept compensation from any other person for any business activity without written notice to and approval by his/her broker-dealer. They are required to disclose all “outside business activities” and not allowed to “participate” in any “private securities transaction” without written notice to the firm and its approval.
Specifically FINRA Rule 3270 entitled “Outside Business Activities of an Associated Person” states:
No person associated with a member in any registered capacity shall be employed by, or accept compensation from, any other person as a result of any business activity, other than a passive investment, outside the scope of his relationship with his employer firm, unless he has provided prompt written notice to the member. Such notice shall be in the form required by the member. Activities subject to the requirements of Rule 3040 shall be exempted from this requirement.
FINRA f/k/a NASD has long recognized that these unauthorized sales are usually “private securities transactions,” where high commissions are paid to brokers by companies that would not pass a “due diligence” review and be suitable for any investor or, even worse, that could be involved in a fraudulent Ponzi Scheme. Rule 3040 entitled “Private Securities Transactions of an Associated Person” states:
No person associated with a member shall participate in any manner in a private securities transaction except in accordance with the requirements of this Rule.
(b) Written Notice
Prior to participating in any private securities transaction, an associated personal shall provide written notice to the member with which he is associated describing in detail the proposed transaction and the person’s proposed role therein and stating whether he has received or may receive selling compensation in connection with the transaction; provided however that, in the case of a series of related transactions in which no selling compensation has been or will be received, an associated person may provide a single written notice.
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FINRA has explicitly stated that, for the purposes of NASD Rule 3040, “participation” in a private securities transaction is broadly construed to include conduct far beyond simply making the sale, including, but not limited to: (i) referring customers; (ii) introducing customers to the issuer; (iii) arranging and/or participating in meetings between the customers and the issuer; or (iv) receiving a referral or finder’s fee from the issuer.
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