The securities industry is one of the most regulated, largely because of the high potential for fraud and abuse. Various laws and regulations protect investors by imposing requirements on securities transactions and the people who facilitate them.
Individual brokers and brokerage firms must be registered and licensed with the Financial Industry Regulatory Authority (FINRA) before they are permitted to conduct securities transactions. FINRA also administers a number of exams that provide certification for selling specific kinds of securities.
All of these regulations exist to protect investors from fraudulent conduct by brokers. Nevertheless, brokers occasionally attempt to skirt the rules and offer private deals to their clients. Not only do these transactions violate FINRA rules, they also pose additional risks for investors.
Brokerage firms maintain a list of approved securities their brokers are allowed to offer. By approving products ahead of time, brokerage firms ensure that their brokers sell only securities that are vetted and verified as legitimate products.
Brokers sell away when they offer their clients securities not on the firm’s approved product list.
Brokers may sell away if they want to make extra commissions without sharing with their firm. Selling away is not always malicious; sometimes, a broker means well but isn’t able to offer the securities a client wants through normal channels. Regardless of the broker’s intent, however, FINRA prohibits selling away and sanctions brokers for doing so.
Common Examples of Selling Away
While there is no specific form a selling-away transaction takes, they frequently involve certain types of investments. These investments include:
- Private placements involving unregistered securities;
- Private deals involving promissory notes; and
- Real estate deals conducted privately and away from the broker’s regular business.
Deals that involve selling away often exhibit the same red flags as other types of investment fraud, like Ponzi schemes. Excessively high or consistent returns are indicators that the deal is probably too good to be true.
What Are the Risks of Investing in Securities That Are Sold Away?
Investments of all kinds carry a certain level of risk. However, investing in a selling-away deal carries more risk because they come without the safeguards that accompany approved investments.
Lack of screening
First, selling-away deals involve securities that are not screened by the brokerage firm. Brokerage firms screen the products they offer for a reason: to make sure that their customers have access to solid investments. Without these safeguards, investors are taking on significantly higher risk.
Lack of disclosures
Second, selling away deals rarely include the formal risk disclosures found with approved brokerage products. There is no review of the investment by the brokerage’s compliance department, and the exact nature of the risk involved may be unclear.
Finally, it may be harder to recover losses. When a broker engages in an approved transaction, the brokerage takes on liability for the broker’s activity. Because brokerages are often completely unaware of selling-away transactions, it is much harder to prove liability on the part of the brokerage. In the case of significant investor losses, this can mean less money recovered overall.
Selling-Away FINRA Regulations
There are two main FINRA regulations that cover selling away: Rule 3270 and Rule 3280.
FINRA Rule 3270 prohibits brokers from engaging in activities that are outside of the broker’s relationship with their brokerage firm unless written notice is provided to the firm.
FINRA Rule 3280 is similar, and prohibits brokers from engaging in private securities transactions (including selling away) without first providing written notice to their firm. After receiving that notice, the member firm may approve or disapprove the transaction. If the firm approves, then the firm supervises and records the transaction. Disapproval, on the other hand, prohibits the broker from participation in the transaction either directly or indirectly.
What Are the Penalties for Selling Away?
Both brokers and brokerage firms can be held liable when a broker sells away. FINRA regulations require brokers to offer securities products suitable for each of their client’s needs. Brokers must account for their clients’ objectives, level of investing sophistication, and risk tolerances.
When a broker fails to fulfill this obligation, FINRA may sanction, suspend, or bar the broker from the financial industry. According to FINRA’s Sanctions Guidelines, Brokers who engage in selling away open themselves up to monetary sanctions between $2,500 and $77,000 for each rule violation. For serious violations, FINRA may suspend the broker for up to two years or permanently bar them from practicing as a broker. The severity of the penalty depends on several factors:
- Whether the selling away involved customers of the broker’s firm;
- How directly the selling away relates to the injury caused to investors;
- How long the outside activity occurred;
- The amount of money involved in the sales;
- Whether the broker misled their firm or clients with respect to the transactions; and
- How important the broker was in facilitating the transaction.
Because selling away involves transactions outside of a broker’s relationship with their brokerage firm, holding the firm responsible for investor losses is more difficult. Nevertheless, a brokerage firm may still be liable for the conduct of its brokers under FINRA regulations. Brokerage firms have an obligation to supervise the brokers with which they are associated. Failure to do so may result in the firm’s liability to the investor.
How Do I Recover Losses from Selling Away Deals?
Investors can try to recover their losses through several formal and informal methods. Speaking with a selling away lawyer is the best way to determine which method is right for your situation.
Many brokerage firms require their customers to sign mandatory arbitration clauses. If this is the case, then the investor must use FINRA’s arbitration process rather than filing a lawsuit.
Arbitration starts when the investor files a claim. From there, the parties go through similar procedures to those in the regular court system. Each side will engage in discovery and present their case at a hearing before an arbitrator. The arbitrator is responsible for reviewing the evidence and ultimately issuing a decision and award.
Contacting Your Brokerage Firm
A brokerage firm’s compliance department may be interested in reaching a resolution without involving the courts. In some cases, investors recover losses from their broker’s selling away deals through mediation. FINRA provides access to informal mediation to facilitate a mutually acceptable agreement between the investor and the broker or firm.
Filing a Lawsuit
If there is no mandatory arbitration clause and mediation is unsuccessful, the investor can file a lawsuit. As with all lawsuits, this can be expensive and, depending on the amount of losses suffered by the investor, may not be the best option. An investment fraud attorney can review your case and provide advice on the best way to proceed.
Related Read: Can You Sue a Brokerage Firm for Investment Losses?
Why You Need a Securities Fraud Attorney
No matter which method of recovery you choose, you should hire a securities law attorney experienced with recovering money for investors to represent you. A securities fraud attorney can advise you on the best way to recover your losses from a brokerage firm.
This is especially true because many selling away cases involve several different legal claims at the same time. A securities fraud attorney can attempt to reach a settlement with the brokerage firm and, if necessary, help you with the FINRA arbitration process.
Did You Experience Losses From a Selling Away Deal?
If you have suffered investment losses due to your broker’s negligence or mistreatment, you should speak with a selling away attorney.
The Law Offices of Robert Wayne Pearce, P.A., specialize in helping investors get their money back from bad investments. We have over 40 years of experience resolving all kinds of investment disputes.
Contact us today for a free consultation about your case.