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Selling away occurs when a broker or other registered financial advisor sells or solicits the sale of private securities not approved by the investment firm for which he or she works. Selling away is a breach of fiduciary duty that often results in substantial losses for innocent investors.
Selling away entails the sale of private securities that are not authorized by and not on the products list of a registered broker’s or financial advisor’s broker-dealer firm. Broker-dealers, however, are responsible for the outside business conducted by its financial advisors whether it approved it or not. Broker-dealers’ supervisory responsibilities are extremely broad. The securities frequently sold, but not approved by the broker-dealers may include the following:
Brokers sometimes sell away to avoid the scrutiny of their broker-dealers over questionable investments in which they place their own interests before those of their investors. Cases involving selling away often involve a broker who sold investment products in which he or she was paid an undisclosed commission or otherwise had a personal interest in. Because selling away is conducted without the authorization of or disclosure to a broker’s investment firm, the securities involved do not benefit from the broker-dealer’s due diligence. In circumstances in which selling away occurs, investors are typically unaware of the risks associated with the securities purchased. The financial advisor frequently receives as much as 10-15% in commissions for the types of securities that are sold away from the firm.
Selling away is not only unethical, it is a violation of Financial Industry Regulatory Authority (FINRA) rules. Investors who suffered losses due to a registered broker selling away may be able to seek damages through securities arbitration against the broker-dealer of the investment advisor who recommended the security. FINRA has regulations that restrict the external or outside business activities of registered brokers and financial advisors, including the transactions of private securities. FINRA defines private securities transactions as any securities transaction outside the regular course or scope of an associated person’s employment with a registered broker-dealer firm.
If a broker wishes to sell securities outside of an investment firm’s approved products list, he or she must provide the firm with written notice prior to participating in a private securities transaction; the broker-dealer may then decide whether to approve the sale or solicitation of the securities in question. Regardless of whether the broker-dealer approves the security or not, it assumes the responsibility for transaction oversight as if it was executed on behalf of the firm.
Selling away often stems from registered brokers who work in satellite offices for larger investment firms and have little oversight from or contact with their principal management. Although brokerage firms may not know that their agents are selling away, investment firms may be held liable for investor losses if it can be established that the broker-dealer should have known about a broker’s outside sales activities, lacked reasonable supervisory policies to prevent and detect broker misconduct, or otherwise failed to act in the best interests of its investors.
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