“Selling away” occurs when a securities broker buys, solicits, or sells securities that were not approved by the broker’s affiliated firm or recorded on the firm’s books and records. Selling away is prohibited under the rules of the Financial Industry Regulatory Authority (FINRA), particularly FINRA Rule 3040, as well as other securities laws. The most common securities sold away from brokerage firms are private placements and promissory notes.
Most often, the investor is never aware that the broker is acting outside of normal securities channels. In many cases, the broker will create false account statements or confirmations. In other cases, the broker will have the investor open a self-directed account that will provide custodial services for the investments. The self-directed account helps the broker cloak the illegitimacy of the investment by having a third-party prepare statements and distribute income payments. However, these account statements can also be misleading because the broker has complete discretion to stop paying the investor.
A broker who engages in substantial selling away activities may move from firm to firm as needed to minimize questions and protect his illegal business activities. The investor does not learn that the broker’s activities were wrongful until the investment scheme is publicized or the broker stops returning their calls. The brokerage firm’s typical response to their employees selling away is to claim ignorance. However, under FINRA Rule 3010, firms have an obligation to supervise their employees.
Yet, too often, the brokerage firm’s only supervision over the broker’s outside business activities consists of documentation completed by the broker without independent verification. Also common are pre-announced visits to the broker’s office that allow the broker to clean up any signs of wrongdoing before inspection. In more egregious cases, the firm ignores red flags such as customers moving large amounts of assets away from the firm, checks to unknown companies, customer complaints concerning the investments sold away, or the broker’s prior termination for selling away.
Even if the broker is caught, a brokerage firm may allow the broker to resign without alerting FINRA or other regulators that the broker has violated securities laws. This violates FINRA rules, which require brokerage firms to disclose the reason for termination if the termination was a result of suspicion of violating the securities laws. Worse still, the brokerage firm may not even bother to inform the client that the broker may have sold an illegal security or a security not approved by the firm.