As far as the securities industry is concerned, there is no shortage of rules, laws, and regulations. And thanks to securities fraud, such as Ponzi schemes and market crashes, the rulebook is only getting thicker as protections expand to more completely cover the market and its investors.
For example, what does it mean when a broker is selling away? “Selling away” is a practice that’s part of the rubric. It’s essentially investment professionals selling securities not issued by their brokerage company.
An Intro to Selling Away
“Selling away” is selling securities privately, outside the scope of business, or outside the regular course of one’s company. An investment professional (e.g., a financial advisor or broker) who sells securities or solicits securities sales that the company cannot or doesn’t offer could be selling away.
Selling away is usually prohibited due to the high likelihood for deception, fraud, and increased investor risk. One hazard occurs when an investor mistakenly believes the broker’s firm endorses the external investment, creating a false sense of security and legitimacy. Moreover, as the firm isn’t monitoring the sale as per specific rules, the risk of investors losing their money is greater. It’s, therefore, imperative to conduct extensive research prior to making such investment decisions.
Selling Away Regulations
The Financial Industry Regulatory Authority (FINRA), a non-governmental organization, oversees all brokerage firms, stock market operations, and securities representatives. In its role, FINRA offers guidance and rules to comply with securities regulations.
- Rule 3280: Investment professionals, with some exceptions, cannot engage in selling away. In certain scenarios, these transactions are permitted if the professional gives a written notice to the company well in advance and reveals whether he would be getting compensation for the particular transaction.
- Rule 3270: FINRA-registered individuals cannot engage in private securities transactions or any outside business without first notifying the firm. Also, this rule denotes the obligations of a company that has been provided such a notice by an investment professional or broker.
Selling Away: Potential Punishments
If an investment professional is guilty of selling away, he or she could be sanctioned, barred, or suspended from selling securities. The severity of the punishment is based on several factors, which include volume of sales, the period during which the sales took place, the number of customers, monetary benefits the professional enjoys, and whether the sales caused injury to investors. Firms could also be sanctioned in cases where they received sale notice but did not submit a written approval, acknowledgement, or disapproval of the notice.
To learn more about selling away, contact Meissner Associates.