Selling Away

Selling away is when a financial advisor solicits a customer to participate in a private securities transaction that is “away” from the firm. In other words, when a broker recommends a transaction to buy or sell a security that is not offered or approved by the brokerage firm where the financial advisor is employed or registered. Selling away is also referred to as private securities transactions or undisclosed outside business activities.

FINRA Rule 3280 states that stockbrokers registered with an investment firm cannot participate in any manner in a private securities transaction unless the broker provides written notice to the firm and the firm approves the proposed transaction.

The rule defines a “private securities transaction” as any securities transaction outside the regular course or scope of a financial advisor’s employment with a brokerage firm.

As a general matter, stockbrokers are permitted only to solicit and sell investments approved by their firm. However, quite frequently, financial advisors solicit, participate, or directly engage in the sale of investments not approved by their firms or investments that are not registered.

Below are some examples of “selling away.”

Financial advisors often engage in selling away to pursue high commissions, which they would not need to split with their firm, or to avoid scrutiny from their brokerage firm’s compliance department.

Broker-dealers are required to supervise financial advisors and customer accounts to ensure compliance with securities laws and industry regulations. These protections are in place to protect investors. When a financial advisor recommends, or otherwise participates in, a security transaction that is “away” from the firm, supervision becomes more difficult. The result is that the investor is left with less protection and often assumes more risk. 

Any security sold outside the regular course or scope of practice that is not approved by the broker-dealer can be “sold away.” However, some investments are just less likely to be sold away, such as common stock of large corporations, well-known mutual funds, and certain types of bonds. Even so, it can happen. For example, a financial advisor who works at a brokerage firm that primarily sells bonds and who then solicits a customer to invest in a mutual fund not approved by the brokerage firm.

More common, selling away is related to more obscure securities and financial products, such as Future Income Payments, LLC. Future Income Payments, LLC represented itself as a structured cash flow investment that purchased pensions at a discount from pensioners and then sold a portion of those pensions as a “pension stream to investors.” Investors were promised high returns, and brokers who sold the investment received a sizeable commission. Licensed financial advisors across the country solicited their customers to purchase securities of Future Income Payments, LLC, even though the financial advisors’ employing brokerage firms did not approve the sale of this product.

Financial advisors chased the high commissions and skirted their firms’ compliance departments. Investors were left holding the empty bag when Future Income Payments, LLC ceased doing business after being unmasked as a Ponzi scheme. 

The overwhelming majority of selling away cases involve high-risk and complex securities. Generally, investments linked to selling away transactions include off-shore securities, insurance trusts, stocks or ownership interests in small businesses, startup ventures, corporate debentures, mortgage notes, private placements, promissory notes, oil & gas interests, real estate deals, and pre-IPO shares.

A brokerage firm can be held responsible for their financial advisors' conduct in “selling away” cases under certain circumstances.

Pursuant to FINRA Rule 3280, when a broker-dealer approves a private transaction away from the firm, the firm assumes the legal responsibility for the trade. There are no exceptions to this rule. Broker-dealers can be held responsible for the conduct of their financial advisors in connection with these approved transactions.

Even if a transaction is not approved by a firm, a brokerage firm can also be held liable if the financial advisor acted with apparent authority, or the investor reasonably believed that the advisor’s activities were approved or part of the broker’s services.

Brokerage firms must properly supervise financial advisors and customer accounts. Brokerage firms must also establish and maintain a reasonably designed system to oversee account activity, such as private securities transactions, to ensure compliance with securities laws and industry regulations. When a brokerage firm fails to supervise its financial advisors or the investment account activity sufficiently, it may be liable for investment losses sustained by customers.

Can I sue my financial advisor or brokerage firm to recover selling away losses?  The short answer is "yes." As with any litigation, whether you are successful will depend on your case's specific facts and circumstances.

To recover financial compensation for selling-away-related losses, investors need to take legal action. Disputes between investors and financial advisors and brokerage firms are generally litigated and decided in arbitration instead of court due to binding contractual agreements. The parties agreed to this alternative dispute resolution process when the customer opened the brokerage account and signed the account opening documents.

Securities arbitration is a unique and complex practice area. Investors should seek out experienced counsel who can navigate the arbitration process and effectively advocate on their behalf.

Iorio Altamirano LLP is a securities arbitration law firm based in New York City. We are experienced securities arbitration attorneys, and we represent investors nationwide who have suffered investment losses because of wrongful conduct by financial advisors and brokerage firms.

If you have suffered financial losses due to selling away, contact securities arbitration law firm Iorio Altamirano LLP toll-free at (855) 430-4010 for a free and confidential evaluation.