What is “Selling Away?”
| April 22, 2020
“Selling away” means that a broker is selling or offering securities that are not offered or approved by the brokerage firm he or she is affiliated with. Brokerage firms put a lot of effort into carefully researching and approving the investment products they allow their brokers to offer to their clients, and a broker who engages in “selling away” is acting inappropriately. Brokers or financial advisers who engage in this kind of behavior are abusing their position of trust with their clients, and their brokerage firms often have no idea that the unapproved investment products are being offered.
Although the firm may be unaware that one of its brokers is offering these outside investments, brokerage firms do have a basic duty to supervise the actions of their employees. In a case of “selling away,” it may be possible to also hold the brokerage firm responsible for the losses sustained by victims of stockbroker misconduct or fraud because of a failure to supervise.
What are the Five Types of Selling Away?
Selling away is not always easy to understand, and there are various ways that this can occur.
- Private placements or private side deals. A private placement or private side deal could include the sale of an unregistered security to a private investor as opposed to through a standard public offering. In general, ordinary retail investors are not eligible to participate in private placements because these are typically riskier securities transactions opened only to qualified investors. However, there are times when these private deals are offered only to “top customers” or to special friends and family members.
- Promissory notes. A promissory note signifies a type of debt or loan arrangement that businesses or individuals can use as a way to raise funds. These are typically private investment interactions, not public investments. The material risks and other details of these kinds of transactions may not be readily apparent to an investor. In many cases, promissory note investments often involve elements of Ponzi schemes or fraud, as funds from new investors are often used to pay returns to previous investors.
- The guarantee. There is no such thing as a guaranteed return on a legitimate investment. If someone has guaranteed a return on a private deal or side deal or called the investment a no-lose proposition, this is a red flag of selling away.
- Unusually high returns. If the rate of return on the potential investment is unusually high or unusually consistent, or if the product or strategy is too complex to understand, this is another sign that selling away may be occurring.
- Private real estate deals. Investors often assume that real estate-related investments pose less risk than other types of investments. In some cases, this may be true. However, selling away often involves private real estate deals that involved risks that are not represented at the time of sale. Often, these are group (or pooled) asset deals in which the details are not always consistent with representations made by a broker or advisor.
Regulations Pertaining to Selling Away
The Financial Industry Regulatory Authority (FINRA) requires that firms and individuals be registered and meet various requirements in order to conduct securities transactions. Those who sell securities must pass qualifications exams, and not all brokers are authorized to sell every type of security.
There are a few key federal regulations pertaining to selling away:
- FINRA Rule 3280. With only a few exceptions, investment professionals are not allowed to engage in private securities transactions (selling away). These transactions may be allowed if the professionals involved provide written notice to the firm and discloses whether or not they will receive compensation for the proposed transaction.
- FINRA Rule 3270: FINRA registered individuals are not allowed to engage in any outside business activity or private securities transactions unless they have provided notice to the firm. This rule also defines the obligations of a firm that receives such a notice.
If you or somebody you care about believes that you have been deceived in “selling away” activities, you need to consult with an experienced securities attorney immediately. At Meyer Wilson, we are ready to get to work on your behalf.
How to Get Help if You Have Sustained Investment Losses Due to Selling Away
If you have sustained losses in connection with selling away, or if you have lost investment money in a similar situation, please reach out to one of our experienced stockbroker misconduct lawyers today for a free and confidential evaluation of your potential claim.
To learn more about selling away, view the video below: