When a broker sells securities that are not offered by the brokerage firm, this is called “selling away.”
Selling away is a violation of securities regulations. If an investor suffers losses in a selling away situation, the broker—and ultimately, the brokerage firm—may be liable.
Selling Away Schemes Can Be Dangerous for Investors
Brokerage firms keep a list of products that its brokers may sell to investors. Products on the list have been approved based on the firm’s due diligence process, which is designed to filter out disreputable and risky investments. Investment products not approved for sale by the firm are more likely to be high-risk or fraudulent.
Brokers may sell away to conceal fraud.
A broker may sell away in order to earn a commission on an investment the client is willing to buy, or in order to not have to share the commission with the brokerage firm. Brokers may steer clients towards unregistered investments in which the broker has a personal financial interest. Selling away can also conceal more deliberate fraudulent activities, such as Ponzi schemes.
Selling Away Can Be Legal, But Firms Must Approve and Supervise
Although brokers may sell securities that are not offered by their firm, the firm must be given written notice and sign off on any such transaction. If a brokerage firm approves an unregistered transaction, the firm is then responsible for supervising the transaction.
Brokerage firms may try to avoid liability in a selling away case by denying that they knew about the outside transaction. But firms are required to have reasonable supervisory procedures in place that can detect selling away and other violations.
Perhaps more importantly, firms must implement their supervisory procedures in a reasonable manner, including investigating possible red flags such as broker irregularities. There may be a heightened duty to supervise a broker who has a history of disciplinary actions, customer complaints, or other legal issues.
Selling Away Red Flags
Investors often are not aware when a broker sells investments without the approval of the brokerage firm. There may be certain red flags, however, that indicate possible selling away.
For starters, you should always perform a background check on your broker. FINRA offers free background checks through its BrokerCheck service.
Always perform a broker background check.
Research shows that broker misconduct is more prevalent among repeat offenders, so prior complaints or disciplinary action for selling away (or any securities violation) is a red flag.
Investors should also be wary of:
- Non-public investments such as private placements.
- Investment offers that sound too good to be true (such as “special,” “secret,” or “limited time” offers).
- Documents (including a transaction “confirmation” document) given to you by the broker that do not have the brokerage firm’s name on them.
- Requests for payments or communications outside of the firm’s official channels.
If you are suspicious of your adviser’s conduct, contact the Business Trial Group’s securities attorneys for a complimentary case review.