What Does Selling Away Mean in the Financial Industry?

In the financial industry, “selling away” refers to a practice where a financial professional conducts securities transactions for a client without the knowledge or approval of their employing brokerage firm. This activity operates outside the firm’s established supervisory framework and approved product lists. Understanding this concept is important for investors to recognize potential risks associated with unauthorized financial activities.

Defining Selling Away

Selling away occurs when a registered representative, such as a stockbroker or financial advisor, sells or solicits the sale of securities that are not held or offered by their associated brokerage firm. This practice bypasses the firm’s standard procedures for due diligence and supervision. The transactions are conducted outside the regular scope of the professional’s employment with the firm, meaning they are not recorded on the firm’s official books.

Selling away involves a security transaction conducted without the employing firm’s authorization and oversight. Brokerage firms typically maintain an approved product list, which identifies investments vetted through their compliance processes. When a broker engages in selling away, they circumvent this critical vetting, potentially exposing investors to unreviewed products.

This practice impacts both the client, who may unknowingly invest in unapproved or high-risk products, and the firm, which faces significant regulatory and reputational risks. While a broker might engage in selling away to earn higher commissions or to accommodate a client’s desire for a specific unapproved product, it always represents a deviation from authorized conduct. Even if a broker’s intent is not malicious, selling away is prohibited by regulatory bodies.

Common Selling Away Scenarios

Selling away manifests in various forms, often involving investments lacking the transparency and oversight of publicly traded securities. One common scenario involves private placements, which are unregistered securities sold directly to private investors rather than through a public offering. These investments bypass the rigorous due diligence typically applied to products on a firm’s approved list, increasing investor risk.

Another example includes the sale of promissory notes, which are debt products businesses use to raise capital, often promising high interest rates. Brokers might also engage in selling away through real estate deals or other ventures that are not part of their firm’s official offerings. Such activities are often conducted without the firm’s knowledge, preventing proper review and supervision.

Additionally, selling away can occur when a financial professional engages in “outside business activities” that involve securities transactions without proper disclosure and approval from their firm. This could include directly managing client funds or investments through a separate entity not supervised by the primary brokerage firm. These scenarios all involve the professional circumventing their firm’s oversight, often for personal financial gain or to facilitate a client’s investment in an unapproved product.

Regulatory Basis

Selling away is strictly prohibited due to its violation of regulatory rules designed to protect investors. The Financial Industry Regulatory Authority (FINRA) and the U.S. Securities and Exchange Commission (SEC) are primary regulatory bodies overseeing broker-dealers and financial professionals. These organizations mandate that firms adequately supervise their representatives and ensure all securities transactions are conducted within approved channels.

FINRA Rule 3110 requires member firms to establish and maintain a system to supervise the activities of their associated persons. This system must be designed to achieve compliance with applicable securities laws and FINRA rules. Selling away undermines this crucial supervisory obligation, as it involves transactions conducted outside the firm’s established oversight.

Specific FINRA rules directly address activities that constitute selling away. FINRA Rule 3270 requires a registered person to provide prior written notice to their firm before engaging in any outside business activity. FINRA Rule 3280 mandates that associated persons provide detailed written notice to their firm before participating in any private securities transaction. If the firm approves a private securities transaction where compensation is received, it must record and supervise the transaction.

Disciplinary Actions and Penalties

Financial professionals and their employing firms face significant consequences when selling away occurs. Regulatory bodies like FINRA and the SEC impose a range of disciplinary actions to penalize such violations and deter future misconduct. These actions can include substantial monetary fines, which vary depending on the severity of the violation and can range from thousands to tens of thousands of dollars.

Individuals found to have engaged in selling away may face suspension from the securities industry for a specified period, or even a permanent bar, effectively ending their career. Formal reprimands are also issued, serving as a public record. In cases where investors suffer financial losses, professionals may be ordered to pay restitution to compensate those harmed.

Employing firms also bear responsibility for their representatives’ actions due to their supervisory obligations. Firms can incur significant penalties, including fines, for failing to adequately supervise their associated persons and prevent selling away. A firm’s reputation can be severely damaged, leading to a loss of client trust. These disciplinary outcomes are often publicly reported, further impacting the professional’s career and the firm’s standing.

Investor Actions

If an investor suspects they have been a victim of selling away, several steps can be taken to report the activity and seek resolution. The initial step involves contacting the financial professional’s employing firm directly. Many firms have compliance departments that may resolve the issue internally.

Investors can also file a formal complaint with the Financial Industry Regulatory Authority (FINRA) or the U.S. Securities and Exchange Commission (SEC). This can be done through FINRA’s Investor Complaint Center.

For seeking recovery of losses, FINRA’s arbitration process is a primary avenue for dispute resolution. Many brokerage agreements include mandatory arbitration clauses, requiring disputes to be resolved through this method. It is important for investors to gather all relevant documentation, such as account statements, communications with the professional, and any agreements related to the investment, as these will be crucial for any complaint or arbitration process.