What is Selling Away? Risks, Regulations and Legal Recourse

When you trust a broker with your investments, you expect oversight and transparency to safeguard against unauthorized or high-risk transactions. However, some brokers engage in “selling away,” an illegal practice of selling securities or investments not approved by their employing firm. This risky maneuver leaves investors vulnerable to unregulated, high-risk opportunities and even potential scams. Without the usual firm protections, you could be exposed to serious financial losses with limited options for recovery.

Recognizing the dangers of selling away is crucial for safeguarding your financial well-being. Sonn Law Group, a nationally recognized leader in securities fraud cases, is dedicated to helping investors hold brokers accountable for unauthorized transactions. In this guide, we’ll explain what selling away entails, its risks and how to identify warning signs. 

If you suspect your broker has engaged in this practice, contact Sonn Law Group to explore your options for financial recovery and secure the compensation you deserve.

Understanding Selling Away

“Selling away” is a term used to describe a practice where a broker engages in unauthorized transactions outside of their affiliated firm’s supervision and approval. When a broker sells investments or securities that their firm hasn’t approved, they bypass essential safeguards that protect investors from potentially risky, unvetted financial products. 

Under Financial Industry Regulatory Authority (FINRA) guidelines, specifically FINRA Rule 3270, brokers are required to disclose any outside business activities, particularly those involving private securities transactions, to their firm. This rule helps protect investors by ensuring that all investments a broker offers are subject to firm oversight, reducing the risk of conflicts of interest or unauthorized, high-risk transactions.

When a broker notifies a firm of outside business activities, the firm is required to:

• Review the Proposed Activity: Firms must assess how the activity might impact client interests and whether it aligns with regulatory standards.
• Determine Authorization: Firms decide whether to approve, limit or prohibit the broker’s involvement in the outside activity.
• Maintain Records: Firms must keep detailed records of all outside activity disclosures and compliance reviews to demonstrate that they are meeting their supervisory responsibilities.

Common Scenarios of Selling Away

Selling away often involves brokers offering unapproved securities like private placements and promissory notes. These investments, which are not publicly traded, bypass the rigorous due diligence that brokerage firms typically conduct for approved products. 

Private placements, which are offerings of unregistered securities to a limited number of investors, can be risky because they lack public disclosures and often have limited liquidity. While they can be legitimate investment opportunities, they require careful vetting that may be lacking in selling away scenarios. 

Promissory notes, essentially IOUs from companies or individuals promising to repay a loan with interest, may promise high returns but can be structured without oversight, leaving investors vulnerable to hidden risks. These are particularly attractive for selling away schemes due to their flexibility and potential for high commissions. By circumventing firm supervision, brokers expose investors to potential losses from unvetted, high-risk investments that might otherwise be flagged during routine reviews.

In addition to unauthorized securities, selling away often involves brokers engaging in outside business activities (OBAs) without informing their affiliated firms, as required by FINRA Rule 3270. This may include undisclosed ventures, such as real estate projects, digital assets or personal investment products not vetted by the broker’s firm. 

Without proper firm oversight, these activities create potential conflicts of interest and can lead to investments that lack adequate risk assessment. When brokers operate outside firm-sanctioned channels, investors face greater exposure to fraud and diminished options for recourse if the investment fails.

Investor Risks With Selling Away

Selling away exposes investors to significant risks of financial loss and potential fraud. When brokers promote investments outside their firm’s oversight, these offerings often lack the thorough due diligence that reputable firms require. This gap in scrutiny can lead to investors unknowingly committing funds to high-risk or even fraudulent schemes. In some cases, brokers selling away funnel client assets into Ponzi schemes, where returns are generated from other investors’ capital rather than genuine profits. Without the protections of firm-sanctioned oversight, investors face a greater likelihood of substantial financial losses and find it more challenging to recover those losses.

Deceptive practices are also a common feature of selling away, further heightening investors’ risk. Brokers involved in selling away may create fake account statements or encourage self-directed accounts to obscure the unauthorized nature of the investments. Additionally, they may misrepresent the investment’s risk level or potential returns, presenting it as safer or more profitable than it truly is. Operating outside the usual compliance and regulatory channels, these brokers bypass critical safeguards meant to protect investors, leaving clients vulnerable to unverified investments with limited avenues for recourse.

Legal and Regulatory Response To Selling Away

Brokerage firms are legally responsible under FINRA regulations to supervise their brokers’ activities, even for actions that occur outside the firm’s immediate purview. FINRA Rule 3110 requires firms to establish and maintain effective supervisory systems to prevent unauthorized activities, such as selling away. Key responsibilities and consequences include:

• Supervisory Duty: Firms must monitor brokers’ activities, watching for red flags like unusual changes in production levels or lifestyle that may indicate unauthorized transactions.
• Accountability for Misconduct: Firms that fail to enforce proper supervisory procedures can be held liable for their brokers’ misconduct, including selling unapproved securities.
• Disciplinary Actions: FINRA can impose penalties on both brokers and their firms for neglecting oversight responsibilities, including fines, suspensions and permanent industry bans.

For investors who have suffered losses due to selling away, FINRA arbitration provides a structured path for seeking restitution. This process is often more efficient and cost-effective than traditional court litigation and is overseen by arbitrators with specialized knowledge in securities law and industry practices. In FINRA arbitration, investors can present evidence of unauthorized transactions and deceptive practices to make their case. The arbitration decisions are generally binding, offering finality and a pathway to compensation for impacted investors. 

At Sonn Law Group, our experienced securities attorneys guide clients through the intricacies of FINRA arbitration, advocating to maximize recovery for losses incurred from unauthorized transactions. Acting promptly is crucial, as there are time limits for filing claims, and early legal guidance can significantly strengthen an investor’s case.

How a Selling Away Attorney Can Help

For investors affected by selling away, having a specialized attorney on their side is crucial. A selling away attorney offers essential support at every stage, helping investors pursue claims, understand their rights and navigate the legal complexities. Here’s how they make a difference:

• Comprehensive Case Evaluation: A knowledgeable attorney assesses your case, evaluating the specifics of your losses and determining the potential for recovery. They identify the broker responsible for unauthorized transactions and any other parties who may share liability.
• Navigating Complex Regulations: Selling away cases involve intricate securities laws and FINRA regulations. An attorney specializing in this area helps you understand how these laws apply to your case, ensuring you’re informed and aware of your rights.
• Gathering and Analyzing Evidence: Building a strong claim requires precise documentation, such as account statements, communication records and other relevant materials. A skilled attorney knows exactly what evidence will best support your case.
• Pursuing Multiple Recovery Options: Depending on the details, your attorney may explore recovery options through FINRA arbitration, civil litigation or even by cooperating with regulatory investigations, ensuring that all possible avenues are considered.
• Negotiating and Advocating for Your Interests: Many cases are resolved through settlements. Your attorney will represent you in settlement negotiations or FINRA arbitration, increasing your chances of achieving a favorable outcome.

If you’ve experienced losses due to unauthorized broker transactions, Sonn Law Group’s team is here to help. Contact us today for a free consultation to discuss your rights and potential paths to recovery.

Signs To Recognize and Avoid Selling Away

Recognizing selling away activities before they lead to financial harm is essential for investors. Brokers engaged in unauthorized transactions often use specific tactics to bypass firm oversight, exposing investors to heightened risks. Below are key warning signs and recommended practices to help protect yourself from potential fraud.

Red Flags for Investors

Unauthorized selling often involves subtle but telling signs. By staying vigilant, you can spot these red flags and prevent unauthorized transactions:

• Unsolicited Investment Offers: Receiving unexpected pitches for investment opportunities, especially through email, phone or social media, should raise concerns. Selling away brokers frequently operate outside official firm channels, promoting products that lack firm approval.
• Lack of Official Documentation: Legitimate investments come with formal documentation. An investment opportunity that lacks official paperwork or disclosure statements could indicate unauthorized or risky transactions.
• Pressure to Invest Quickly: Brokers engaging in selling away may urge you to act fast, discouraging you from consulting with others. High-pressure tactics are commonly used to push risky or fraudulent investments.
• Promises of High Returns With Low Risk: Be skeptical of any claims of high returns with little to no risk, as they often signal potential fraud. Such promises are frequently associated with unverified investments.
• Requests for Payments to Individuals: Payments should always go to the brokerage firm, not individual brokers. Requests for personal payment can be a clear indication of selling away.

Best Practices for Investor Due Diligence

It’s important to verify the legitimacy of investment opportunities and the brokers presenting them. To guard against unauthorized transactions, follow these best practices:

• Verify Transactions With Your Brokerage Firm: Confirming investments directly with your brokerage firm ensures that the opportunity is approved and authorized.
• Obtain Written Confirmation: Requesting formal, written documentation for each investment provides essential records and a layer of security.
• Check Broker Credentials: Resources like FINRA’s BrokerCheck allow you to verify your broker’s background, registration status and disciplinary history.
• Ask Questions: Seek clarity on any investment’s mechanics and benefits, and understand why it’s being recommended.
• Be Wary of High-Pressure Sales Tactics: Avoid rushed decisions. Take your time, verify details, and, if necessary, consult a trusted advisor or brokerage firm representative before proceeding.

Get a Free Consultation From Sonn Law Group

Protecting your investments from unauthorized activities like selling away requires vigilance and, when necessary, experienced legal support. At Sonn Law Group, we’re committed to helping investors recover losses caused by broker misconduct and unauthorized transactions. Our attorneys understand the complexities of securities law and FINRA regulations and are dedicated to holding brokers accountable for their actions.

If you suspect your broker has engaged in selling away or other unauthorized activities, our team is ready to guide you through your options for financial recovery. With a free, no-obligation consultation, we can assess your case, answer your questions and outline the best path forward to reclaim your losses. Contact us today to get started.