Investment Fraud: Unapproved Securities or “Selling Away”
Can your brokerage firm be held responsible for investment losses due to unapproved securities transactions or “selling away”?
When a licensed securities agent sells an investment to his/her client that was not approved by their employer, this is referred to as “selling away” and it is in violation of FINRA Rules and Regulations.
Typically, when a broker is “selling away,” the investments are in the form of private placements or other non-public investments, and often these are investments that the broker has some pecuniary interest in. Such an investment is generally a violation of securities rules because the brokerage firm has not researched the risks of the investment or approved the investment for sale to its clients, and the broker is selling the investment without the knowledge of his employer.
Even if the representative didn’t receive a typical finder’s fee or commission, it’s quite possible that the individual is receiving some sort of indirect compensation.
Nonetheless, a broker-dealer can be held liable for a financial advisor’s “selling away” for failing to adequately supervise its employees and protect its clients.
FINRA Rules regarding Selling Away/Private Securities Transactions
The Financial Industry Regulatory Authority (FINRA), overseen by the SEC, provides regulatory services to the financial industry by licensing and regulating broker-dealers. FINRA also operates the largest dispute resolution forum in the securities industry. FINRA Dispute Resolution is the forum for almost all disputes between investors, brokerage firms and brokers.
FINRA’s stated mission is “to safeguard the investing public against fraud and bad practices.”
FINRA Rule 3280 Private Securities Transactions of an Associated Person
With certain exceptions, financial advisors may not engage in private securities transactions (“selling away”). In some circumstances, these transactions are allowed if the professional provides written notice to the firm first and discloses whether or not he or she will receive compensation for the proposed transaction.
FINRA Rule 3270 Outside Business Activities of a Registered Person
Financial advisors registered with FINRA may not engage in any outside business activity and private securities transactions unless they have provided written notice to the firm first. The rule also governs the duty of brokerage firms to supervise disclosed outside business activities:
A registered representative must evaluate the proposed activity to determine whether the activity properly is characterized as an outside business activity or whether it should be treated as an outside securities activity subject to the requirements of Rule 3280.
FINRA requires broker-dealers to supervise members’ activities in addition to giving approval of disclosed outside business activities. Further, FINRA brokerage firms have a general obligation to supervise their agents’ activities regardless of whether they are disclosed or not.
SEC Rule 206(4)-7(a)
The Securities and Exchange Commission’s rule governing “selling away” says that a registered investment advisory (RIA) firm is under an obligation to have policies and procedures in place reasonably designed to prevent violation of the Act or SEC rules adopted under the Act.
This duty applies to outside business activities that could present opportunities to engage in fraudulent activity, or violations of fiduciary duty. Therefore, the rule does seem to require RIAs to supervise any activity that could cause a violation, which would include selling investments regardless of whether they are approved or not or disclosed or not.
What are the Consequences for Selling Away?
Sanctions for financial professionals who get caught selling away from their member firm may include dismissal, suspension, a bar from the securities industry and possible monetary fines, depending on the severity of the offense and the harm that may have been done to investors.
Firms can also be sanctioned if they received notice of the sale but failed to provide written approval, disapproval, or acknowledgment of the notice.
FINRA Sanctions Brokers for Selling Away
On June 25, 2021, FINRA reportedly barred financial advisor George McCaffrey III of NTB Financial after he provided FINRA with allegedly false information in connection with FINRA’s investigation. McCaffrey purportedly participated in 22 undisclosed private securities transactions in which nine investors, including one firm customer, purportedly purchased $1,775,000 in debt and equity securities. The findings stated that McCaffrey introduced the nine individuals to representatives of a greenhouse building and leasing company so they could invest in the company.
Those investors allegedly purchased $1,775,000 in promissory notes of the greenhouse building and leasing company and preferred stock in one of the company’s affiliates. FINRA found that the transactions were not reportedly executed through the firm, and McCaffrey allegedly did not notify his member firm that he would be participating in them, nor did he report it on the firm’s annual compliance questionnaire.
On December 20, 2022, FINRA reportedly barred former PFS Investments advisor Desiderio Torrez (CRD#: 4759218) from associating with any FINRA member at any time after he reportedly failed to provide information in FINRA’s investigation about a customer complaint relating to Torrez’s alleged recommendation that the customer invest in a company.
FINRA reportedly reached a settlement agreement with financial advisor Daniel T. Minich (CRD #6465746) in August 2022, after he allegedly participated in three private securities transactions totaling approximately $200,000 reportedly without providing prior written notice to his member firm, Ameriprise Financial.
Do you need a FINRA Attorney?
FINRA operates the largest securities dispute resolution forum in the United States, and has extensive experience in providing a fair, efficient and effective venue to handle a securities-related dispute.
Investors can file an arbitration claim or request mediation through FINRA when they have a dispute involving the business activities of a brokerage firm or one of its brokers. To be considered, the alleged act resulting in a claim must have taken place within the past six years.
If you are concerned that your financial advisor may be selling away, don’t wait to take action. Please call the White Law Group at 888-637-5510 for a free consultation with a national FINRA attorney.
The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm dedicated to the representation of investors in FINRA arbitration claims against brokerage firms throughout the United States.
The White Law Group’s FINRA arbitration attorneys have handled over 700 FINRA arbitration claims involving unauthorized trading, unsuitable investments, fraud, negligence, churning/excessive trading, and improper use of margin.
For information on The White Law Group and its representation of investors in claims against brokerage firms, visit https://whitesecuritieslaw.com.
Tags: basics of selling away, brokerage firm outside business activities, brokerage firm respondeat superior liability, financial advisor attorney, financial advisor lawyer, FINRA attorney, FINRA investment fraud attorney, FINRA lawyer, FINRA Rule 3270, FINRA selling away attorney, FINRA selling away lawyer, private securities transactions, SEC Rule 206(4)-7(a) Last modified: February 16, 2023