Selling away occurs when a broker sells you a product that is not approved by the broker’s firm. The broker is “selling away” from the firm or participating in an “outside business activity.” Your broker and the brokerage firm (even if it is unaware of the selling away) may be liable to you for your losses from selling away.
In selling away frauds, the broker is having you invest, without your knowledge, in a company started by the broker and/or the broker’s friends or relatives.
The broker can trick you in several ways, for example:
- the broker may use the brokerage firm’s email or letterhead to make it appear as if the investment is approved by the brokerage firm;
- the broker may indicate that your funds are being placed with a third party bank and imply that you are investing in a bond sold by the bank. In reality, the broker has essentially placed your funds in his own account. Also, the investment may be presented as a promissory note with an attractive interest rate;
- your investment will likely no longer appear on your brokerage firm’s account statements, so you may lose track of the investment.
- when you start to ask questions about the investment, or why you have not received all of your payments as promised from the sham promissory note, the broker will find reasons to either avoid your questions, or make excuses for the delay.
How can you protect yourself?
Products that are sold away or outside the brokerage firm are likely to be risky to a degree that is well beyond your investment profile.
HOW TO PROTECT YOURSELF
- Review your account statements carefully for any unusual transactions.
- Ask for confirmation, in writing, that the product is sold by the brokerage firm. You should obtain a letter from the compliance department.
- If the transaction sounds unusual, it probably is.
- If the investment does not appear on the account statements managed by your account custodian (a third party) question why.
- Be careful not to sign any “comfort letter” indicating that you are generally happy with how your account is being handled, or that you understand that a certain investment is outside The brokerage firm.
- Keep your broker updated in writing about your investment profile. Your original account application likely contains an outdated investment profile. Your broker is required to know their customer under FINRA Rule 2111 and factors include:
- other investments;
- financial situation and needs, which might include questions about annual income and liquid net worth;
- tax status, such as marginal tax rate;
- investment objectives, which might include generating income, funding retirement, buying a home, preserving wealth or market speculation;
- investment experience;
- investment time horizon, such as the expected time available to achieve a particular financial goal;
- liquidity needs, which is the customer’s need to convert investments to cash without incurring significant loss in value; and
- risk tolerance, which is a customer’s willingness to risk losing some or all of the original investment in exchange for greater potential returns.
WHAT CAN YOU DO WHEN SELLING AWAY OCCURS
FINRA Rule 3270 prohibits your broker from participating in outside business activities without written permission. NASD’s 3000 level rules require brokerage firms to supervise their brokers, and common law doctrines such as respondeat superior can make brokerage firms responsible for their employees’ actions. Accordingly, if your brokerage firm failed to detect the outside business activity, you likely have a claim against it. Reputable brokerage firms have substantial systems and safeguards in place to detect and prevent selling away and outside business activity.
Contact a qualified securities arbitration attorney immediately if you feel that you, or a loved one, is the victim of selling away or outside business activity.