Selling Away – FINRA Rule 3040

Selling away is when a securities broker buys, sells, or solicits securities that are not approved by the broker’s firm. This is against the rules set by FINRA (Financial Industry Regulatory Authority), particularly FINRA Rule 3040, and other securities laws. Selling away often involves fraudulent investments, private placements, and promissory notes.

For broker-dealers, selling away can be frustrating as they miss out on commissions but still face liability. The investor is often unaware that the broker is acting outside normal channels, and the broker may create false account statements or use self-directed accounts to conceal the illegitimacy of the investment. Financial advisors who engage in selling away may move from firm to firm to avoid detection, and the brokerage firm may claim ignorance or have lax supervision procedures. 

Selling away is a common occurrence and FINRA has warned broker-dealers to monitor their employees and prevent it through training and education. Regulatory authorities such as the SEC and FINRA have increased their supervisory requirements for brokerage firms in recent years. 

Securities can be sold away from a brokerage firm, but it’s uncommon for a broker to do so with well-known stocks or mutual funds. Usually, selling away involves less recognized, high-risk securities, such as private placements, promissory notes, real estate deals, and investments promising guaranteed or abnormally high returns. Private placements are unregistered sales to private investors and are only accessible to a limited group of qualified investors. Promissory notes, used by businesses to raise funds, carry significant risks, especially if sold away from a brokerage firm’s oversight. Real estate investments can also be risky if sold away from a broker-dealer. Guaranteed returns are not realistic and high return promises often come with elevated risks, especially if the transaction is not overseen by a brokerage firm. If an investment opportunity seems too good to be true, it probably is.

What investors can do if they suspect their broker has engaged in Selling Away

If an investor believes that their financial advisor has engaged in “selling away” or the sale of securities not offered by their brokerage firm, they can take the following steps:

• Report the incident: Investors should report the selling away to the broker-dealer firm, the Financial Industry Regulatory Authority (FINRA), or the Securities and Exchange Commission (SEC).

• Document the evidence: Investors should gather all relevant documentation, including account statements and correspondence with the advisor, to support their claim.

• Hire an attorney: An attorney experienced in securities law can help the investor understand their rights and determine the best course of action. You should contact an attorney with experience with representing investors in front of FINRA. 

• Consider arbitration: FINRA operates an arbitration program to resolve disputes between investors and brokerage firms. This can be a quicker and more cost-effective alternative to a court trial.

• Seek compensation: If the selling away resulted in financial losses, the investor may be able to recover their damages through arbitration or a lawsuit.

It is important for investors to be vigilant and thoroughly research any investment opportunities presented to them. If an investment seems too good to be true or if the advisor is selling securities not offered by their firm, it may be a sign of selling away and a cause for concern.