If you know that your broker’s investment firm backs the advice and investment decisions of your broker, you naturally feel more confident about the actions of your broker. But in some situations, investors find out that their brokers are acting independently of their firms, such as selling away securities.
“Selling away” is a concept that could endanger your investments and cause you loss. FindLaw provides some background on why brokers should not engage in this practice.
A look at selling away
Consider a scenario where your broker or financial advisor solicits the sale of securities or sells securities in a private transaction. The firm does not offer these securities, so you might not feel comfortable with this situation since the firm has not endorsed the transaction and is not overseeing it. Instead, your broker is acting on personal judgment that could lead you into a bad investment.
The risks of fraud
FINRA rules prohibit selling away not only because it may lead to a bad investment, but because it puts investors at greater risk of fraud or deception. Selling away means that a brokerage firm is not supervising the sale according to certain rules of investment. Some brokers even engage in private transactions without telling their clients. This is an act of deception since the clients do not know that a brokerage firm has not given the sale their endorsement.
Exceptions to the rules
FINRA does allow some private securities sales to take place provided brokers follow the proper guidelines. FINRA Rule 3280 permits a broker to give written notice to a firm and notify the firm if he or she will take compensation for a possible transaction. FINRA Rule 3270 discusses standards that a firm must meet once given notice of a proposed private transaction.
The consequences for unauthorized private transactions can involve the sanctioning of the broker or barring the broker from selling securities ever again. The firm that oversees the broker may also receive sanctions for inadequate supervision of the broker.