Brokers are only allowed to sell you securities that their firm offers. Some brokers may offer you investments not offered by their firm as a way of avoiding scrutiny or making a higher commission. This practice is known as “selling away,” and it is prohibited by FINRA rules.
If you have lost money because of selling away, you may be entitled to financial compensation. The broker misconduct attorneys at Rikard & Protopapas can represent you in a FINRA arbitration claim as you seek to recover what you have lost.
The Issues With Selling Away Transactions
Brokers are subject to supervision from the firm with which they are affiliated. Firms vet classes of investment that their brokers offer to investors.
There are good reasons why some firms will not allow their brokers to sell certain securities. They often do not want the legal risk that comes with these investments. These firms do not want their representatives offering investments to customers that carry an excessive amount of risk or result in extremely high commissions.
However, some brokers may not heed these rules because they have their motivations at play. The investments involved in selling away transactions are often illiquid with very high commissions. The broker may not only be able to get very high commissions from the customer but they could also be paid on the side for selling these investments.
Here, the broker deliberately violates firm and FINRA rules to sell you the security. The brokers have often been enticed to break the rules by someone else who is paying them a large sum of money.
Examples of Where Selling Away Occurs the Most
Some securities that play a common role in selling away transactions include:
- Private placements: These are unregistered securities (often under an SEC exception) that are suitable for very few investors. Private placements are very risky and can cost investors quite a bit of money. The company that is raising capital has a motivation to get brokers to sell their securities, and they may offer incentives.
- Real estate investment trusts (REITs): Publicly listed REITs are less risky and more liquid than private REITs. There are extremely high fees associated with private REITs that could put investors into a substantial hole right after they make their investment.
- Promissory notes: These are debt securities that are not registered or listed on any exchange. The investor could be paying substantial commissions to purchase something that is not regulated and very risky.
Selling Away Is Forbidden By FINRA Rules
FINRA rules make selling away a prohibited practice. Selling away is directly addressed in FINRA Rule 3280, which states:
“No person associated with a member shall participate in any manner in a private securities transaction except by the requirements of this Rule.”
A private securities transaction is “any securities transaction outside the regular course or scope of an associated person’s employment.” If the firm has not approved the security for sale, it would be considered outside the scope of an associated person’s employment.
There is an entire process that a broker must follow before they can engage in this type of transaction. They must get approval from their firm before they can sell an investment that has not been previously approved.
Theoretically, the brokerage’s approval would then mean that the security is one that the broker can sell, and it would no longer be considered away. Presumably, the broker’s compliance and legal departments would closely review the legal issues involved in the sale of that particular security.
You Can File an Arbitration Claim to Potentially Recover Your Losses
Even though the individual broker was the one responsible for breaking the rules, you can take action against the brokerage firm. Under FINRA rule 3110, the brokerage must reasonably supervise associated persons. They should enforce their written procedures. If the broker fails in this regard, they can become liable to pay the losses that you have suffered.
Your sole way to get compensation from the broker is to file a FINRA arbitration claim. You cannot directly sue the broker for financial compensation. If you can prove that the brokerage violated FINRA rules, you may be able to get some or all of your money back in an arbitration claim.
Oftentimes, a broker may be more willing to negotiate a settlement when they realize that their representative failed to follow the rules and evaded their own supervision and internal controls. However, the brokerage may not offer you anywhere close to full compensation, meaning that you have to continue to negotiate or pursue your claim at an arbitrator’s hearing.
Why You Need an Attorney for a Selling Away Transaction
You may have no idea what happened. All you know is that something looks wrong, and you lose a lot of money. The brokerage may be tending to their problems, trying to keep you from learning what was done, solely because they want to protect themselves. Hiring an attorney may be the only way to get to the bottom of why you lost money.
The FINRA arbitration process, while more streamlined than litigation, can still be complex. You may need to go through arbitration to get answers and accountability.
Through the FINRA discovery process, your lawyer could obtain information that could help prove your case. Then, they could help select an arbitrator for your case.
Contact an Investment Loss Attorney About Your Situation
If you have lost money on a transaction, and you believe that your broker violated FINRA rules, the attorneys at Rikard & Protopapas can help. We can speak with you and explain the path that could result in you getting some of your money back. You can speak with a lawyer during a free initial consultation by calling us today at (803)-805-7546 or contacting us through our website.