Unveiling the Dark Side of Securities Trading: Selling Away - T-Tees - Your Answers Await, Life's Questions Unraveled

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In the realm of securities trading, there exists a clandestine practice known as “selling away.” This illicit act occurs when a securities broker engages in the buying, soliciting, or selling of securities that have not been approved by their affiliated firm or recorded on the firm’s books. Selling away is strictly prohibited under the rules of the Financial Industry Regulatory Authority (FINRA), specifically FINRA Rule 3040, as well as other securities laws. This deceitful practice often involves the sale of fraudulent investments, private placements, and promissory notes.

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The Broker-Dealer Conundrum

From the perspective of broker-dealers, selling away cases pose a significant challenge. Not only are they excluded from earning commissions on these unauthorized investments, but they are still held liable as if the firm itself had sold them. This unfortunate scenario further emphasizes the gravity of selling away, both for investors and broker-dealers alike.

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Most troublingly, unsuspecting investors are often oblivious to the fact that their broker is operating outside the confines of standard securities channels. In some instances, brokers may fabricate account statements or confirmations, providing a false sense of legitimacy. Alternatively, they may steer investors towards self-directed accounts that offer custodial services for the illicit investments. These third-party-prepared statements and income payments can be misleading, as the broker retains complete discretion to halt payments at will.

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A Web of Deception

Brokers who engage in extensive selling away activities often resort to migrating between firms to evade detection and minimize scrutiny of their illicit business activities. Investors only discover the wrongful nature of these activities when the investment scheme becomes public knowledge or when the broker ceases communication. In response to allegations of selling away, brokerage firms typically feign ignorance. However, under FINRA Rule 3010, firms have an obligation to supervise their employees.

Sadly, many brokerage firms limit their supervision of brokers’ outside business activities to mere documentation completed by the brokers themselves, without independent verification. In certain cases, pre-announced visits to brokers’ offices enable them to conceal any signs of wrongdoing prior to inspection. Even more concerning, firms may ignore red flags such as customers transferring significant assets away from the firm, checks issued to unknown entities, customer complaints regarding the sold-away investments, or the broker’s previous termination for selling away.

Neglected Responsibilities

Warning Signs Ignored

Selling away is not an isolated or uncommon occurrence and diligent broker-dealers should not be caught off guard. As early as 1986, the National Association of Securities Dealers (now FINRA) alerted broker-dealers that unauthorized private securities transactions, or selling away, were the most frequent violations of its rules committed by registered representatives.

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FINRA has explicitly directed its warning to broker-dealers, asserting that these firms bear the responsibility of monitoring their registered representatives’ activities to detect any violations of FINRA Rule 3040.

Even in 2001, FINRA cautioned broker-dealers about the prevalence of fraudulent selling-away schemes and emphasized the importance of regularly reviewing supervisory and compliance procedures to ensure clear and comprehensive reporting requirements. It was imperative for broker-dealers to prevent selling away by providing thorough training and education to their brokers on how to avoid such misconduct.

Regulatory Reinforcement

Regulatory authorities such as the Securities and Exchange Commission (SEC) and FINRA have been intensifying the supervisory obligations of brokerage firms in recent years, particularly concerning selling away. Echoing the SEC’s stance, effective supervision by a broker-dealer is deemed a critical element in the regulatory framework, with its significance growing as firms expand. Broker-dealers must allocate appropriate staffing, resources, and implement a robust system of follow-up and review to diligently exercise their supervisory responsibilities.