What Is Selling Away?
Selling away is when a broker solicits a client to purchase securities not held or offered by the executing brokerage firm. Brokerage firms generally have lists of approved products that can be offered by their brokers to clients of the firm. These approved products have usually undergone due diligence screenings and have been identified by the firm's screening personnel as solid products.
When a broker sells away from the firm's list of approved products, they run the risk of selling something for which due diligence has not been completed. As a general rule, such activities are a violation of securities regulations.
Key Takeaways
- Selling away refers to offering or obtaining financial products for a client that are not approved by a brokerage.
- Doing so can generate extra commissions for a broker, but comes with a greater degree of risk since those products are not vetted or authorized for sale by the broker's employer.
- Selling away is often seen as a violation of both internal workplace rules as well as broader securities regulations.
- Due to the number of products most brokerages have access to, selling away is not very common.
- High-net-worth clients can sometimes force the hands of the broker into selling away although again, this is not common.
How Selling Away Works
Selling away occurs when a broker sells investments that are not a part of the official list of products offered by their firm. At times, a broker may inappropriately do this because the client wants to purchase a product that has not yet been approved by the broker's firm, such as a specific mutual fund or an over-the-counter (OTC) security.
The broker may be eager to earn a commission and to keep their client happy, so they might bend or break the rules and find a way to obtain the security desired by their client. This can often happen when the investments in question are private placements or other non-public investments that have limited oversight or transparency. Generally, selling away is a violation of securities regulations and can result in disciplinary action or fines.
FINRA rule 3040prohibits a registered representative or associated person from selling any security "away" from the member firm unless the firm has authorized the associated person to make the sale. Rule 3040further requires registered persons to provide notice of the proposed transaction, in writing, to their firm, before the sale is made.
Example of Selling Away
For example, Bert is a broker at Bert's Brokerage. Ernie is Bert's client. Ernie wants to purchase stock of XYZ company, which is a private company not traded on public exchanges. They are offering stock directly through an agency that underwrites and distributes private placements.
Unfortunately, Bert's brokerage has not performed the necessary due diligence on XYZ company, so their private stock is not on the list of approved products for sale. Bert, however, wants to earn the commission associated with this sale of XYZ company stock, so Bert "sells away" from Bert's Brokerage and completes the transaction on behalf of his client by using a third-party broker, Sam's Securities, who does have approval for that product.
Who Does FINRA Rule 3210 Apply to?
FINRA Rule 3210 was approved by the SEC in April 2016 and was rolled out in order to ensure that member companies, brokers, and advisors perform at expected ethical standards. The rule specifically deals with accounts that brokers and advisors open at firms that are not where they are employed or registered. It requires all licensed employees to declare investment accounts held at other institutions as well as requiring said employees to notify their employer, in writing, of both their intent to open the account and declare all accounts where they have a financial or beneficial interest.
What Does the Term Pump-and-Dump Mean?
Pump-and-dump is a term that describes the manipulation of a security's price through false recommendations or reports. The practice is illegal but surprisingly commonplace, especially among digital currencies and other securities with marginal liquidity. The scheme is usually done on a stock or security with low liquidity because it is easier to manipulate the price if there are fewer algorithmic traders and where buy orders would have a more pronounced effect on the price of the security,
What Violates FINRA Rules Regarding Selling Away?
As mentioned above, Rule 3040 stipulates that selling a security away without first obtaining written approval from the firm violates the rule. When a registered person engages in outside activity without prior notice to the firm, this violates Rule 3030. There has been an uptick in businesses registering as Series 6 Investment Companies or Variable Contracts Products representatives, but they are still required to inform their firms if they don't wish to violate the two rules mentioned.
The Bottom Line
Selling away is when a brokerage purchases a security for a client that they themselves are not authorized to sell. This can lead to higher commissions for the broker, but at the cost of violating securities laws while simultaneously taking on unnecessary risk for the brokerage.
