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FINRA Focuses on Unsupervised Brokers Selling Fraudulent Securities

Recent statistics show that FINRA (the Financial Industry Regulatory Authority, Inc.) is keeping a much closer eye on unsupervised stockbrokers who are engaging in the illegal sale of private securities transactions that are not approved by their brokerage firm. This particular type of securities fraud is known as "selling away", meaning that the broker is , participating in private securities transactions and other business dealings "away from" their brokerage firms and the firms' supervision. This heightened regulatory oversight has been necessitated by that fact that the current low-interest rate environment breeds this type of investment fraud. People who are unable to live on the low-interest yields of today are particularly susceptible to pitches for promissory notes, private placement products and ponzi schemes that promise a higher and steady return over time. Unfortunately, as the general public has now become aware from prosecution of people like Bernard Madoff, if it sounds too good to be true, it probably is.

Although FINRA only took action against 45 people for private-securities transactions in all of 2008, that number increased to 56 people in 2009. For the first 4 months of 2010, FINRA has already announced actions against 21 individuals - if that trend continues for the remainder of the year then we could see over 60 FINRA disciplinary actions related to "selling away" this year alone. While it is not per se inappropriate for a registered representative to participate in an outside business activity, such activities are supposed to be fully disclosed to the brokerage firm for whom the registered representative works so that its compliance officers can conduct the necessary due diligence during office inspections and audits. Unfortunately, brokerage firms often do not have sufficient compliance and regulatory systems in place (or the procedures are not followed) and the fraud goes undetected.

In the end, it is often the FINRA brokerage firm that finds itself at the other end of a complaint by an investor who has lost money through one of the firm's brokers who sold products or investments that were not approved by the brokerage firm. If a brokerage firm permits its registered representatives to participate in outside business activities, then the firm needs to be up the supervisory challenge that comes with the territory. Also, the brokerage firm must be diligent in its compliance procedures to prevent its brokers from selling these "secret" investments. The more light that FINRA can shed on "selling away" and the large investment losses that result from it, the more that brokerage firms will be motivated to get it right and protect their customers from this illegal conduct.

The information contained in The Firm’s posts on its blog, fraud alerts, investigations or elsewhere on the site is based upon information obtained from other sources including, but not limited to, news outlets and federal, state, and regulatory agency filings. All suspects and subjects of postings herein are presumed innocent until proven guilty in a court of law or administrative action and any and all crimes are alleged until a court or regulatory agency finds otherwise .

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