Selling away practices and unauthorized private securities transactions are risky for investors, and thus there are rules to control this conduct promulgated by regulatory bodies like the Financial Industry Regulatory Authority (FINRA). These rules are designed to safeguard investors from financial misconduct by brokers who may engage in outside business activities without proper authorization. In this article, we’ll explore these regulations, why some brokers might engage in selling away, and how investors can recover losses resulting from such unauthorized transactions.
Understanding FINRA Rules 3270 and 3280: Selling Away and Outside Business Activities
What Is Selling Away? Understanding Private Securities Transactions
Selling away happens when a broker recommends or sells securities that are not held, offered, or approved by their employing brokerage firm, often involving unauthorized private securities transactions. This practice is strictly prohibited by FINRA Rule 3280, which, along with FINRA Rule 3270, requires brokers to provide prior written notice to their firm before engaging in any outside business activities or private securities transactions. These regulations are key aspects of FINRA’s efforts to prevent unauthorized private securities transactions and ensure that any FINRA outside business activity is properly supervised.
Selling away often involves high-risk investments or private securities transactions that lack proper due diligence and oversight, potentially exposing investors to significant financial harm. For example, a broker might present a client with an “exclusive” opportunity to invest in a startup company not listed among the firm’s approved products, promising unusually high returns while downplaying the associated risks. It can also include outright fraudulent investments, such as Ponzi schemes and promissory note scams.
Why Do Brokers Engage in Selling Away? Exploring Broker Misconduct
Brokers may engage in selling away due to financial incentives and conflicts of interest. The allure of higher commissions—sometimes two to three times greater than those from traditional registered products—can tempt brokers to prioritize personal gain over their clients’ best interests. This substantial difference might lead some brokers to recommend unapproved investments, engaging in outside business activity.
Additionally, brokers operating in independent branches or satellite offices with inadequate supervision are more likely to engage in selling away, as the lack of oversight creates an environment conducive to unauthorized activities. Moreover, brokers might use outside brokerage accounts to hide their selling away activities, actions which are subject to FINRA scrutiny.
We Have Recovered Over
$350 Million for Our Clients Nationwide.
Legal Implications and Investor Recovery from Selling Away Losses
Brokerage Firm Liability in Failure to Supervise Cases
Brokerage firms can be held liable for selling away activities if they fail to adequately supervise their brokers. Under FINRA Rule 3110, firms have a duty to establish and maintain a system reasonably designed to supervise the activities of each registered representative to ensure compliance with securities laws and regulations. This includes implementing robust supervisory measures such as regular monitoring of broker activities, compliance training programs, and procedures for detecting unauthorized transactions like selling away and undisclosed outside business activities that FINRA rules seek to prohibit.
For example, firms might:
-
Conduct regular audits
-
Review communications
-
Implement systems to detect red flags like unusual trading patterns or client complaints
Effective supervision is indispensable, especially when brokers engage in outside business activities. Examples of outside business activity FINRA monitors include:
-
Unreported investment advisory services
-
External consulting gigs; or
-
Involvement in private securities transactions.
In our experience, when a broker is found guilty of selling away, a firm’s supervision is ALWAYS deficient – because adequate supervision prevents selling away in the first place.
Investor Recovery from Selling Away Losses Through Securities Arbitration
If you’ve suffered losses due to selling away, there are avenues available for recovery. The primary method is through FINRA arbitration, which offers a more efficient and cost-effective alternative to traditional court litigation. In this process, investors can file claims against both the broker and the firm for unauthorized transactions if it is deemed relevant to the case.
Engaging an attorney experienced in broker misconduct and selling away cases is essential. They can navigate the complexities of securities arbitration and increase the likelihood of a successful recovery. If you’re considering pursuing a claim, reach out to us for a free strategic analysis of your case and to explore how we can support you in the recovery process. Our team at Meyer Wilson can assist by evaluating your situation, identifying potential claims against brokers and firms, and guiding you through the process of seeking compensation for your losses. If you believe you have been affected by a broker’s undisclosed outside business activities, reach out to us to discuss how we can help you navigate this complex area of securities law.
Conclusion
Understanding FINRA Rules 3270 and 3280 and the implications of selling away is indispensable. Unauthorized transactions can lead to significant financial harm for investors. If you have been affected by such misconduct, it is worth noting that you have options to recover your losses. Our firm is dedicated to helping investors navigate these complex legal processes and hold brokers and brokerage firms accountable for their actions. If you have questions or need assistance with your investment concerns, please reach out to Meyer Wilson for professional guidance and support.
Our lawyers are nationwide leaders in investment fraud cases.
Frequently Asked Questions
What is FINRA Rule 3270?
FINRA Rule 3270 requires registered representatives to provide written notice to their member firms before engaging in any outside business activities. This rule applies to any business activity performed outside the scope of their relationship with the firm, including roles such as consultant, employee, or independent contractor for another entity.
What are private securities transactions?
Private securities transactions, often referred to as “selling away,” occur when a registered representative engages in the sale of securities or investments not offered or approved by their employing brokerage firm. Such unauthorized transactions bypass the firm’s due diligence process and may carry higher risks for investors. FINRA regulations, particularly FINRA Rule 3280, require brokers to disclose and obtain approval for such transactions to protect investors from potentially fraudulent or unsuitable investments.
How does FINRA Rule 3280 affect brokers?
FINRA Rule 3280 impacts brokers by requiring them to provide written notice to their member firms before participating in any private securities transaction, whether they receive compensation or not. If the transaction involves compensation, the firm must approve it in writing before the broker can proceed. Even without compensation, the firm may still impose conditions on the broker’s participation.
What are some examples of outside business activity?
-
Serving on the board of directors for a non-profit organization
-
Operating a real estate business
-
Providing tax preparation services
-
Engaging in freelance consulting work
-
Running a small business unrelated to the securities industry
Recovering Losses Caused by Investment Misconduct.