Selling Away

Selling away is when a financial advisor or broker sells securities or investments not approved or authorized by their employing brokerage firm. The aims of regulating against it are twofold. First, it aims to protect investors by ensuring they are only exposed to investments that have undergone proper due diligence and have been approved by their brokerage firm.

Second, it seeks to maintain the integrity of the financial industry by holding financial professionals accountable for their actions. By preventing unauthorized sales of securities, regulators aim to uphold transparency, trust, and ethical conduct within the financial services sector, ultimately preserving the investing public's confidence in the financial markets. This practice is typically illegal and violates securities laws and regulations.

• Selling away is the prohibited practice where a financial advisor or broker conducts securities transactions or offers investment opportunities not authorized by their employing brokerage firm.
• It violates securities regulations because it involves financial professionals engaging in activities outside the scope of their employment, potentially exposing investors to unauthorized and often high-risk investments.
• Common examples include financial advisors soliciting investments in private companies, hedge funds, real estate ventures, or other non-standard financial instruments not approved or offered by their brokerage firms.
• Investors can detect it by carefully reviewing their account statements for unauthorized investments, legitimacy of recommended investments, and the credentials of their financial advisors.

Selling away describes the prohibited practice where a financial advisor or broker conducts securities transactions or offers investment opportunities not sanctioned or authorized by their employing brokerage firm. It involves financial professionals going rogue by promoting or selling investments outside their firm's approved product lineup. This activity is illegal and violates securities regulations designed to protect investors in the financial industry.

Here's how it works:

1. Unauthorized Investments: In violation of their firm's policies and industry regulations, a financial advisor decides to promote or sell investments not on the list of approved products offered by their brokerage firm. These unauthorized investments range from private placements and hedge funds to non-standard financial instruments.
2. Bypassing Due Diligence: The advisor sidesteps the due diligence and compliance processes that brokerage firms typically perform on approved investments by selling away. These processes are in place to assess the suitability, risk, and compliance of investment products to ensure they align with their clients' needs and risk tolerance.
3. Secrecy and Concealment: To avoid detection, financial advisor often keeps these unauthorized transactions hidden from their firm and regulatory authorities. They may use personal email accounts, private communication channels, or other covert methods to conduct these transactions.
4. Investor Vulnerability: Clients who trust their financial advisors may unknowingly invest in these unauthorized securities, often assuming that their recommendations align with their financial goals and risk tolerance. This puts the investors at risk of exposure to unapproved and potentially high-risk investments.
5. Regulatory Violations: It breaches securities regulations and the fiduciary duty that financial advisors owe to their clients. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) actively monitor and investigate such violations. Penalties for individuals and firms found guilty of selling away can include fines, license revocation, and legal action.

Detecting selling away can be challenging, but there are several steps investors can take to identify this illicit practice and protect their interests:

1. Review Account Statements: Regularly examine the investment account statements and transaction history. Look for any unfamiliar or unauthorized investments.
2. Ask Questions: Engage with the financial advisor and ask questions about every investment in the portfolio. Understand the nature, risks, and purpose of each investment.
3. Scrutinize Communication: Pay attention to all communication from the advisor, including emails, letters, and statements. Be cautious of unofficial or personal communication channels that the advisor might use to discuss investments.
4. Verify Credentials: Ensure the financial advisor has registration and license with regulatory authorities, such as FINRA or the SEC. One can use their registration numbers to verify their qualifications and check for any disciplinary actions or complaints against them.
5. Research Investments: Conduct independent research on the investments in the portfolio. Check the authorization of the brokerage firm. Verify the legitimacy and performance of these investments through reputable sources.
6. Request Documentation: Ask for official investment documentation, including prospectuses, offering documents, and contracts. Verify the authenticity of these documents, and consult with a legal or financial expert if one has doubts.
7. Monitor for High-Pressure Sales Tactics: Be cautious if the advisor employs high-pressure sales tactics or tries to rush one into making decisions about unfamiliar investments.
8. Report Suspicious Activity: If one suspects the advisor is selling away or any other unethical behavior, report it to the appropriate regulatory authorities. One can contact FINRA or the SEC to file a complaint and seek assistance addressing the issue.

Protecting the self against selling away and unauthorized investments involves proactive steps to ensure the legitimacy of the financial advisor and the investments they recommend. Here are key strategies to safeguard the investments:

1. Verify Advisor's Credentials: Ensure financial advisors are registered with regulatory bodies like FINRA or the SEC. Verify their background, qualifications, and any disciplinary history. Use online databases to check their registration status and credentials.
2. Conduct Due Diligence: Research the financial advisor's firm and its reputation. Look for reviews, ratings, and any history of regulatory violations. A reputable firm is more likely to have proper oversight in place.
3. Understand Risk Tolerance: Have a clear understanding of risk tolerance and investment goals. Communicate these preferences to the advisor so they can tailor their recommendations accordingly. Be cautious if they push investments that don't align with the risk profile.
4. Ask Questions: Don't hesitate to ask questions about any investment opportunity presented. Request detailed information, including prospectuses, historical performance, fees, and risks associated with the investment.
5. Review Account Statements: Regularly review the investment account statements and transaction history. Ensure that every investment listed is authorized or discussed with the advisor. Be vigilant for any irregularities or unauthorized transactions.
6. Monitor Communication Channels: Ensure all communication with an advisor is conducted through official channels, such as the firm's email or phone system. Be cautious of personal email accounts or messaging apps, which could indicate an attempt to hide unauthorized activity.
7. Diversify The  Portfolio: Avoid putting all investments into a single basket. Diversify portfolio across different asset classes and investment types to spread risk. This can make it less likely for an advisor to concentrate assets in risky, unauthorized investments.

Let us understand more through the following examples.

Example #1

Imagine a person has a financial advisor named John who works for a reputable brokerage firm. John recommends an exciting investment opportunity in a startup company he claims has incredible potential. However, this investment is not offered through his firm, and he asks one to wire a significant sum directly to his account to secure the spot in the investment. He assures one it's a unique opportunity.

Suspecting something needs to be corrected, one investigates and finds no record of this investment within the firm's approved offerings. One also notices that John has been using his email to communicate about this investment. This scenario raises concerns about selling away, as John is soliciting an unauthorized investment outside his firm's purview, potentially putting the funds at risk.

Example #2

In 2017, a notable real-life case involved a financial advisor named Robert H. Shapiro and his company, Woodbridge Group of Companies LLC. Shapiro was found to have orchestrated a $1.2 billion Ponzi scheme through unregistered securities offerings. He promised investors steady returns through investments in real estate.

However, these investments were not registered with the SEC, and Shapiro had been using a network of brokers to solicit funds for these unapproved ventures. This case illustrates selling away on a massive scale, where an advisor concealed unauthorized investments from regulatory scrutiny, ultimately defrauding thousands of investors. Shapiro was later convicted and sentenced to prison for his fraudulent activities.

FINRA (Financial Industry Regulatory Authority) regulations play a crucial role in addressing and preventing the practice of selling away in the financial industry. Here's how FINRA regulations address it:

1. Prohibited Activity: FINRA explicitly prohibits selling away in its rules and regulations. Financial professionals can sell only authorized securities and investments their brokerage firm offers. Any deviation from this rule is a violation.
2. Oversight and Compliance: FINRA-regulated firms must establish and maintain robust supervisory and compliance systems. This includes procedures to prevent and detect selling away activities within the firm. Firms must monitor their representatives' activities closely to ensure they adhere to the approved product list.
3. Registered Representatives: Financial advisors and registered representatives must obtain written approval from their firm before offering or selling any securities not part of the firm's approved product lineup. This approval process involves a thorough review to assess the suitability and compliance of the investment.
4. Reporting Requirements: Firms report any instances of suspected selling away to FINRA promptly. This allows FINRA to initiate investigations into potential violations and take appropriate action.
5. Investor Education: FINRA places a strong emphasis on investor education and protection. It provides resources and information to help investors understand the risks of unauthorized or non-standard investments. This empowers investors to make informed decisions and recognize potential red flags.
6. Enforcement: FINRA can take disciplinary actions against individuals and firms upon violation. Penalties can include fines, suspensions, bars from the industry, and orders for restitution to affected investors.
7. Arbitration and Mediation: Investors who believe they have been victims of selling away can seek resolution through FINRA's arbitration and mediation processes. These mechanisms offer investors a means to recover losses from unauthorized investments.

Here are the critical penalties associated with selling away:

1. Fines: Financial advisors and brokerage firms engaged in selling away can face significant monetary fines. The penalties imposed by FINRA can vary widely depending on factors such as the severity of the violation, the extent of harm to investors, and the firm's or individual's disciplinary history.
2. Suspensions: Registered individuals, including brokers and financial advisors, can receive suspensions of their licenses as a penalty for selling away. The nature of the misconduct determines the length of the suspension, which can range from a few months to several years. During the suspension, the individual cannot conduct securities-related business.
3. Bars: FINRA can bar individuals from the securities industry due to selling away violations. This severe penalty can be temporary or permanent, effectively ending the individual's career in the financial sector. The duration of the bar depends on the seriousness of the misconduct.
4. Restitution: In cases where investors have suffered financial losses from selling away, FINRA can order the responsible parties to pay restitution to the affected investors. This is intended to compensate victims for their losses and help make them whole.
5. Censures: A censure is a formal public reprimand of an individual or firm's conduct. While it doesn't involve fines or suspensions, it is a significant mark on their regulatory record and can harm their reputation.
6. Expulsion: In severe cases, FINRA can expel a firm from membership. This means the firm loses its ability to operate in the securities industry and can no longer conduct business as a FINRA member.
7. Corrective Actions: In addition to penalties, FINRA may require firms to take disciplinary actions to address deficiencies in their compliance or business practices. These actions are aimed at preventing future violations.

This has been a guide to what is Selling Away. Here, we explain its examples, penalties, how to detect it and protect against it, and FINRA regulations. You can learn more about it from the following articles –

• Selling Group
• Average Selling Price
• Sellout