Selling Away: A Violation of FINRA Rules
Definition of Selling Away
Selling away is a practice in which a broker solicits a client to purchase securities not held or offered by the executing brokerage firm. Brokerage firms typically maintain lists of approved products that brokers can offer to clients.
Risks and Consequences of Selling Away
Selling away carries significant risks, as the products involved may not have undergone proper due diligence or may not be authorized for sale by the broker’s employer. This can expose the broker and the firm to liability and regulatory sanctions.
FINRA Rule 3040
FINRA Rule 3040 explicitly prohibits registered representatives from selling securities “away” from the member firm without authorization. Rule 3040 also requires brokers to provide written notice of proposed transactions to their firm before executing them.
Additional Considerations
Rule 3030 also applies to selling away, as it prohibits registered persons from engaging in outside activity without prior notice to the firm. Businesses registering as Series 6 Investment Companies or Variable Contracts Products representatives must also inform their firms to avoid violating these rules.
Consequences of Selling Away
Selling away can result in disciplinary action or fines for the registered representative. The firm may also face sanctions for failing to supervise its brokers and prevent selling away activities.
Conclusion
Selling away is a serious violation of FINRA rules and can have severe consequences for both the broker and the brokerage firm. Brokers must adhere to the rules and regulations governing their activities to protect clients and maintain the integrity of the financial markets.
References
- FINRA Notice to Members 01-79
- Selling Away: What it is, How it Works, Example
- Corporate Finance Institute: Selling Away
FAQs
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.
Which FINRA rule prohibits selling away?
FINRA Rule 3040 prohibits registered representatives from selling securities “away” from the member firm unless the firm has authorized the sale.
What are the consequences of selling away?
Selling away can result in disciplinary action or fines for the registered representative. The firm may also face sanctions for failing to supervise its brokers and prevent selling away activities.
What should brokers do to avoid selling away?
Brokers should only offer products that are on the firm’s approved list and should obtain written authorization from the firm before executing any transactions.
What should investors do if they suspect their broker is selling away?
Investors should contact their brokerage firm and FINRA to report any suspected selling away activities.
What is the difference between selling away and outside business activity?
Selling away involves selling securities that are not approved by the broker’s firm, while outside business activity involves engaging in activities outside the scope of the broker’s employment without the firm’s knowledge or consent.
What is the role of FINRA in regulating selling away?
FINRA is responsible for enforcing Rule 3040 and other regulations governing the conduct of brokers and brokerage firms. FINRA can investigate allegations of selling away and take disciplinary action against violators.
What are the potential risks to investors from selling away?
Selling away can expose investors to unsuitable or risky investments that have not been properly vetted by the brokerage firm. Investors may also lose money if the broker is unable to fulfill their obligations due to financial or legal problems.