Issues of Selling Away

When an investment is sold by a broker to a customer, outside the client’s account and outside the investment products offered by the brokerage firm there may be a selling away issue. These investments which are known as Private Securities, often involve investments in, privately held companies, promissory notes, private limited partnerships and real estate.

There are strict guidelines regarding private securities transactions and NASD Rule 3040, Private Securities Transactions of an Associated Person by the National Association of Securities Dealers (NASD). It is stated by the rule that the brokers may not participate in any manner in a transaction which is of private securities except in accordance with the requirements Rule. These rules are designed in order to help protect individual investors and to help ensure the integrity of the brokers.

A private securities transaction means that if there are any securities transactions outside the regular scope or course of broker’s employment with their brokerage house, and it includes, but is not limited to the new offerings of securities which are not registered, and also that the Broker receives a selling compensation, under NASD Rule 3040.

The broker must provide written notice to their brokerage firm prior to any private securities transaction. The transaction must be recorded on the brokerage firm’s records and books and the broker’s participation must be supervised by the brokerage house in the transaction as if the transaction were executed on behalf of the brokerage house, if the transaction is approved. The broker should not participate in the transaction in any manner, indirectly or directly, if the transaction was disapproved in the broker’s participation. It is “selling away”, if the broker does not seek or receive approval for any transaction for a client.

Some of the “red flags” that a broker may be engaging in selling away are:

• The customer’s participation in an investment which is not offered by the brokerage firm is solicited by the broker.
• The broker suggests that the customer should not mention it to anyone else at the brokerage firm and that the investment is a “secret”.
• Payment for the investment is directly made to the company or some third party or to the broker being invested in and not the brokerage firm.
• The broker recommends initial public offerings and outside private placements and the transactions are executed outside the employer or his brokerage firm.

If a client is concerned about the practice of “selling away” which is occurring, the customer should immediately contact their broker’s supervisor. In many cases, the brokerage firm is liable for this activity and it needs to take appropriate action. Any losses which may have already occurred may occur or some other financial impact such as commissions or fees may be able to be recovered from the brokerage house.