Selling Away Violation Lawyer

“Outside Business Activities” and “Outside Securities Activities” are closely monitored by brokerage firms and regulators to ensure that Financial Advisors do not involve customers in investment opportunities that are not approved by the Financial Advisor’s employing brokerage firm.  This practice is known as “selling away,” which is strictly prohibited by FINRA and every financial services firm.  Brokerages and Financial Advisors are routinely sanctioned or barred from the industry for this unlawful practice.

The purpose behind this prohibition is to ensure that a Financial Advisor only offers to sell securities that have been vetted by his or her brokerage firm after there has been a rigorous due diligence process.  Most brokerage firms have an approved list of investments, products, and research that can be provided or made available to clients.  Any deviation by the Financial Advisor from the approved product list may constitute selling away.

The most classic form of selling away occurs when a Financial Advisor offers a client the opportunity to invest in a business he or she created.  If this has happened to you, a dedicated stock broker misconduct lawyer can help.

What Do the FINRA Rules Say About Selling Away?

FINRA has codified the rules applicable to selling away.  FINRA Rule 3270, titled “Outside Business Activities of Registered Persons,” provides:

No registered person may be an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm, unless he or she has provided prior written notice to the member, in such form as specified by the member. Passive investments and activities subject to the requirements of Rule 3280 shall be exempted from this requirement.

In addition, FINRA Rule 3280 provides:

No person associated with a member shall participate in any manner in a private securities transaction except in accordance with the requirements of this Rule.

Prior to participating in any private securities transaction, an associated person shall provide written notice to the member with which he is associated describing in detail the proposed transaction and the person’s proposed role therein and stating whether he has received or may receive selling compensation in connection with the transaction; provided however that, in the case of a series of related transactions in which no selling compensation has been or will be received, an associated person may provide a single written notice.

(c) Transactions for Compensation

(1) In the case of a transaction in which an associated person has received or may receive selling compensation, a member which has received notice pursuant to paragraph (b) shall advise the associated person in writing stating whether the member:

(A) approves the person’s participation in the proposed transaction; or
(B) disapproves the person’s participation in the proposed transaction.

(2) If the member approves a person’s participation in a transaction pursuant to paragraph (c)(1), the transaction shall be recorded on the books and records of the member and the member shall supervise the person’s participation in the transaction as if the transaction were executed on behalf of the member.

(3) If the member disapproves a person’s participation pursuant to paragraph (c)(1), the person shall not participate in the transaction in any manner, directly or indirectly.

(d) Transactions Not for Compensation

In the case of a transaction or a series of related transactions in which an associated person has not and will not receive any selling compensation, a member which has received notice pursuant to paragraph (b) shall provide the associated person prompt written acknowledgment of said notice and may, at its discretion, require the person to adhere to specified conditions in connection with his participation in the transaction.

How Do I Know If My Financial Advisor Is Selling Away?

If you have concerns that a financial advisor has recommended a private securities transaction, you should first carefully review your account statements and trade confirmations. In most instances, every investment you have purchased through a brokerage firm will be reflected on your account statements. If you have not received any account documentation from your brokerage evidencing the purchase, sale or market value of the investment in question, it is possible that your financial advisor has engaged in selling away.

An Example of Selling Away

A classic case of selling away occurred recently with respect to the Horizon Private Equity Fund, III.  The Horizon Fund was a private offering sold by an Oppenheimer & Co. registered Financial Advisor to customers of the firm.  The Financial Advisor represented to clients that the Horizon Fund was sponsored by Oppenheimer when, in reality, it was a vessel through which the Financial Advisor used to enrich himself. 

The Horizon Fund was not a legitimate investment opportunity.  It was a $150 million Ponzi Scheme that impacted hundreds of investors, who were solicited by the Oppenheimer broker to invest with the promise of monthly dividend payments.  In 2021, the Securities and Exchange Commission filed an enforcement action against the broker for securities fraud. 

If a Financial Advisor recommends a security with a guaranteed rate of income that seems “too good to be true,” chances are it is, and you should immediately speak with a securities fraud attorney.  The Wolper Law Firm has extensive experience handling matters involving private securities transactions and selling away.

If you believe that your financial advisor has engaged in such conduct as selling away, please contact the Wolper Law Firm for a free consultation and case evaluation. Call 800.931.8452 to get started.