Regardless of why a broker chooses to sell away from their firm, it is always a problem. This practice is prohibited and it can put innocent investors at a serious financial risk.
How FINRA Rule 3280 regulates selling away
FINRA Rule 3280 controls how brokers should handle any private securities transactions. Essentially, these rules govern when individual brokers are allowed to sell away from their member firm, and what they need to do to get firm approval to conduct such a transaction.
Rule 3280 puts an obligation on both brokers and brokerage firms. Most importantly, the rule requires that registered investment advisors must disclose their any proposed “selling away” to the compliance department of their broker-dealer. After a thorough, accurate disclosure is made, a brokerage firm then has the responsibility to review the proposed private securities transaction. Upon review, the member firm has two options:
In the event that a brokerage firm does approve a “sell away”, that firm will assume legal responsibility for the trade. There are no exceptions to this rule. When the private transaction (ie. the selling away) is allowed, the broker-dealer assumes legal responsibility. This means that the broker-dealer could potentially be held liable, should some type of misconduct occur.
On the other hand, if the firm decides to block an individual broker’s private transaction, then the broker cannot go forward with the deal. If a broker fails to make disclosure in the first place, of if a broker goes forward with a sell away after receiving disapproval from their member firm, that individual has violated the requirements of FINRA Rule 3280.
How Do I Know if My Broker “Sold Away”?
Many different types of securities can be ‘sold away’ from a brokerage firm. Though it is unlikely that a broker would engage in selling away with a common stock of a large cap company, or with a prominent mutual fund. Most often, selling away is related to more obscure securities and financial products.
Indeed, the overwhelming majority of selling away cases involve very complex, high-risk securities. Specifically, securities that are most frequently linked to selling away transactions are:
Unfortunately, it can sometimes be very difficult for investors to know whether or not their broker is actually selling away. Not only will your broker not always tell you that they are selling away, but your broker may actively try to mislead you, using tricks to disguise the transaction.
In some cases, a broker may even use a letterhead from the broker-dealer. In the most egregious cases, a bad-acting broker may even produce sham, fraudulent account statements from their employer to show returns that are not even real. To protect yourself from unknowingly becoming a victim of selling away, please keep the following three tips in mind:
Private securities transactions (PSTs) are subject to very strict regulations. Under United States securities law, registered broker-dealers are responsible for any and all investment-related activities conducted by the firm’s licensed representatives.
To be clear, this means that brokerage firms are legally responsible for the relevant conduct of their brokers, even if the broker is engaging in securities transactions completely outside of the scope of their employment at the firm.
Put another way, “true” selling away is never allowed. Individual brokers are always required to report their PSTs to their member firm, and brokerages are always required to monitor and oversee those transactions. A licensed securities representatives cannot sell securities privately without first disclosing the proposed transaction and then seeking approval from their member firm.
Can I sue my broker for selling away?
To recover financial compensation for your selling away-related losses, you will need to take legal action. While a lawsuit may be the appropriate action in some selling away cases, most often, you will need to seek compensation through arbitration with FINRA.
When you first invested with your current broker or brokerage firm, you very likely signed a customer agreement that contained a mandatory arbitration clause within it. No matter which state you live in, the courts will almost certainly enforce any arbitration provision.
As such, you will likely need to take your claim through FINRA’s arbitration process. As FINRA expressly advises in its official Arbitration Claim Filing Guide, victimized investors should start by considering all of their informal remedies.
By contacting the broker or the brokerage firm’s compliance department, an investor may be able to reach a fair resolution, perhaps through voluntary mediation. Should you choose FINRA mediation, you should be represented by an attorney during the proceedings.
Of course, mediation will not be sufficient to resolve all selling away disputes. You may need to file for arbitration. This is done by submitting a ‘Statement of Claim’ along with all of your supporting evidence to FINRA. It is strongly advised that you work with a qualified FINRA arbitration lawyer to prepare your complaint before submitting. Your lawyer will make sure that your selling away complaint is submitted in the most effective manner possible.
Far too often, the big brokerage firms look the other way when it comes to their representatives’ selling away because “they do not want to know”. These firms want plausible deniability, and they do not want to rock the boat with their top representatives. There are many different scenarios where this could happen.
For example, the compliance officials within a brokerage firm may have suspicions that a top-producing broker is selling away, without disclosing their securities transactions to the firm as is required by FINRA Rule 3280. Yet, the firm may choose to look the other way for as long as possible, due to the fact that the broker is bringing in considerable investment fees to the company.
In other cases, compliance officials may inquire about a private transaction that a top-broker is engaging in. But, the broker may respond by falsely assuring the compliance department that the transaction in question is not securities-related. While a thorough investigation should always be conducted by the broker-dealer, they may sometimes choose to just drop the issue, and rely on their broker.
The bottom line: firm supervisors and compliance staff often want to avoid looking too deeply into the transactions of their top-producing brokers. Through a combination of negligence and willful blindness, selling away transactions occur with little to no oversight. This puts investors at a serious financial risk. Negligent brokers and brokerage firms must be held responsible should an investor sustain major financial losses.
If you lost a substantial amount of money in a “selling away” transaction, you need to consult with a qualified securities fraud attorney as soon as possible. Your attorney will be able to review the facts of your claim, and determine exactly what you need to do to seek the fair compensation that you deserve.
Selling away cases are especially complex. To hold the responsible broker fully liable for your damages, you will need to know the full extent of the misconduct. In most selling away cases, victimized investors actually have several different underlying legal claims.
Indeed, private securities transactions are often associated with material misrepresentations, unsuitable investments and other forms of malfeasance. Regardless, the responsible broker must be held accountable.
Additionally, the broker’s member firm may also bear liability for your losses. Holding a brokerage firm liable in a selling away case can be challenging, as broker-dealers will usually counter that they should not be held responsible for the undisclosed misconduct of the individual. However, there are ways to hold broker dealers liable in these types of claims. Depending on the facts of your case, your attorney may be able to establish vicarious liability or may be able to hold the brokerage responsible for their failure to supervise and control their representative.
At Sonn Law Group, our top-rated investment fraud attorneys have extensive experience handling selling away cases. If you lost money because your broker ‘sold away’ from their registered brokerage firm, contact us today. We are standing by, ready to help you fight for the full compensation you rightfully deserve.
To schedule a free, no obligation review of your case, please contact our firm today by calling 844-689-5754 or reaching out to us directly online. We handle all selling away cases on a contingency fee basis, that means we do not get paid unless we help you recover financial compensation for your losses.