Repercussions for Brokers ‘Selling Away’ Investment Funds

Repercussions for Brokers ‘Selling Away’ Investment Funds

In recent years, you may have read headlines about investment brokers “selling away” their funds. It doesn’t sound good, but perhaps you don’t fully understand what it means. What is selling away, why is it such a serious matter, and what are the repercussions for doing it?

What Is “Selling Away?”

In simple terms, selling away occurs when a broker entices you to purchase securities that aren’t offered or held by their brokerage firm. Brokers are technically allowed to sell these securities, but they must give the firm prior written notice, and the firm must handle the compensation process. Even if a broker receives no compensation from the process, the firm must still acknowledge that they received written notice before anyone recommends outside securities to a client.

Selling away investments tends to be a red flag – namely, it’s an avenue for concealing more deliberate and fraudulent investment activity like Ponzi schemes.

This is the main reason that selling away is a violation of securities law. By taking transactions “off the grid,” investment bankers are in a better position to participate in deceitful and dishonest behavior to drive their own profits.

Violating Securities Law

Unfortunately, incidents of selling away aren’t unusual. It may have hit its peak when the markets were down, but even now that the markets are on the upswing, investment firms must keep close tabs on their employees.

Selling away is a pernicious and dangerous practice that is a direct violation of the Financial Industry Regulation Authority Rule 3040, as well as state security law in all 50 states. Depending on the nature of the violation, punishments can range from a slap on the wrist to something more serious. If, for example, the incident was isolated and there appears to be no malicious intent to defraud the firm, the Financial Industry Regulatory Authority (FINRA), may only assess a fine or advise the broker to give up any gains from the transaction.

In more serious cases, punishment may include suspension, revocation of license, or a complete bar from the securities industry. These scenarios, if they include criminal actions, may include fines or even jail time. For example, a St. Louis-based broker was recently sentenced to 97 months in prison by a federal judge, in part for selling away unregistered securities to a mortgage company.

These civil and criminal penalties may be added to the firm’s own punishments, which range from having a formal warning on file to termination.

Can the Brokerage Firm Be Responsible?

Investment firms that do not keep proper tabs on their brokers may be legally liable for these transactions. These brokerage firms have a responsibility to monitor the actions of their staff, and plaintiffs suffering damages from unregistered securities can (and have) come after the supervising firm for damages. For this reason, investment firms are keeping closer tabs on their brokers and establishing stiffer penalties for those who try to take their securities off the grid. In short, selling away is a serious violation of securities law and will not be tolerated.