Many investors are too trusting to make money to properly vet a financial adviser and the source of the investment. Despite a brokerage firm’s standards of care in handling client accounts, some brokers take advantage of a client’s blind trust to sell securities the brokerage firm does not offer.
When a U.S. based brokerage firm sells an investment to a client without his brokerage firm’s permission, the broker is selling investments away from the firm, or simply “selling away.” A broker might partake in this inappropriate practice to earn a commission he or she would otherwise have to pass up.
It is mandatory for brokers to receive their employers’ approval on every transaction. Broker-dealers must do due diligence on all investments they offer to determine if they can sell the particular investment. If a firm prohibits the purchase or sale of an investment, it won’t give the broker permission to complete the transaction. This is to protect the investor from an unsuitable investment.
Unfortunately, some brokers would rather capitalize on an unknowing client’s willingness to invest instead of abide by regulations. Instead of missing out on a commission opportunity, a bad broker may complete the transaction without his/her firm’s permission. They often get away with this practice, as most investors don’t even know that their broker engaged in illicit conduct.
The Dangers of Selling Away
Selling away risks a client’s investment by putting money where the firm does not allow. Every brokerage firm has an approved product list that describes the types of investments and securities brokers may sell. The products on the approved list have passed through the firm’s thorough due diligence process, which includes obtaining necessary compliance and risk department reviews, among other qualifications. A broker who sells away may involve private placement or non-public investment securities instead of those on the approved list.
A broker’s “outside” business activities should never involve unwitting clients. Schemes involving selling away are dangerous for investors because they can easily become victims of securities fraud or theft – losing hundreds of thousands because of a bad broker’s actions.
In many cases, selling away schemes involve promissory notes. Promissory notes are essentially loans, where the investor agrees to lend money in exchange for high interest rates. In this kind of scheme, the borrower abruptly stops (or never starts) paying interest, and the investment vanishes. All the while, the broker knows or should know what’s going to happen and deceives the investor into thinking it’s a suitable investment. The investor trusts the financial adviser without realizing that the entire operation is outside of the firm’s knowledge.
Holding Bad Brokers Responsible for Selling Away
Selling away is in violation of a brokerage firm’s compliance rules and securities regulations. Brokers must abide by certain rules to legally service a client’s account. Brokerage firms are
always liable for the actions of their employees while rendering investment advice. Firms typically do not allow outside investments. In many cases, these investments may be fraudulent within themselves. The Financial Industry Regulatory Authority (FINRA) has rules that control outside business activities and private securities transactions. If a broker breaks these rules, costing clients’ money, victims must file a FINRA arbitration claim to pursue restitution.
Erez Law specializes in selling away, as well as several other types of broker misconduct. Our goal is to help investors who have suffered great losses due to bad brokers, and our team represents clients throughout Latin America in countries like Venezuela, Colombia, Argentina and Mexico, as well as the U.S., including Puerto Rico. Selling away cases can be incredibly serious, as it involves broker deception. As an investor, you put your trust in a broker to manage your portfolio with care, only acting in your best interest. With so much money on the line, broker deception can be devastating to an investor’s future. If you suspect your broker of making investments without the approval of his or her firm, contact Erez Law to take a closer look.