What Is a Selling Away Practice?
"Selling away" is the act of brokers offering unapproved financial products to clients, aiming for extra commissions. This is risky as these products lack proper vetting. It's against rules and regulations, though uncommon due to the array of products brokerages provide. Occasionally, wealthy clients might encourage it, but such instances remain rare.
Basics
When a broker convinces a client to purchase securities not approved by their brokerage firm, it is referred to as "selling away". Brokerage firms have approved product lists, products that are thoroughly vetted by the firm's screening personnel. Selling products outside this list risks offering items without proper due diligence and often violates securities regulations.
Key Aspects
Brokers engage in "selling away" when they sell investments that are not on the approved list of their firm. They might do this to fulfill client requests for products that their firm hasn't endorsed, like specific mutual funds or over-the-counter securities. To earn commissions and please clients, brokers might break rules to get these desired securities, especially when they're less regulated. However, this usually breaches securities regulations, resulting in potential penalties.
Controlled by Financial Industry Regulatory Authority (FINRA), rule 3040 stops registered representatives or associates from selling securities "away" from their firm without permission. The rule requires notifying the firm in writing before making the sale and gaining approval.
Selling Away Example
Alice is a broker at a firm called Alice's Brokerage, and her client is Bob. Bob wants to buy stock from a private company named ABC. This company doesn't trade on public exchanges, so they offer their stock through a special agency. The issue is that Alice's firm hasn't done the necessary checks on ABC, so they haven't approved selling its stock. But Alice still wants to earn the commission from this sale. To do so, she goes outside her firm and arranges the transaction through another broker, Tom's Securities, who can sell ABC's stock.
FINRA Rule 3210
In April 2016, the SEC approved FINRA Rule 3210 to set ethical standards for member companies, brokers, and advisors. This rule is about accounts brokers and advisors open at firms not where they work. It requires them to disclose these accounts and their intentions in writing to their employer. They also need to declare all accounts with financial or beneficial interest.
Pump-and-Dump
"Pump-and-dump" refers to manipulating a security's price with false recommendations or reports. It's illegal but common, especially in digital currencies and illiquid securities. This scheme often targets stocks or securities with low liquidity, where fewer algorithmic traders make it easier to influence prices, and buy orders have a stronger impact.
Conclusion
Selling away is a dangerous practice that brokers engage in when they offer unapproved financial products to clients. It is against securities regulations and can result in potential penalties. Investors should be aware of this practice and only invest in products that have been properly vetted by their brokerage firm.