Selling Away

What Is Selling Away?

Selling away is when a broker solicits a client to purchase securities not held or offered by the executing brokerage firm. Brokerage firms generally have lists of approved products that can be offered by their brokers to clients of the firm. These approved products have usually undergone due diligence screenings and have been identified by the firm's screening personnel as solid products.

When a broker sells away from the firm's list of approved products, they run the risk of selling something for which due diligence has not been completed. As a general rule, such activities are a violation of securities regulations.

Key Takeaways

  • Selling away refers to offering or obtaining financial products for a client that are not approved by a brokerage.
  • Doing so can generate extra commissions for a broker, but comes with a greater degree of risk since those products are not vetted or authorized for sale by the broker's employer.
  • Selling away is often seen as a violation of both internal workplace rules as well as broader securities regulation.

How Selling Away Works

Selling away occurs when a broker sells investments that are not a part of the official list of products offered by their firm. At times, a broker may inappropriately do this because the client wants to purchase a product that has not yet been approved by the broker's firm, such a specific mutual fund or an over-the-counter (OTC) security.

The broker may be eager to earn a commission and to keep their client happy, so they might bend or break the rules and find a way to obtain the security desired by their client. This can often happen when the investments in question are private placements or other non-public investments that have limited oversight or transparency. Generally, selling away is a violation of securities regulations and can result in disciplinary action or fines.

FINRA rule 3040 prohibits an a registered representative or associated person from selling any security "away" from the member firm unless the firm has authorized the associated person to make the sale. Rule 3040 further requires registered persons to provide notice of the proposed transaction, in writing, to his or her firm, before the sale is made.

Example of Selling Away

For example, Bert is a broker at Bert's Brokerage. Ernie is Bert's client. Ernie wants to purchase stock of XYZ company, which is a private company not traded on public exchanges. They are offering stock directly through an agency that underwrites and distributes private placements. Unfortunately, Bert's brokerage has not performed the necessary due diligence on XYZ company, so their private stock is not on the list of approved products for sale. Bert, however, wants to earn the commission associated with this sale of XYZ company stock, so Bert "sells away" from Bert's Brokerage and completes the transaction on behalf of his client by using a third-party broker, Sam's Securities, who does have approval for that product.

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  1. https://www.finra.org/rules-guidance/notices/01-79#:~:text=Rule%203040%20prohibits%20an%20associated,promissory%20notes%20that%20are%20securities.

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