It is typical for investors to work with an investment brokerage firm and be assigned to a specific investment broker to assist them with their investment plans. Generally, working with an investment broker is a sound decision for any investor since licensed securities brokers are knowledgeable professionals in managing investment accounts and can provide their clients with the security that their investment goals are taken care of. However, blindly following a broker’s advice and plans is not a sound strategy since some brokers may sell you risky investments that their brokerage firm does not even offer. This type of practice is called selling away and is illegal, prohibited, and poses a significant adverse risk to an investor.
The term selling away is the practice of an investment broker selling securities that are not sold through or approved by their brokerage firm. In practice, an investment broker is committing “selling away” if they solicit a brokerage firm’s client to buy securities not sold through the brokerage firm.
The brokerage firm does not vet these securities sold through selling away; thus, it is illegal and against the brokerage firm’s practice for their brokers to sell to their respective clients. As such, they were selling away is a prohibitable practice and a clear ethical violation for brokers to engage in.
If an investment broker engages in this illegal practice, their brokerage firms are ultimately responsible for negligence. Thus, strict compliance and preventative measures are typically imposed by investment firms on their brokers to prevent selling away.
Engaging in selling away is a risky business for brokers. The two common reasons why brokers end up committing selling away are as follows:
- First, the broker seeks to obtain high commissions associated with getting their clients precarious and questionable investments, or
- Second, the broker wants to conduct an easy, albeit illegal, way to complete the transaction by avoiding scrutiny from their brokerage firm’s compliance department.
Of course, these reasons are not reasonable excuses for brokers to engage in selling away.
How Investors Can Protect Themselves From Brokers
- One of the first things to do as an investor working with an investment broker is to check the broker’s registration status on the free search tool at the Investor.gov website. This tool can, at the very least, confirm that the broker is a registered investment broker.
- Another thing to do is to ensure that all account statements or documents issued pertaining to investments are directly from the brokerage firm you are engaged in. As mentioned above, this is a usual tell-tale sign of a broker engaging in selling away is purchasing securities not offered by the investment firm the broker is working for.
- Another thing an investor could do to protect themselves from brokers engaged in selling away would be to obtain written confirmation for any securities transactions done on your behalf. By getting written confirmation from your broker and their compliance department, an investor can be ensured that the brokerage firm has vetted and approved the securities transaction.
- Lastly, a prudent investor must conduct independent research on prospective investments to ensure that the securities are legitimate offerings and approved by the brokerage firm that the broker is working for.
Unfortunately, being a registered investment broker is not a guarantee that a broker is not engaging in selling away. Thus, investors need to be aware of some red flags that indicate that the broker they are working with is engaging in selling away.
Some of these red flags may include, but are not limited to, the following:
- If the broker asks the investor to write a check or wire money to a different brokerage firm or a different person other than the broker;
- If the broker tries to sell an investment without showing any paperwork regarding the securities;
- If the investments or deposits that the investor made through the broker do not appear on the account statements or documents issued by the brokerage firm; or
- If the broker receives an account statement or document from another brokerage firm.
How to Report a Broker
If an investor suspect that their broker is engaged in selling away securities, they should report the broker and file a formal complaint to the following entities to avoid risking their investments:
- The compliance department of the broker’s brokerage firm
Once the investor has reported a formal complaint, these entities would investigate the broker’s activities to determine if selling away has been committed.