Selling Away (Private Securities Transactions)

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“private securities are investments not approved by brokerage firms”

Financial advisors are prohibited by brokerage firms with whom they hold their securities licenses from “selling away” in private securities transactions. Selling away is considered any activity where a financial advisor is engaged in “private securities transactions” with the investing public that concerns securities that have not been approved by their brokerage firm and there is an expectation that “selling compensation” will be paid. Brokerage firms primarily market and sell registered securities, however, in some instances non-registered securities are sold through the use of a private placement memorandum which are sold to accredited investors. Financial advisors can only sell “approved” investments through the brokerage firm where they hold their securities licenses.

Securities licensed financial advisors are required to disclose “outside business activities” to their financial brokerage firms which is recorded on the Financial Industry Regulatory Authority (FINRA) financial advisor “broker check” database. Outside business activities include any business activity from which the financial advisor expects to be compensated. Financial advisors are required to receive prior-approval from their brokerage firm for any “outside business activities” and you can check your financial advisor FINRA disclosures. If there is no “outside business activities” disclosed on the financial advisor’s “broker check” record related to a solicitation, this means that the brokerage firm is unaware of the activity and the business activity is most likely not approved.

Brokerage firms are responsible for all of their financial advisors’ business activities whether disclosed or not and are required to take affirmative action to monitor and uncover any unapproved outside business activities, including activities related to private securities transactions. Many brokerage firms audit their financial advisors’ personal and business bank accounts to determine all sources of income which may related to outside business activities and private securities transactions. Brokerage firms conduct these audits because of the responsibilities they have to supervise the activities of financial advisors registered with the firm. Most brokerage firms terminate licensed financial advisors who “sell away” from the brokerage firm securities that are not approved. This is because of the potential liability brokerage firms face as documented by a long history of adverse FINRA arbitration awards for member firms, as a result of this failure to supervise. Investment losses from “selling away” transactions have occurred in many private securities transactions, including the following:

  • Promissory Notes;
  • Unregistered Securities;
  • Real Estate Investments;
  • Oil & Gas Partnerships;
  • Multi-level Marketing;
  • Small Business and Startups Investments;
  • Hedge Funds; and
  • Third-party Investment Advisors.

In many instances, private securities transactions are characterized by financial advisors as unique, opportunities that are portrayed as available for a “limited time” to create a sense of urgency to invest. A financial advisor’s motivation for “selling away” in a private securities transaction, might be the result of conflicts of interest, and are many times sold through the use of fraudulent misrepresentations and omissions of material facts concerning an investment’s risk, economic viability and the compensation they are paid.

KlaymanToskes can help you determine whether investment losses in private securities was the result of a “selling away” transaction with a securities licensed financial advisor. If the investment loss was in a “non-approved” investment of your financial advisor’s brokerage firm, they may still be held responsible for a failure to supervise the “selling away” activities of the financial advisor through a FINRA arbitration claim for damages.

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