What is Selling Away: Explained

“Selling away” refers to a practice in the financial industry where a broker executes a securities transaction without the approval of their employing brokerage firm. This unauthorized trading can result in significant financial losses for the firm, the investor, or both. It is a violation of industry regulations and can lead to disciplinary actions against the broker.

Investors should be aware of the risks associated with selling away and always stay informed about their investment accounts. Before entering into any financial transactions, it is important to establish clear communication channels with your broker and ensure that all trading activities are authorized and compliant with industry regulations. Vigilance and due diligence are key in protecting your investments from potential harm caused by unauthorized trading practices like selling away.

When it comes to investing in securities, it is important to understand the various terms and practices that are involved. One such term that often comes up is “selling away”. In this article, we will delve deeper into what selling away is, how it occurs, and what potential risks it poses for investors.

Definition of Selling Away

Selling away, also known as “private securities transactions”, refers to a situation where a financial advisor or a securities broker engages in securities-related transactions with clients that are not approved or conducted through the broker-dealer firm they are affiliated with. In simple terms, it is the unauthorized sale of securities by a broker who diverts customers to invest in unregistered investments that are not offered by their firm.

How Selling Away Occurs

Selling away typically occurs when a broker intentionally goes outside the scope of their employment with a registered broker-dealer firm. They may have various motivations for doing so, including personal financial gain or the belief that the investments they promote provide better returns for their clients. However, it is important to note that selling away is considered a violation of industry rules and regulations.

Risks of Selling Away

Investing in securities involved in selling away transactions carries inherent risks for investors. Due to the secretive and unauthorized nature of these transactions, investors may not receive the same level of protection and oversight that they would with registered investments. Here are some key risks associated with selling away:

1. Lack of Regulatory Oversight: Selling away typically involves investments that have not undergone the same level of regulatory scrutiny and approval as registered securities. This lack of oversight increases the chances of fraud, misrepresentation, and investment scams.

2. Inherent Illiquidity: Many investments associated with selling away are illiquid in nature, meaning they cannot be easily sold or converted into cash. This lack of liquidity makes it challenging for investors to access their funds when needed and can lead to financial difficulties.

3. Limited Recourse: In cases where investors suffer financial losses due to selling away, their ability to seek recourse may be limited. Since these investments are often unregistered, investors may find it difficult to take legal action or recover their losses.

4. Potential for High Fees: Investments involved in selling away transactions may come with high fees and expenses. Brokers promoting these investments may receive significant commissions or kickbacks, which can erode the overall returns for investors.

5. Unreliable Information and Due Diligence: Unlike registered securities, investments involved in selling away transactions may lack proper disclosure and transparent information. This makes it difficult for investors to conduct thorough due diligence and assess the risk-reward profile of such investments.

Steps to Protect Yourself

While selling away poses risks, there are steps investors can take to protect themselves:

1. Research and Due Diligence: Before investing, thoroughly research and conduct due diligence on both the investment opportunity and the broker promoting it. Look for any red flags, such as lack of proper licensing or registration.

2. Verify Broker Credentials: Check if the broker promoting the investment is licensed and registered with a reputable regulatory authority. This ensures they are legally authorized to offer investment advice.

3. Understand Investments: Take the time to fully understand the investment being offered, including its risks, terms, and potential returns. If something seems too good to be true, it probably is.

4. Diversify Your Portfolio: Avoid putting all your eggs in one basket. Diversify your investment portfolio across different asset classes and securities to mitigate risk.

5. Consult with Independent Professionals: Seek advice from independent financial advisors, lawyers, or accountants who are not directly affiliated with the promoting broker. They can provide unbiased insights and help you make informed decisions.

Selling away refers to a broker’s unauthorized private securities transactions conducted without their firm’s knowledge or approval. This unethical practice can lead to significant financial and legal consequences for both the broker and the firm. It is important for brokers to adhere to the rules and regulations set forth by regulatory authorities to maintain the integrity of the financial markets and protect investors.

Leave a Comment