What selling away is
A registered broker is supposed to sell securities through the firm he or she is registered with, on the firm’s books, under the firm’s supervision. Selling away is when the broker sells an investment outside the firm — a promissory note in a friend’s business, an interest in a real estate development, a private fund, a start-up, a cryptocurrency scheme — and the firm’s name appears nowhere on the paperwork. The investment does not show up on your brokerage statement. The check is made out to some other entity. Sometimes the broker says the firm “does not offer this one” or asks you to keep it between the two of you.
When the investment fails, the firm’s first response is that it had nothing to do with it. Often that is not the end of the analysis.
Why it is common in expat communities
A broker who serves Americans abroad is far from the branch, far from the supervisor, and dealing with customers who trust him precisely because he is the one person from home who still calls. Expat communities also generate their own investment opportunities — the hotel project, the condo development, the friend’s import business — and a broker with a book of retirees is the natural person to bring them to. The mix of distance, trust, and local deals is why selling-away cases involving Americans abroad look the way they do: a note or partnership interest, sold over dinner, that the firm never saw.
Rule 3280: notice, approval, supervision
FINRA Rule 3280 governs private securities transactions. A registered person who wants to participate in any securities transaction outside the firm must first give the firm written notice describing the transaction, his role, and whether he will be compensated. If he will be paid, the firm must approve or disapprove in writing — and if it approves, it must record the transaction on its own books and supervise it as if it were the firm’s own. If he will not be paid, the firm must still acknowledge the notice and may impose conditions.
The rule places the duty on the broker, but its consequence falls on the firm. A broker who gave no notice violated the rule. A firm that received notice and approved without supervising violated it. And a firm that never received notice is not automatically off the hook, because of the next rule.
Rule 3110: the firm should have known
FINRA Rule 3110 requires every member firm to maintain a supervisory system reasonably designed to achieve compliance with the securities laws and FINRA rules — including a system that would detect a broker running an outside book. Firms are expected to review correspondence, monitor outside business activities, watch for customers moving money out to unfamiliar entities, and follow up on the red flags that selling away produces. When a firm’s supervision would have caught the side deals if anyone had looked, arbitration panels have held firms responsible for the losses, on the theory that the firm failed to supervise a person it chose to register.
The practical test in these cases is what the firm knew or should have known. Emails on the firm’s system referring to the deal; wires from the brokerage account to the entity; the broker’s disclosed outside business activities; prior complaints; a branch manager who heard about it at lunch — each of these is evidence that the firm had the information and did nothing.
The red flags you can see on your side
Selling away is easier to identify than most broker misconduct, because the absence of the firm is the tell:
- The investment never appears on your brokerage statement
- You wrote a check or sent a wire to a company, a person, or an account other than the brokerage firm
- The paperwork is a promissory note, an LLC operating agreement, a subscription agreement — with no brokerage firm name on it
- The broker asked you not to mention it to the firm, or said the firm “does not handle this kind of thing”
- Returns were promised as a fixed percentage, paid for a while, then stopped
- The broker or a relative of the broker has an ownership role in the venture
What the claim looks like and where it is brought
The claim is brought in FINRA arbitration against the firm (and usually the broker) for failure to supervise, for the Rule 3280 violation, and typically for the underlying misrepresentation or unsuitability of the investment itself under Rule 2111 and Rule 2010. The firm’s arbitration clause covers disputes with its customers concerning the broker’s conduct, and panels have regularly accepted jurisdiction over selling-away claims even where the firm argued the investment was not its business. If the broker has since left the industry or been barred, the firm that registered him at the time of the sale is still the defendant that can pay.
Damages are typically the amount invested less anything received back, plus interest, and, where permitted, costs and fees. No outcome is promised in any case. Evidence is the note or agreement, the wire or check records, your correspondence with the broker, and the broker’s BrokerCheck record — which will often show a termination “for cause” or a regulatory action once the side deals came to light. None of it requires you to be in the United States.
What to do now
If any of the red flags above describe an investment you hold, the sequence is short:
- Search the broker on BrokerCheck and save the report, including the disclosure section
- Gather the investment paperwork, the record of how you paid, and every email or message with the broker about it
- Do not sign any release, extension, or restructuring of the note without a review
- Send it all for a free, confidential review; the first question we answer is whether a registered firm can be reached
Key takeaways
If you remember six things
- Selling away is a broker selling an investment outside the firm; the tell is that it never appears on your statement.
- FINRA Rule 3280 requires written notice to the firm, and firm approval and supervision if the broker is paid.
- FINRA Rule 3110 makes the firm responsible for a supervisory system that would have caught it.
- The test is what the firm knew or should have known — emails, wires, outside business disclosures, prior complaints.
- The claim is brought in FINRA arbitration against the firm, even if the broker is gone or barred.
- Check BrokerCheck, gather the paperwork and payment records, and do not sign a restructuring before a review.
Questions
Asked most often
The firm says the investment was never its product and it is not responsible. Is that true?
It is what firms say in every selling-away case. Whether it holds depends on whether the firm knew or should have known — through its own emails, wires, disclosures, or supervision — and on whether the broker gave the notice Rule 3280 required. That is decided on the documents.
The broker has been barred by FINRA. Who do I claim against?
The firm that registered the broker when the sale was made. A bar often follows exactly the conduct you are describing, and it removes the broker from the industry, not the firm’s responsibility for supervising him at the time.
I paid by wire from a foreign bank, not from my brokerage account. Does that hurt the case?
It removes one piece of evidence the firm might have seen, but it does not end the case. Correspondence on the firm’s system, the broker’s outside-activity disclosures, and other customers’ complaints are commonly how firms are shown to have known.
The note is still paying interest. Should I wait?
No. Schemes of this kind pay until they cannot. The six-year eligibility rule runs from the sale, and a note that is still paying in year five may stop in year seven. Have it reviewed now.