A controversial selling-away case decided by the Securities and Exchange Commission last month serves as a warning to brokers about getting entangled in an often vague and gray area of securities law.
And it serves as a reminder of the risks that financial advisers face from overly aggressive enforcers. The SEC last month threw out the case, which was brought by the Financial Industry Regulatory Authority Inc. (FINRA) of New York and Washington against two Dallas-based brokers for Paine Webber Inc. of New York.
In dismissing the case, the SEC chided FINRA enforcers for attempting a “novel interpretation” of FINRA’s selling-away rule. FINRA, then known as NASD, charged the brokers in 2002. In the action, FINRA alleged the brokers engaged in a private securities transaction by soliciting clients to buy shares in e2 Communications Inc. of Dallas without the required prior notice and approval from their firm.
Both a Finra hearing panel and its National Adjudicatory Council upheld some of the charges.
But on appeal, the SEC said that “the record demonstrates that e2 itself solicited” the clients. “NASD points to no evidence that [the brokers] were involved in these … purchases.”
Although the brokers in this case were ultimately absolved of the charges, selling away occurs very frequently and investors need to understand their right and options for recovery should they be involved in one of these unauthorized and illegal transactions.
Selling away occurs when a broker recommends or solicits the purchase of a security that is not approved for sale by the broker’s employing firm. Selling away cases often involve ponzi schemes, real estate partnerships and other forms of private investment.
As broker/dealers are responsible for supervising their agents, they may be responsible for any losses that occur from the unauthorized transactions. In other words, brokerage firms are typically liable for the conduct of their agents done during the course of their employment.
If you believe you have been sold an unauthorized investment that was not on your brokerage firm’s recommended list, please contact our offices for a free consultation.