Last time we spoke about pointers for firms dealing with selling away. Today, let's look at the issue from the broker's perspective. Selling away, technically termed participating in "private securities transactions" is governed by FINRA Rule 3040. See the Rule here. As I noted earlier, this Rule applies to all associated persons of a broker-dealer, not just registered folks. But, it is the registered folks who typically get caught up in this problem, in my experience.
Brokers should read the rule carefully and understand two of its main components. First, the Rule prohibits associated persons from "participat[ing] in any manner" in a private securities transaction without complying with the Rule. But what does that mean? It means what it says - you can't participate in any manner - meaning you can't effect the sale, you can't simply pass on documents to a potential investor, you can't function as a middleman, etc. So, if you're going to participate, you have to give your firm prior written notice.
The second important area is that if you are going to be compensated in any fashion, you have to receive written approval for the transaction from your firm. (See my earlier post for the requirements that a firm has to follow if they approve the transaction.) Compensation includes commissions, finder's fees, compensation for making a referral, etc. It is interpreted fairly broadly.
Often, brokers get conned into violating the Rule. They are presented with a product that they are convinced may be beneficial to their customers, offering a better return than what the market is currently bearing out. The issuer or distributor of the product may advise the broker that the product is not a security, or that no license is necessary to sell it. And the broker foolishly believes it and goes along. Then, along comes the regulators and plaintiff attorneys charging the broker with selling away, making unsuitable recommendations, selling unregistered securities, and more.
Take a quick look at SEC and FINRA disciplinary actions and you'll find numerous instances of brokers paying the consequences for selling away. Review arbitration awards and you'll see that the broker and his or her firm pays those consequences too, as a result of the principal/agent relationship. As a broker, be aware that no one else is responsible for your compliance, and consider whether your ability to work in the industry is too valuable to sell away.
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