Selling Away

Selling away is one of the most common violations in the securities industry and a frequent topic on the Series 63 exam.

Definition

  • Selling away occurs when an agent effects securities transactions that are not recorded on the regular books or records of the broker-dealer (BD) the agent represents
  • Also called private securities transactions

The Written Pre-Approval Requirement

  • Any transaction an agent effects must be recorded on the BD's books unless the BD has authorized the off-book transaction in writing prior to execution
  • Written pre-approval from the BD is the only way to conduct an off-book transaction lawfully
  • Oral approval is not sufficient; it must be in writing
  • Informing the BD after the fact does not cure the violation

Exam Tip: Gotchas

  • Oral approval is not enough. Even if the agent's supervisor verbally says "sure, go ahead," the trade is still selling away until written authorization exists before execution.

Why Selling Away Is Prohibited

The prohibition exists to protect both customers and the supervisory structure:

  • The BD cannot supervise transactions it does not know about (FINRA Rule 3110 requires written supervisory procedures)
  • Customers lose the protections of the BD's compliance infrastructure, Securities Investor Protection Corporation (SIPC) insurance coverage, and dispute resolution processes
  • Selling away often involves high-risk, unregistered, or fraudulent securities (e.g., Regulation D private placements offered without BD approval)
  • The BD cannot fulfill its legal obligation to supervise agents if transactions occur outside its awareness

Common Selling Away Scenarios

  • An agent sells interests in a friend's private business venture to customers without BD knowledge
  • An agent recommends promissory notes or other unregistered investments to customers outside of the BD's platform
  • An agent participates in a Regulation D offering without disclosing it to the BD

In each case, the violation occurs regardless of whether the security itself is legitimate. The issue is the failure to get written pre-approval and record the transaction on the BD's books.

Exam Tip: Gotchas

An agent who sells securities outside of their BD's platform must have written pre-approval from the BD. If the agent merely informs the BD after the fact, the agent has engaged in selling away, even if the security was legitimate and the customer made money.