Outside Business Activities “Selling Away”

Investors will sometimes get pitched an investment by their financial advisor that doesn’t clear through normal channels. These types of transactions are considered to be outside business activities, and are also referred to as “selling away.”

Licensed financial advisors are required to transmit all of their business through the broker dealer with whom they are licensed, unless they have written permission to do otherwise. For a variety of reasons, financial advisors may choose to get involved with a startup company, whose investments aren’t approved for sale, and whose securities aren’t traded on a public market.

In a typical situation the financial advisor will approach an existing (or prospective client) touting the investment. If the client is interested he or she will write a check directly to the new company, bypassing the broker dealer. The investor will then receive the shares from the financial advisor or from the company.

This transaction is problematic on several levels; since the financial advisor’s license to sell securities only extends to transactions made through his broker dealer, the financial advisor engaged in an unlicensed sale of securities. And if the financial advisor was compensated, any exemption which could have applied to the transaction is lost, making the purchase of the security an unregistered transaction.

Clients are generally unaware that the financial advisor is “selling away” from the firm. Oftentimes the client calls the financial advisor at the firm, and discusses the transaction at the firm, or at other meetings where other, firm related business is discussed.

Brokerage firms are liable for the outside business activities of their agents, particularly as it pertains to existing clients of the firm.