This common compliance violation can make advisors unemployable
Q: Is it still considered “selling away” if a rep doesn’t receive any compensation?
A: The short answer is, yes.
Selling away refers to selling securities without processing the order through your firm or without your firm's permission or knowledge, and this practice is a violation of FINRA rules, whether or not compensation is involved.
FINRA Rule 3280 (Private Securities Transactions of an Associated Person) defines "selling compensation" as “any compensation paid directly or indirectly from whatever source in connection with or as a result of the purchase or sale of a security, including, though not limited to, commissions; finder's fees; securities or rights to acquire securities; rights of participation in profits, tax benefits, or dissolution proceeds, as a general partner or otherwise; or expense reimbursements.”
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So when you say that the rep didn’t receive any compensation, be sure to look beyond the typical finder’s fee or commission. It’s quite possible that the individual is receiving some sort of indirect compensation. Even if you’re certain that no compensation of any sort was paid, the rule still requires that the rep provide written notice to the member firm that she’s associated with.
Violating this rule has extremely serious consequences. You will almost certainly be terminated and you will likely find yourself on the receiving end of a FINRA disciplinary action
This notice must describe, in detail, the proposed transaction and the person’s proposed role therein. Thereafter, the member firm that received the notice must provide the associated person “prompt written acknowledgment of said notice and may, at its discretion, require the person to adhere to specified conditions in connection with his participation in the transaction.”
Remember, this presupposes that the registered representative is not receiving any compensation. If the rep does receive compensation, then the firm can outright prohibit the rep from participating in the transaction. If the member firm prohibits the representative from participating in the transaction, then the person cannot participate in the transaction in any manner, either directly or indirectly.
Violating Rule 3280 has extremely serious consequences. You will almost certainly be terminated and you will likely find yourself on the receiving end of a FINRA disciplinary action. It is a rare case where a rep that gets terminated for selling away can demonstrate that he was innocent of the violation and, consequently, you’re looking at fines and a suspension in addition to the termination. The resulting black mark on your record will make it increasingly difficult to get hired at larger, more reputable, firms.
I cannot tell you how often I see the pattern repeated. The rep finds herself at a smaller, less compliance oriented firm and winds up with another mark on her record; either for engaging in behavior that the firm encourages or because she gets terminated for failing to “go with the flow.” The additional black mark makes it harder to find work and so the rep winds up at even shadier firms until he’s ultimately unemployable or barred from the industry.
This happens with other rule violations as well, but for some reason, selling away seems to be one of the more common rules that trip up registered reps.