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Work-from-Home Investment Advisers May Not Be Properly Supervised and Could Victimise Customers, Investor Right Lawyers Caution

Published: 11 Oct 2021

As COVID-19 has caused employees all over the world to work remotely, investors need to be more aware than ever of the possibility that their advisers might be working without adequate supervision and could be engaging in securities-related misconduct. Specifically, investors should be aware that their brokers might be selling investment products not authorised by their brokerage firm, commonly referred to as “selling away.”

Selling away is when a broker solicits a client to purchase securities not held or offered by the brokerage firm, and not approved by the firm. Brokerage firms generally have lists of approved products that can be offered by their brokers to clients of the firm. Generally, these products have undergone due diligence screenings and have been identified by the firm’s screening personnel as legitimate products. When a broker sells away from the firm’s list of approved products, they run the risk of selling problematic, questionable, or outright fraudulent investment products for which due diligence has not been completed. The reason investment professionals sometimes sell such products is the high sales commissions those products typically offer to selling brokers. As a general rule, such transactions violate securities regulations and investors may be entitled to recover for any losses.

There typically is a reason why the adviser does not want to make his or her employer aware of the selling away – and that reason usually does not bode well for the investor. The adviser might be reluctant to share the sales commission with the firm – a violation of the industry rules – or he or she might already have concerns about the investment and might suspect that the firm will not approve it for sale.

In some instances, brokers may get approval from their firm to sell products not on the firm’s list of approved securities. The securities industry rules govern how brokers may handle the sale of private securities. At their core, these rules govern when individual brokers are allowed to sell away from their firm and what they need to do to get firm approval to conduct such a transaction.

The industry rules applicable to the sales of such products put an obligation on both brokers and brokerage firms. Advisers must disclose their proposed sale to the compliance department of their broker-dealer. After a thorough, accurate disclosure is made, a brokerage firm then has the responsibility to review the proposed private securities transaction. The firm may either approve the sale, or block the adviser from selling the product. Importantly, if a brokerage firm approves the sale, then that firm will assume legal responsibility for the trade. There are no exceptions to this rule. This means that the broker-dealer could potentially be held liable, should some type of misconduct occur.

On the other hand, if the firm decides to block an individual broker’s private transaction, then the broker cannot go forward with the deal. If a broker fails to make disclosure in the first place, of if a broker goes forward with a sell away despite being blocked by their firm, that individual has violated the applicable securities rules.

Brokerage firms have duties to adequately supervise the actions and associated persons of the firm. Compliance with these duties becomes critical when it comes to selling away. The securities industry rules require a firm to establish and maintain a system to supervise the activities of its associated persons that is reasonably designed to achieve compliance with the applicable securities laws and regulations.

The industry rules detail requirements for a brokerage firm to have reasonably designed written supervisory procedures to supervise the activities of its associated persons and the types of businesses in which it engages. Among other things, a firm's supervisory procedures must address supervision of supervisory personnel and provide for the review of a firm's investment banking and securities business, correspondence and internal communications, and customer complaints.

A broker-dealer’s failure to supervise the actions of its adviser could result in liability for the investors who lost money as a result of an improper investment recommendation by their stockbroker.

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Alan Rosca

Firm: Goldman Scarlato & Penny, P.C.
Country: USA - Ohio - Ohio

Practice Area: Securities Litigation

  • 23250 Chagrin Blvd. Suite 100,
    Beachwood
    OH 44122


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