NASAA Series 63Ethical Practices and ObligationsMedium
An agent for a broker-dealer receives a request from a client to transfer funds from their brokerage account directly to the agent's personal bank account to facilitate a 'special private investment opportunity' that the agent is offering outside of the broker-dealer. The agent assures the client this is a 'can't miss' deal and that the broker-dealer is aware of his side activities. The client transfers the funds. This activity is best described as:
- AAuthorized outside business activity
- BA legitimate private placement
- CCommingling of funds
- DSelling away
Show answer & explanationAnswer & explanation
Correct answer: D. Selling away
Selling away occurs when an agent engages in securities transactions outside the regular scope of their employment with their broker-dealer, especially when the broker-dealer is unaware or has not approved of the activity. Soliciting funds for a 'special private investment opportunity' into a personal account, outside of the firm's supervision, is a classic example of selling away and often involves undisclosed conflicts and potential fraud.
Why the other options are wrong
- A. This is unlikely to be authorized given the transfer to a personal account and the 'special private investment opportunity' outside the firm's purview.
- B. While it might be a private placement, the critical issue is that it's being conducted by the agent outside the firm's oversight and through their personal account, making it 'selling away'.
- C. Commingling involves mixing client funds with the firm's funds or the agent's personal funds, but the primary issue here is the sale of an unapproved security product.
Selling Away
An agent's engagement in private securities transactions without the knowledge and written approval of their employing broker-dealer.
- Prohibited practice under the Uniform Securities Act and FINRA rules.
- Presents significant risks to clients due to lack of firm oversight.
- Often involves undisclosed compensation and potential for fraud.
Memory trick: Selling away means straying from the firm's path.