Selling Away

Selling securities away from the firm without the firm's written authorization is:

1. A.Encouraged to grow businessFirms do want production, which is what gives this its surface appeal. They want it on their own books, where it can be supervised and where the firm answers for it. Business the firm never sees is growth it cannot review, which is the opposite of what it encourages.
2. B.ProhibitedCorrect - selling away is barred without authorization.
3. C.A best practiceThe practice the rules actually call for is the reverse: bring the proposed transaction to the firm and obtain written authorization before doing anything. Skipping that step is the definition of the violation, not a superior way of working.
4. D.Allowed for exempt securitiesThis borrows a registration concept and applies it to a supervision problem. Whether the security needs to be registered says nothing about whether the agent's employer must know about the trade, and the prohibition is triggered by transacting off the firm's books regardless of what was sold.

Why: Effecting transactions not recorded on the employer's books without written authorization (selling away) is prohibited.

An agent effects securities transactions away from the firm without its authorization. This is:

1. A.Standard for top producersProduction volume is not a supervisory exemption. If anything the reasoning runs backward, since an agent handling more client money is the one whose transactions the firm most needs to see recorded.
2. B.Selling away, which is prohibitedCorrect - selling away is barred.
3. C.Independent entrepreneurshipAn agent cannot be independent and affiliated at the same time. The only reason he may transact at all is his association with a registered broker-dealer, so business done outside that association borrows the firm's standing while escaping its oversight.
4. D.Allowed if profitableThis judges the conduct by its result, which nobody knows at the time the rule is broken. The violation is complete when the transaction is effected without authorization, and a client who profits was exposed to the same absence of firm review as one who lost.

Why: Selling away - transacting outside the firm's knowledge and books without authorization - is prohibited.

A principal discovers that a representative has been privately selling shares of a friend's startup company to several of his brokerage customers, for compensation, without ever telling the firm. What must the principal do?

1. A.Treat this as a Rule 3280 violation requiring investigation and escalation as a serious supervisory matterCorrect. Undisclosed, compensated private securities transactions violate Rule 3280's notice-and-approval requirement and warrant serious escalation.
2. B.Require the representative to obtain retroactive customer consent to resolve the issueWrong. Retroactive customer consent does not cure the firm's failure to receive the required prior notice and approval.
3. C.Take no action since the transactions involved a friend rather than a firm customer relationshipWrong. The scenario states the sales were made to the representative's brokerage customers, which is squarely within Rule 3280's scope.
4. D.Note the private sales in the representative's file and take no further action since no customer has complainedWrong. Discovery of undisclosed private securities transactions requires investigation and escalation regardless of whether a complaint exists.

Why: This is undisclosed "selling away" in violation of Rule 3280, which requires prior written notice to the firm of any proposed private securities transaction, with written firm approval required when compensation is involved. The principal must treat this as a serious violation requiring investigation and escalation, not a minor paperwork lapse.

Embarrassed by a loss in a customer's account, a representative privately promises to reimburse the customer out of his own pocket if the position does not recover. No money has changed hands. Which rule does this implicate?

1. A.The prohibition on guaranteeing a customer against loss and sharing in an account, which the promise itself violates.Correct. The undertaking is the prohibited act, and no transfer of funds is needed to complete it.
2. B.The borrowing and lending rule, since the representative has committed his personal funds to a customer.Wrong. A contingent promise to make a customer whole is not a loan in either direction.
3. C.No rule, because a representative may use his own money as he pleases and the customer benefits.Wrong. The customer's apparent benefit is exactly the harm, since it misrepresents the risk of the position.
4. D.The outside business activity rule, because the promise creates a financial arrangement outside the firm's business.Wrong. He is not conducting a business away from the member; he is making a promise about a firm account.

Why: Guaranteeing a customer against loss, and sharing directly or indirectly in the profits or losses of a customer's account, are prohibited by their own rule and not by the borrowing and lending provisions. Sharing is permitted only where the member firm gives prior written authorisation, the customer agrees in writing, and the representative's participation is proportionate to his own financial contribution, with a narrow exception for immediate family accounts. A guarantee against loss is treated more strictly still, because it corrupts the customer's understanding of risk and disguises the true character of the investment. That no money has moved is irrelevant; the promise itself is the prohibited act.