This practice involves a financial advisor offering or executing securities transactions that are not recorded on the books and records of their brokerage firm. It essentially means conducting securities business outside of the oversight and control of the registered broker-dealer they are associated with. An example could be an advisor recommending a private placement investment to a client without informing or obtaining approval from their firm.
The importance of understanding this activity stems from the regulatory and compliance risks it poses. Brokerage firms are responsible for supervising the activities of their registered representatives. When such activities occur without the firm’s knowledge, it undermines the firm’s ability to ensure compliance with securities laws and protect investors. Historically, regulatory bodies have levied significant fines and penalties against firms where this practice has been identified, highlighting the potential for significant financial and reputational damage.