Trends in Disciplinary Actions – Private Securities Transactions

by Julie Mendel | Jan 23, 2019
FINRA Trends in Disciplinary Action This month we continue our series on trends in disciplinary actions with a look at private securities transactions.

FINRA Rules dictate that private securities transactions can only be conducted by an agent or associated person while under the direct supervision of his or her firm and cannot proceed without prior written approval from their firm. The rule defines private securities transactions as:

Any securities transaction outside the regular course or scope of an associated person's employment with a member, including, but are not limited to, new offerings of securities which are not registered with the Securities and Exchange Commission.

Excluded from this definition are transactions among immediate family members for which no associated person receives:

  • any selling compensation (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) and
  • personal transactions in investment company and variable annuity securities

Prior to participating in a private securities transaction, an associated person must provide written notice to his or her firm that describes in detail the proposed transaction and the associated person's proposed role in the transaction. The notice must also disclose whether any selling compensation in connection with the transaction has been received. If a firm is notified of a transaction occurring that will result in an associated person receiving selling compensation, it is the responsibility of the firm to advise the associated person:

  • that their participation in the proposed transaction is approved or • that permission to participate in the proposed transaction is denied If the participation is approved, it must be recorded in the firm's books and records, and the firm must supervise the participation in the same manner as if the transaction were being executed on behalf of the firm.

If permission to participate is denied, then there is no recourse for the associated person, and that person cannot proceed.

Let’s look at an example. Unfortunately for one registered representative, FINRA imposed a bar from associating with any FINRA member firm in any capacity for seven months and a fine of $7,500 for violating these rules. Specifically, the registered representative:

  • participated in undisclosed private securities transactions
  • made false statements concerning his private securities transactions on his firm’s annual compliance questionnaires
  • arranged and participated in an in-person meeting between one of his customers—who was a professional athlete—and the acquaintance
  • used his personal e-mail address for communications with the customer and a private company

The final nail was the representative’s failure to disclose his private securities transaction to his member firm on at least two occasions.

Make sure your registered representatives are aware of the rules regarding private securities transactions and that your firm policies and procedures include this topic.

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