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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