What Is a Private Securities Transaction?

A private securities transaction involves specific financial activities conducted by individuals associated with a broker-dealer that fall outside their typical job responsibilities or the firm’s direct oversight. These transactions are subject to particular regulatory requirements.

Defining Private Securities Transactions

A private securities transaction, as defined by FINRA Rule 3280, refers to any securities transaction undertaken by an associated person of a FINRA member firm that occurs outside the regular course or scope of their employment with that firm. The rule applies broadly to any participation in such transactions, regardless of whether compensation is received.

Common examples of activities that fall under this definition include participating in private placements, which are offerings of securities not registered with the Securities and Exchange Commission, or selling interests in privately held companies. Other instances could involve arranging investments for clients in ventures not approved by the firm, or acting as a “finder” for issuers seeking new investors.

However, certain transactions are specifically excluded from this definition. These exclusions include personal transactions in investment company and variable annuity securities, as well as transactions between immediate family members where no selling compensation is received by the associated person.

A crucial distinction within private securities transactions is whether the associated person receives “selling compensation” for their involvement. Selling compensation encompasses any direct or indirect payment for the purchase or sale of a security, such as commissions, finder’s fees, securities, or rights to acquire securities. The presence or absence of this compensation significantly alters the regulatory obligations for both the associated person and their employing firm, leading to different levels of oversight and record-keeping requirements.

Associated Person Regulatory Requirements

Before engaging in any such activity, the associated person is required to provide prior written notice to their employing broker-dealer. This notice must detail the proposed transaction and outlining the associated person’s intended role within it.

A key piece of information that must be included in this written notice is whether the associated person has received or anticipates receiving any selling compensation in connection with the transaction. This disclosure is fundamental, as the firm’s subsequent actions and supervisory responsibilities are directly influenced by the presence of compensation.

If the associated person expects to receive selling compensation, the firm must provide a written response, either approving or disapproving their participation. Should the firm approve the transaction, it then assumes the responsibility to record the transaction on its official books and records, and to supervise the associated person’s involvement as if it were a transaction executed on behalf of the firm itself. Conversely, if the firm disapproves, the associated person is prohibited from participating in the transaction in any manner.

For transactions where the associated person will not receive any selling compensation, the requirements differ. While written notice to the firm is still mandatory, the firm is generally not required to officially approve the transaction or to record it on its books and records. Instead, the firm must provide a prompt written acknowledgment of the notice and has the discretion to impose conditions on the associated person’s participation or prohibit it entirely.

Broker-Dealer Supervision and Record Keeping

Upon receiving notice of a proposed private securities transaction, the broker-dealer has responsibilities, particularly when selling compensation is involved. The firm must review the proposed transaction to determine if it aligns with internal policies and regulatory standards. This review process helps prevent conflicts of interest and ensures compliance.

If the transaction involves selling compensation, the firm is required to formally approve or disapprove the associated person’s participation in writing. Should the firm grant approval, it incurs supervisory obligations. The transaction must then be recorded on the firm’s books and records, treating it as if it were a transaction executed directly by the firm.

This entails supervising the associated person’s involvement in the transaction to ensure adherence to securities laws and FINRA rules, similar to how the firm supervises its own business activities. The firm’s oversight extends to ensuring the transaction is conducted ethically and does not pose undue risks to investors.

For private securities transactions where no selling compensation is received by the associated person, the firm’s obligations are less extensive but still present. The firm must acknowledge receipt of the written notice provided by the associated person. While formal approval and ongoing supervision as a firm transaction are not required, the firm retains the right to impose conditions on the associated person’s participation or prohibit the activity if deemed necessary.