Private Securities Transactions: Regulations for Advisors
Private securities transactions involve buying and selling securities outside public stock markets like the NYSE. They typically happen between two parties, sometimes with a broker-dealer as a middleman, and often involve individuals connected to registered broker-dealers. These transactions can include personal securities trading, private placements, or advisory services.
These transactions are generally riskier than public market investments due to illiquidity, lower transparency, and less oversight. Investors should thoroughly research, consult trusted advisors, and understand the risks and rewards before getting involved.
FINRA Rule 3280 Private Securities Transactions
FINRA Rule 3280 requires brokers and brokerage firm employees to notify their firms in writing before participating in any private securities transactions. This rule ensures transparency by requiring them to disclose the deal details, their role, and any expected compensation.
This rule helps protect investors by ensuring financial professionals follow regulations, manage conflicts of interest, and prioritize their clients’ best interests, fostering trust and accountability in the financial industry.
Participating in Private Securities Transactions
When individuals associated with a registered broker-dealer engage in securities transactions or related activities outside of the scope of their employment with the broker-dealer, this is considered a private securities transaction. Below are some examples:
Personal Investments: An associated person of a broker-dealer may engage in Private Securites Transactions when they buy or sell securities for their personal investment portfolio. This includes trading stocks, bonds, or other securities for their own account.
Private Placements: Private Securities Transactions may involve participation in private placements or investments in private companies. This can include investing in start-ups, venture capital opportunities, or other private securities offerings.
Advisory Services: Some individuals associated with broker-dealers may offer advisory services related to securities outside of their broker-dealer’s services. This could include providing investment advice, portfolio management, or financial planning services.
Compensation: Private Securities Transactions can also occur when associated persons receive compensation for their involvement in securities transactions or related activities. This compensation may come in the form of commissions, fees, or other financial benefits.
In one example, a financial advisor who works for a registered broker-dealer decides to invest in a private start-up company as an equity shareholder. They contribute a significant amount of their own funds to this investment, with the expectation of potential future returns if the start-up becomes successful. This investment in the private company is considered a Private Securities Transaction because it is separate from the services and offerings provided by their employing broker-dealer.
In this example, the financial advisor’s investment in the private start-up is a private securities transaction because it involves the purchase of securities (equity shares) outside the scope of their work at the broker-dealer. The advisor may have to disclose this investment to their employer and seek the necessary approvals to ensure compliance with regulatory requirements and manage potential conflicts of interest.
Selling Away & Private Securities Transactions
Hiring a FINRA Attorney
The White Law Group’s FINRA arbitration attorneys have handled over 700 FINRA arbitration claims involving unauthorized trading, unsuitable investments, fraud, negligence, churning/excessive trading, and improper use of margin. The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Seattle, Washington.
If you are concerned that your broker may be involved in misconduct involving private securities transactions, we may be able to help you. Please call our offices for a free consultation at 888-637-5510.
Our firm represents investors in all types of securities related claims, including claims involving stock fraud, broker misrepresentation, churning, unsuitable investments, selling away, and unauthorized trading, among many others.
Last modified: November 5, 2024
