What does it mean to Participate in a Private Securities Transaction?
Private Securities Transactions in the financial and securities world, involve buying and selling securities. Unlike the open stock markets like the NYSE, where anyone can trade, private securities transactions are different. They’re typically deals between two parties, and sometimes a middleman, such as a broker-dealer, is involved.
The key component of private securities transactions is how even though these transactions don’t happen within a broker-dealer’s usual operations, the people engaged in them usually have ties to a registered broker-dealer. They’re somehow connected to these brokerage firms. Private securities transactions can cover a variety of activities. It could be someone managing their personal securities trading, getting involved in private placements, or offering advisory services related to securities.
However, here’s the important part to understand, private securities transactions are not a free-for-all. Just like many other transactions, they’re subject to regulations to ensure fairness, investor protection, and market integrity. There are several rules in place to make sure everything is done by the book, and disclosures are very important. Disclosures are there to ensure that everyone is playing by the securities rules and to deal with any possible conflicts of interest.
It’s important to note that private securities transactions are considered to be riskier than traditional public market investments. In most cases, they often involve illiquid assets and may lack the same level of transparency and regulatory oversight. Investors considering these private securities transactions should conduct thorough due diligence, speak with their trusted financial professionals, and develop a full understanding of the potential risks and rewards prior to engaging in these transactions.
The Importance & Framework of FINRA Rule 3280
The Financial Industry Regulatory Authority (FINRA), is the self-regulator who oversees brokers and brokerage firms. FINRA Rule 3280 sets forth a framework for associated persons of broker-dealers that engage in private securities transactions. According to FINRA, before engaging in any private securities transaction, an associated individual must deliver a written notification to the member firm to which they are affiliated. This means that when you’re thinking about getting involved in a private securities deal, it’s important to give your employer all details to ensure transparency. You should tell them what the deal is all about, what your role in it will be, and if you expect to get paid for selling anything.
Further, FINRA rule 3280 plays a role in maintaining a level of trust and accountability in the financial industry, which is important for retail investors. It instills a barrier of protection for investors, ensuring that the people helping with investments are following the rules when they’re involved in private deals. Continually, this rule acts as a mediator as it helps address and manage any conflicts of interest. All investors want to know that their advisor is acting in their best interest, and this rule helps make that happen.
Overall, FINRA Rule 3280 ensures that financial professionals act in accordance with regulatory standards and prioritize the best interests of their clients, which enhances the overall protection and confidence of retail investors in the marketplace.
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
Private securities transactions and “selling away” are certainly related concepts in the securities industry, but they differ in their nature and regulatory treatment. Private securities transactions are primarily used when investors associated with a registered broker-dealer do some trading, but not through the company they work for. It’s similar to having an additional income source. They’re under the watchful eye of the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC). These two regulatory agencies monitor these investments to make sure everyone’s playing by the rules, and complying with securities laws regulations.
Further, selling away is when someone working for a registered broker-dealer makes the decision to to practice poor business ethics and goes against regulations. Typically, broker-dealers begin by selling investments that their company hasn’t given them the green light for. The root of the problem with selling away is that this action breaks rules. It’s like going off the grid in the world of securities and doing business without the proper authorization or following the regular rules set by the broker-dealer. Just like with private securities transactions it’s the broker-dealer’s job to keep an eye on investment movements to ensure their team isn’t selling away. If a registered representative does engage in selling away, they can get into serious trouble with regulators and might face penalties or disciplinary actions.
Private securities transactions and selling away both involve doing securities deals that go beyond what a broker-dealer usually allows. However, the real difference here is how they’re dealt with by the rules. With private securities transactions, there’s some supervision, and as long as you follow the disclosure and get the thumbs-up, you can go ahead. But selling away is different. It’s when investors stray from following the rules and do deals that their firm hasn’t approved, and that is what can get them into trouble with regulators. It’s not just about playing by the book; it’s about keeping the financial world in check and making sure your clients are in safe hands.
Hiring a Securities Fraud 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, securities fraud attorneys at The White Law Group may be able to help you. Please call our offices for a free consultation at 888-637-5510 or visit us on the web at https://whitesecuritieslaw.com.
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 3, 2023