Private Securities Transactions - Selling Away

Private Securities Transactions - Selling Away:

An associated person may not engage in any private securities transaction without first obtaining the prior approval of his broker/dealer. If a registered representative sells an investment product that his employing firm does not conduct business in, without the members knowledge, then the associated person is guilty of selling away.

What is a private securities transaction?

FINRA Rule 3280(e)(1) defines a private securities transaction as any securities transaction outside the regular course or scope of an associated person's employment with a member (broker/dealer), including, though not limited to, new offerings of securities which are not registered with the Securities and Exchange Commission, provided however that transactions subject to the notification requirements of Rule 3050, transactions among immediate family members (as defined in Rule 2790), for which no associated person receives any selling compensation, and personal transactions in investment company and variable annuity securities, shall be excluded.

Specifically, FINRA Rule 3280, labeled Private Securities Transactions of an Associated Person, provides that:

(a) Applicability:

No person associated with a member shall participate in any manner in a private securities transaction except in accordance with the requirements of this Rule.

(b) Written Notice:

Prior to participating in any private securities transaction, an associated person shall provide written notice to the member with which he is associated describing in detail the proposed transaction and the person's proposed role therein and stating whether he has received or may receive selling compensation in connection with the transaction; provided however that, in the case of a series of related transactions in which no selling compensation has been or will be received, an associated person may provide a single written notice.

(c) Transactions for Compensation:

(1) In the case of a transaction in which an associated person has received or may receive selling compensation, a member which has received notice pursuant to paragraph (b) shall advise the associated person in writing stating whether the member:

(A) approves the person's participation in the proposed transaction; or

(B) disapproves the person's participation in the proposed transaction.

(2) If the member approves a person's participation in a transaction pursuant to paragraph (c)(1), the transaction shall be recorded on the books and records of the member and the member shall supervise the person's participation in the transaction as if the transaction were executed on behalf of the member.

(3) If the member disapproves a person's participation pursuant to paragraph (c)(1), the person shall not participate in the transaction in any manner, directly or indirectly.

(d) Transactions Not for Compensation:

In the case of a transaction or a series of related transactions in which an associated person has not and will not receive any selling compensation, a member which has received notice pursuant to paragraph (b) shall provide the associated person prompt written acknowledgment of said notice and may, at its discretion, require the person to adhere to specified conditions in connection with his participation in the transaction.

Because of the liability placed upon the broker/dealer by this rule, it is the exception rather than the rule that a broker/dealer will approve a registered representative to become involved in a private securities transaction. Consequently, most private securities transactions are conducted by the registered representatives without his employer's approval. This is called selling away.

If the reader has become involved in a private securities transaction that was sold away from the firm, the firm may still be liable for the acts of its registered representative under the legal doctrine of respondeat superior or as a result of the fact that the firm failed to reasonably supervise its registered representative. Thus, if you have invested in a private securities transaction, which was sold to you by your registered representative, you have two means available to seek recompense for your losses. You can look to the issuer of the investment or you can proceed against your registered representative and his employing firm, keeping in mind that both actions can run simultaneously.

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