How Are Private Securities Transactions by Associated Persons Regulated by FINRA?

The Financial Industry Regulatory Authority (FINRA) requires registered representatives or non-registered employees of registered broker-dealers who participate in private securities transactions to comply with specific requirements.  For these types of private securities transactions, representatives must comply with FINRA Rule 3280, which replaced retired Rule 3040.

Under Rule 3280, no associated person can participate in a private securities transaction unless the transaction is conducted in accordance with the rule.   Prior to participating in any private securities transaction, the associated person must provide written notice to the member describing the proposed transaction and his or her role and stating whether he or she received or may receive selling compensation from the transaction.  For transactions in which the associated person has received or may receive compensation, the member shall advise the associated person in writing whether the member approves or disapproves of the transaction.  If the transaction is approved, it shall be recorded on the books of the member, and the transaction shall be supervised by the member as if it were executed on behalf of the member.  If the transaction is disapproved, the associated person shall not participate in the transaction.  If the transaction is not for compensation, the member shall provide the associated person with written acknowledgement of the notice of the transaction and may require the associated person to adhere to conditions in connection with participation in the transaction.

As defined by the rule, a private securities transaction is any securities transaction outside the regular course or scope of an associated person’s employment with a member, including but not limited to new offerings of securities which are not registered with the Commission.  The rule excludes transactions among immediate family members (as defined in FINRA Rule 5130), for which no associated person receives any selling compensation, and personal transactions in an investment company and variable annuity securities from the definition.  Selling compensation is defined as 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 but 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.