Quick Answer
Private securities transactions are securities deals an associated person conducts outside their firm's business. Compensated deals require prior written notice plus firm approval and supervision. Uncompensated deals require prior written notice; the firm must acknowledge it in writing and may set conditions. Violations can bring suspension, bars, fines, and liability for customer losses.
While outside business activities (OBAs) cover non-securities business activities, private securities transactions involve actual securities deals conducted outside the firm. This is one of the most serious conduct violations in the industry.
What Is a Private Securities Transaction?
A private securities transaction (commonly called "selling away") is any securities transaction outside the regular course or scope of an associated person's employment with their member firm. The exact "course or scope of employment" phrasing comes directly from the regulation and is what you should expect to see on the exam.
- Includes transactions in any type of security: stocks, bonds, private placements, promissory notes, etc.
- The key factor is that the transaction occurs outside the firm's normal business
- Transactions among immediate family members where no selling compensation is received are excluded
Think of it this way: If a registered representative helps a friend buy shares in a private company, that is a securities deal happening outside the firm's umbrella. Even if no money changes hands for the favor, the firm still needs to know about it.
Two Categories: Compensation vs. No Compensation
Before taking part in any private securities transaction, with or without compensation, the person's written notice to the firm must:
- Describe the proposed transaction in detail
- Describe the person's proposed role in it
- State whether the person has received or may receive selling compensation
The firm's response then differs depending on whether compensation is involved:
| Scenario | Requirements |
|---|---|
| Compensation involved (direct or indirect) | Must provide prior written notice to the firm. The firm must tell the person in writing whether it approves or disapproves. If it approves, it records the transaction on its books and supervises it as if it were the firm's own business. If it disapproves, the person may not take part in any way. |
| No compensation involved | Must provide prior written notice to the firm. The firm must promptly acknowledge it in writing and may impose specified conditions on the person's participation. This rule does not prescribe the formal approval or disapproval decision used for compensated transactions. |
What Counts as "Compensation"?
Selling compensation is defined broadly and includes:
- Commissions
- Finder's fees
- Securities or rights to acquire securities
- Expense reimbursements
- Referral fees
- Non-cash benefits of value
Exam Tip: Gotchas
- "Compensation" includes indirect compensation. A registered person who receives a "thank you" gift of value for helping arrange a private placement has received compensation. Even expense reimbursements count. If there is any benefit flowing to the representative, it qualifies as compensation.
- Even with no compensation, prior written notice is still required. The firm must acknowledge the notice in writing and may set conditions; formal approval and supervision as the firm's own business apply when selling compensation is involved.
- Compensation triggers two extra obligations. Notice alone is not enough. The firm must (1) tell the person in writing whether it approves or disapproves and (2) if it approves, record the transaction on its books and supervise it as its own business.
Consequences of Selling Away
Violations of selling away rules can result in severe penalties:
- Suspension or bar from the securities industry
- Fines from FINRA
- Liability for customer losses: the representative may have to make customers whole
- Firm liability if the firm knew or should have known about the activity
Exam Tip: Gotchas
- The firm can be liable even if it did not explicitly approve the transaction. If the firm "knew or should have known" about selling away, it shares responsibility for customer losses.
- Selling away is among the most common reasons for industry suspensions and bars. Questions may test whether a representative faces penalties from FINRA, the firm, or both (the answer is potentially both).
What Should You Check on Exam Day?
- Can you define a private securities transaction, also called selling away, in the exact regulatory phrasing?
- Do you know what the written notice must describe, and what a firm must do once it approves a compensated private securities transaction?
- Can you explain why indirect compensation, like a gift or expense reimbursement, still counts as compensation?
- Do you know what notice is required for an uncompensated private securities transaction?
- Can you state why a firm can be liable for selling away even without giving explicit approval?