Private Securities Transactions (Selling Away)
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 of a registered person's employment with their member firm (FINRA Rule 3280).
- 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
The rules differ depending on whether compensation is involved:
| Scenario | Requirements |
|---|---|
| Compensation involved (direct or indirect) | Must provide prior written notice to the firm describing the transaction AND the compensation. Firm must approve before the person proceeds. If approved, the firm must supervise the activity as if it were the firm's own business. |
| No compensation involved | Must provide prior written notice to the firm. The firm may still impose conditions or prohibit the activity. |
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 difference is that with compensation the firm must also approve and supervise; without compensation the firm just needs to be notified.
- Compensation triggers two extra obligations. Notice alone is not enough. The firm must (1) approve the transaction and (2) 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).