SIE: Outside Private Transactions

Outside Private Transactions

Private securities transactions are transactions made by an associated person outside the course of that person’s employment. For example, if a representative sells shares in a real estate partnership that is not a product of his firm, this would be considered a private securities transaction. Also known as selling away, the practice may include purchases or sales to the firm’s own customers or to people outside the firm. In either case, associated persons are prohibited from engaging in such transactions without first providing written notice to the member firm, in which they describe each transaction in detail, the person’s proposed role in it, and whether a selling commission will be part of the deal.

When a registered representative sells a product away, the firm will not have performed due diligence on the product. Nor will the firm have a record of the transaction or have reviewed it for customer suitability. Even though the firm had no knowledge of the activity, it will still be potentially liable for damages and arbitration costs if the deal goes bad.

Therefore, when an associated person receives selling compensation for a private securities transaction, the deal must not be completed without the member firm’s prior written approval. If approval is granted, the transaction must be recorded