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Regulatory Sanctions

WWW: OOPS! Firm Fined for Missing Private Securities Transactions

April 24, 2017
Broker-dealers commonly mistake ‘private securities transactions’ as ‘outside business activities’, which lead to fines and sanctions. Time to learn from others’ mistakes, like in this case.


Beaconsfield Financial Services, a broker-dealer based in Canonsburg, PA, agreed to pay a $12,500 fine to settle FINRA charges that it failed to reasonably supervise one of its registered rep’s private securities transactions.


BACKGROUND.    Beaconsfield has been a registered B/D with FINRA/NASD since 1984. The Firm conducts a general securities business and employs about 40 registered reps.


FACTS & CIRCUMSTANCES ACCORDING TO FINRA.    From June 2012 to February 2016, a registered rep (RR) of Beaconfield requested permission to be associated with an unaffiliated registered investment advisor (RIA). Beaconfield gave the RR its approval, but erroneously categorized the relationship as an “outside business activity.” The relationship should have categorized as a “private securities transaction.”


FINRA Rule 3280 defines “Private Securities Transaction” as any securities transaction outside the regular course or scope of an associated person’s employment with a member.”


Under FINRA rules, member firms must supervise the securities activity of RRs who engage in investment advisory activities away from the firm where those RRs participate in the execution of securities transactions on behalf of their investment advisor clients. That would include recording these securities transactions on the Firm's books and records or otherwise supervising these activities, as required. Beaconfield’s downfall was that it did not comply with these obligations, resulting in a violation.


DIFFERENTIATING AN OUTSIDE BUSINESS ACTIVITY FROM A PRIVATE SECURITIES TRANSACTION.    In its rulebook, under Rule 3270, FINRA advises members that, upon receiving notice of an employee’s outside business activity, … “A member also must evaluate the proposed activity to determine whether the activity properly is characterized as an outside business activity or whether it should be treated as an outside securities activity subject to the requirements of Rule 3280.   


So, how might the designated principal of a broker-dealer determine whether an employee’s activity constitutes a private securities transaction? One suggestion, according to ACA Compliance Group [See ACA's Compliance Alert, 4/7/16], is to ask the employee appropriate questions, such as:


  • Do you find, or assist others in finding, investors for any type of offering as part of your outside activity?
  • Will you ever be involved in buying or selling interests in any type of offering as part of your outside activity?
  • Do you receive direct or indirect compensation for involvement in any of the above activities?


A “Yes” answer to any of the above questions could indicate the employee’s involvement in private securities transactions. FINRA Rule 3280(b) requires that the employee provide written notice to the member prior to any manner of participation in a private securities transaction for another entity. In addition, the firm would have to supervise the activity related to the private securities transactions.


This case was reported in FINRA Disciplinary Actions for April 2017.

For details on this case, go to … FINRA Disciplinary Actions Online, and refer to Case #2016047658101.