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Regulatory Sanctions

Firm Sees Red (Flags) Over Private Securities Transactions

October 30, 2017



by Howard Haykin


It has become a recurring disciplinary theme. A firm, a supervisor, or a registered rep violates FINRA rules and firm policies by failing to report or adequately supervise private securities transactions. If PSTs are on FINRA’s radar, why have they not yet grabbed the attention of firms and their associated persons?


Mercury Securities agreed to pay a $5 fine to settle FINRA charges that it failed to comply with its obligations to review, approve, document and supervise private securities transactions disclosed by 3 of its registered reps. A lower fine was imposed after considering, among other things, the firm’s revenues and financial resources.


BACKGROUND.    Mercury Securities, a San Rafael, CA-based firm, became a FINRA member in 1996. The firm currently employs 6 individuals, including 4 registered reps, who operate out of the home office OSJ and a registered branch location. Registered personnel are primarily engaged in capital raising efforts for pooled investments, including hedge funds. Mercury has no disciplinary history.


FINRA FINDINGS.    Between March 2013 through October 2015 (the “relevant period'), Mercury approved outside business activities of 3 representatives who, as it turned out, were engaging in private securities transactions ("PSTs") for compensation through those outside businesses ("OBAs").


►   The firm’s WSPs stated that the firm’s representatives were prohibited from engaging in [PSTs] unless the representative provided a written notice containing information about the proposed transactions to the firm, which would then approve or disapprove them in writing.
►   The firm’s WSPs further provided that if it approved the proposed [PSTs], it would record the transactions on its books and records and supervise the transactions.


That said, the firm failed to pick up on red flags that the reps were engaging in private securities transactions. One such red flag included disclosures made by those representatives in connection with their outside business activities. As a result, the firm failed to follow its procedures by:

not collecting sufficient information about those private securities transactions;

  • not approving or disproving those transactions;
  • not recording those transactions on its books and records; and,
  • not adequately supervising the transactions as if they were executed on the firm’s behalf.


FIRM RESPONDS TO FINRA’S CHARGES.    In response to this AWC, the firm issued the following statement:

  • The firm’s WSPs now require registered reps conducting RIA activity away from the firm to provide the firm real time access to the RIA’s custodian’s trading platform to supervise such activity.
  • The firm’s WSPs now require registered reps conducting private securities transactions to disclose each transaction to the firm before it occurs and to provide sufficient documentation regarding the details as outlined in the firm’s WSPs.


FINANCIALISH TAKE AWAYS.    It’s once again worth differentiating Outside Business Activities (“OBAs”) from Private Securities Transactions (“PSTs”). Then, maybe, firms will prioritize enforcement of these rules – in their Written Supervisory Procedures (“WSPs”) and Continuing Education Programs (“CEPs”).


FINRA Rule 3270. Outside Business Activities of Registered Persons.  

No registered person may be an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm, unless he or she has provided prior written notice to the member, in such form as specified by the member. Passive investments and activities subject to the requirements of Rule 3280 shall be exempted from this requirement.


FINRA Rule 3280. Private Securities Transactions of an Associated Person. 

"Private securities transaction" shall mean any securities transaction outside the regular course or scope of an associated person's employment with a member, including, though not limited to, new offerings of securities which are not registered with the Commission, provided however that transactions subject to the notification requirements of Rule 3210, transactions among immediate family members (as defined in FINRA Rule 5130), for which no associated person receives any selling compensation, and personal transactions in investment company and variable annuity securities, shall be excluded.
No person associated with a member shall participate in any manner in a private securities transaction (PST) except in accordance with the requirements of this Rule. Prior to participating in any PST, an associated person shall provide written notice to the member with which he is associated describing in detail the proposed transaction and the person's proposed role therein and stating whether he has received or may receive selling compensation in connection with the transaction; provided however that, in the case of a series of related transactions in which no selling compensation has been or will be received, an associated person may provide a single written notice.


In the case of a PST in which an associated person has received or may receive selling compensation, a member which has received notice shall advise the associated person in writing stating whether the member: (i) approves the person's participation in the proposed transaction; or, (ii) disapproves the person's participation in the proposed transaction. If the member approves a person's participation in a transaction, the transaction shall be recorded on the books and records of the member and the member shall supervise the person's participation in the transaction as if the transaction were executed on behalf of the member. If the member disapproves a person's participation, the person shall not participate in the transaction in any manner, directly or indirectly.


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

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2015043459301.