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Investments

Investing in Private Securities Transactions

October 24, 2019

by Howard Haykin

 

 

A Private Securities Transaction (“PST”) is any securities transaction relating to new offerings of securities which are not registered with the Securities and Exchange Commission (“SEC”). A broker may participate in a PST only after receiving permission from their firm.

 

 

A broker was recently barred from the industry after he engaged in undisclosed and unapproved private securities transactions. Without telling his brokerage firm, Foresters Equity Services, and this broker sold over $2.7 million in promissory notes that were issued by the Woodbridge Group of Companies, a purported real estate company. For his efforts, the broker earned $110,000 in commissions. However, the promissory notes soon became worthless when Woodbridge filed for bankruptcy.

 

 

SAFEGUARDS FOR PRIVATE SECURITIES TRANSACTIONS.    Securities rules and regulations are designed to safeguard investors who purchase PSTs from registered brokers. Firms that permit their brokers to participate in PSTs and earn commissions on these offerings are required to supervise their brokers’ activities and to keep a record of all sales - as if the transactions were executed on behalf of the firm. Unfortunately, Foresters Equity Services was never alerted and did not provide oversight.

 

Because many brokers don’t care about the prohibitions and figure that no one would find out about their outside sales, investors should be prepared to devise their own safeguards. Here are 2 - - 

 

  • Don’t invest in a private securities transaction unless your broker or financial adviser has provided assurance that he or she received firm approval. [Note: If you don’t trust your broker to tell you the truth, contact the a branch manager and give some thought to switching brokers.]

 

  • Before investing, get advice from a trusted independent individual or financial watchdog - someone who can help conduct some form of due diligence on the PST offering.

 

 

[Click on FINRA Rule 3280 for details on PSTs by Associated Persons of Broker-Dealers.]

[Click on FINRA AWC #2018057766401 for details on this particular case.]