Private Securities Transaction

A registered representative gives her member firm written notice that she intends to start a landscaping company. What is the firm required to do with that notice?

1. A.Evaluate whether the activity would compromise her duties to the firm and its customers and whether it is really a securities activity of the firm.Correct. That two-part evaluation, followed by a recorded decision to permit, limit, or prohibit, is precisely what the rule demands of the firm.
2. B.Forward the notice to FINRA, which reviews the proposed activity and determines whether the representative may proceed.Wrong. FINRA never sits in judgment on individual outside activities; the supervisory judgment is the member firm's to make and to document.
3. C.Place the notice in her personnel file, since a business unrelated to securities requires no substantive review.Wrong. The rule reaches any business activity outside the scope of the relationship, and a non-securities venture can still consume time or create conflicts.
4. D.Grant written approval before she begins, because every outside activity requires the firm's affirmative consent.Wrong. Affirmative written approval belongs to compensated private securities transactions; an outside business activity requires prior written notice.

Why: Written notice of an outside business activity triggers an affirmative duty on the firm, not a filing obligation. The firm must consider whether the proposed activity will interfere with or otherwise compromise the representative's responsibilities to the firm and to its customers, and whether the activity should properly be treated as a securities activity of the firm itself. Having done so, the firm may impose conditions or limitations, or prohibit the activity outright, and it must keep a record of its decision. If the landscaping venture were instead a securities-selling venture, the second half of that analysis would pull it out of the outside-activity rule entirely and into the private securities transaction rule.

A representative wants to sell a private placement of his own outside company -- a business he personally founded and owns -- to several of his brokerage customers. What must the principal recognize about this arrangement?

1. A.This is acceptable as long as the representative discloses his ownership informally to each customerWrong. Informal disclosure alone does not satisfy the required notice-and-approval process, nor does it resolve the conflict of interest.
2. B.This should be processed as a routine private securities transaction like any other referralWrong. This misses the significant additional conflict-of-interest dimension created by the representative's personal ownership of the company.
3. C.This raises both Rule 3280 private securities transaction requirements and a serious conflict of interest requiring heightened scrutinyCorrect. The representative's personal ownership creates a serious conflict of interest layered on top of the Rule 3280 notice-and-approval requirement.
4. D.This is not a private securities transaction at all, since the representative owns the company being soldWrong. Personal ownership does not remove the transaction from Rule 3280's scope; if anything, it heightens the concern.

Why: This raises overlapping concerns: it is a private securities transaction requiring notice and firm approval under Rule 3280, and it presents a significant conflict of interest given the representative's personal ownership stake. The principal must treat this with heightened scrutiny, not process it as a routine private placement referral.

A registered representative sells a private placement of an unaffiliated company in which he has no personal ownership interest, believing that because he does not personally benefit from an ownership stake, he does not need to provide his firm with prior written notice of the activity. A principal is asked whether this reasoning is correct. What should she explain?

1. A.The reasoning is correct, since the notice requirement is triggered only when the representative personally holds an ownership stake in the issuer.Wrong. The notice requirement applies to the private securities transaction itself, regardless of ownership interest.
2. B.The reasoning is incorrect; the prior written notice requirement applies to the private securities transaction regardless of whether the representative has an ownership interest.Correct. The notice requirement applies regardless of the representative's ownership interest.
3. C.The reasoning is correct as long as the representative does not receive any commission on the sale.Wrong. The absence of commission doesn't eliminate the notice requirement for the private securities transaction.
4. D.The reasoning is correct only if the customers purchasing the private placement are also accredited investors.Wrong. The customers' accredited status doesn't affect the representative's own notice obligation to the firm.

Why: The obligation to provide the firm with prior written notice of a private securities transaction applies regardless of whether the representative personally holds an ownership stake in the issuer; the absence of an ownership interest does not eliminate the notice requirement for the transaction.

A principal discovers that a representative has been privately selling shares of a friend's startup company to several of his brokerage customers, for compensation, without ever telling the firm. What must the principal do?

1. A.Treat this as a Rule 3280 violation requiring investigation and escalation as a serious supervisory matterCorrect. Undisclosed, compensated private securities transactions violate Rule 3280's notice-and-approval requirement and warrant serious escalation.
2. B.Require the representative to obtain retroactive customer consent to resolve the issueWrong. Retroactive customer consent does not cure the firm's failure to receive the required prior notice and approval.
3. C.Take no action since the transactions involved a friend rather than a firm customer relationshipWrong. The scenario states the sales were made to the representative's brokerage customers, which is squarely within Rule 3280's scope.
4. D.Note the private sales in the representative's file and take no further action since no customer has complainedWrong. Discovery of undisclosed private securities transactions requires investigation and escalation regardless of whether a complaint exists.

Why: This is undisclosed "selling away" in violation of Rule 3280, which requires prior written notice to the firm of any proposed private securities transaction, with written firm approval required when compensation is involved. The principal must treat this as a serious violation requiring investigation and escalation, not a minor paperwork lapse.