FINRA Rule 3280 prohibits registered representatives and financial advisors from engaging in private securities transactions, also known as “selling away,” without providing prior written notice to and receiving prior written approval from their employer firm.
The rule does not prohibit such transactions, it simply requires notice and approval. However, most firms will not give approval because of the potential liability if they do not conduct sufficient due diligence.
The rule requires that prior to participating in any private securities transaction, 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.
Transactions for Compensation
(1) In the case of a transaction in which an associated person has received or may receive selling compensation, a member which has received notice pursuant to paragraph (b) shall advise the associated person in writing stating whether the member:
(A) approves the person’s participation in the proposed transaction; or
(B) disapproves the person’s participation in the proposed transaction.
(2) If the member approves a person’s participation in a transaction pursuant to paragraph (c)(1), 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.
(3) If the member disapproves a person’s participation pursuant to paragraph (c)(1), the person shall not participate in the transaction in any manner, directly or indirectly.
Transactions Not for Compensation
In the case of a transaction or a series of related transactions in which an associated person has not and will not receive any selling compensation, a member which has received notice pursuant to paragraph (b) shall provide the associated person prompt written acknowledgment of said notice and may, at its discretion, require the person to adhere to specified conditions in connection with his participation in the transaction.
Examples of Selling Away
Some examples of a violation of FINRA Rule 3280 include:
- A registered representative sells shares of a private company to a client without informing their employer firm or obtaining approval.
- A financial advisor solicits investments in a hedge fund without disclosing the investment opportunity to their employer firm or obtaining approval.
- A registered representative solicits investments in a real estate development project without disclosing the investment opportunity to their employer firm or obtaining approval.
- A financial advisor solicits investments in a business opportunity without disclosing the investment opportunity to their employer firm or obtaining approval.
FINRA regularly conducts reviews and investigations into allegations of selling away. Such investigations can have a significant impact on an advisor’s registration and public disclosures. If you are the subject of such an investigation, call the securities attorneys at Sallah Astarita & Cox, LLC for assistance in responding to FINRA’s inquiries.
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