The securities industry is highly regulated, and investment advisors must follow strict guidelines concerning the types of investments recommended and sold to investors. This is in order to protect the best interests of all parties involved in investing. A private securities transaction becomes an issue when a registered investment representative sells a client a security that has not been sourced and approved by the financial firm that employs the rep.
Rules and Rep Moonlighting
According to FINRA, a private securities transaction occurs when a licensed investment representative presents or sells a security or other type of investment that is not officially offered by the investment firm that employs him. Private securities can be any type of investment, including publicly traded stocks, bonds or funds to non-public investments offered by private parties.
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The rep commits a private securities transaction if she has any role promoting the contact between one of her clients and the outside investment opportunity. This means that just introducing a client to the seller of an unapproved investment would be classified as a private securities transaction. The rules do not allow these types of transactions because of the ethical and financial considerations they bring.
Reporting and Monitoring
An investment firm is responsible for all investment-related activities of the company's licensed representatives. According to Sonn Law Group, this means a representative of the firm is required by law to report any private securities transactions to her employer. The investment firm also is legally required to review the outside investment opportunity for its suitability and appropriateness.
Securities law makes investment firms responsible for all related activities of employees, even if the employee works outside of a firm's official presence. This means a licensed securities rep is not allowed to work or consult in any capacity as an investment advisor without obtaining approval from the securities firm where her license is registered. Following these ethics rules and regulations helps ensure transparency and protect the assets of everyone involved.
Important Investor Considerations
Any and all investment or financial products an investment rep presents to clients should be approved and offered by the firm he works for. If a rep wants to discuss an opportunity outside the types of investment securities offered by the investment firm, the rep may be trying to work a private securities transaction. This type of transaction can cost the rep his license and is a huge red flag. To make sure they are receiving the best advice, investors should ask if the opportunity was reviewed and approved by the rep's employer. If not, take heed and consider reporting the circumstances to the representative's employer.
Investment Firm Products
Investment firms can offer a wide range of products outside of stocks, bonds and mutual funds. These might include insurance products, real estate investments and private placement opportunities. A rep should be able to meet her client's financial needs with the products in the company's portfolio. Investors can protect themselves from shady or illegal "investments" by making sure that any offering shown by an investment rep is included in the financial products offerings of the rep's employer firm.