The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) continue to stress that the obligation under FINRA Rule 3280, Private Securities Transaction (PST) to disclose personal securities transactions to one’s employing financial institution extends beyond trades executed through another registered firm. This requirement also encompasses personal investments in limited liability companies (LLCs) and limited partnerships (LPs) made outside of, and away from, their registered firm.
Under FINRA Rule 3280, a PST is any securities transaction outside the regular course or scope of an associated person’s employment with a member firm, including new offerings of unregistered securities. This definition expressly includes the purchase or sale of private placements away from the firm, even when the associated person is investing for their own account.
Regulatory Expectations and Requirements
Before engaging in a PST, an associated person is required to provide their firm with prior written notice. This notice must outline the details of the proposed transaction, the individual’s role in the transaction, and whether any form of selling compensation, direct or indirect, will be received. Once the notice is submitted, the firm’s obligations depend on whether compensation is involved. If selling compensation is to be received, the firm must respond in writing with either an approval or disapproval. Any approved transaction must be recorded on the firm’s books and records to evidence review of the activity. While it is not recorded on the financial statements, it would be supervised as though it was executed directly by the firm. If no compensation is involved, the firm must still acknowledge receipt of the notice in writing, although it is not required to supervise the transaction.
Importantly, there are no exceptions for purely passive investments. Even when an associated person is investing solely for their own account and is not soliciting other investors, the transaction may still qualify as a PST if it involves a securities transaction conducted outside of the firm’s supervision.
Why This Matters
Failure by an associated person to provide prior written notice of a private securities transaction, whether compensated or not, can result in violations of FINRA Rule 3280 and the firm’s written supervisory procedures. Such failures may lead to internal disciplinary action, heightened regulatory scrutiny, or formal sanctions from FINRA or the SEC.
The obligation does not rest solely with the representative. Once a notice is submitted, the firm is required to respond in writing, determine whether the activity is permissible, and, if selling compensation is involved, record and supervise the transaction as though executed through the firm. Firms that fail to fulfill these supervisory and recordkeeping obligations face their own exposure to enforcement actions, fines, and reputational harm.
FINRA has repeatedly emphasized in Regulatory Notices and guidance updates that private placements purchased away from the firm constitute PSTs subject to disclosure, firm review, and, where applicable, active supervision. Both firms and registered persons share responsibility for ensuring these transactions are properly reported, evaluated, and documented in compliance with applicable rules.
Best Practices for Associated Persons
Associated persons should begin by reviewing their firm’s Written Supervisory Procedures (WSPs) to understand the specific requirements governing PSTs and other personal securities activities. Any investment in a private LLC or LP that is made outside of the firm’s platform should be disclosed to the compliance department, even if the investment is believed to be purely personal or passive in nature.
Prior to participating in such an investment, the associated person should submit the required written notice, providing all relevant details of the transaction. Once the firm has responded, either by granting approval or acknowledging receipt, copies of all related correspondence should be retained to ensure documentation is available in the event of a future regulatory inquiry or examination.
Best Practices for Firms
Firms should ensure their WSPs clearly define what constitutes a PST, including examples such as personal investments in private LLCs and LPs made outside of the firm. Policies should specify the notice and approval process, outline supervisory responsibilities, and address recordkeeping obligations under FINRA Rule 3280.
Additionally, compliance departments should provide periodic training to associated persons, reinforcing the requirement to disclose and, where applicable, obtain approval for PSTs, regardless of whether the transaction is compensated or purely personal. Firms should maintain a centralized process for receiving, reviewing, and responding to PST notices, and should document all approvals, acknowledgements, and supervisory actions in accordance with regulatory requirements.
Finally, to mitigate regulatory risk, firms should also conduct periodic reviews of employees’ outside investments, confirm that required notices have been submitted, and monitor for unreported PST activity through trade reviews, public filings, and other due diligence measures.
Bottom Line
The requirement to disclose personal securities transactions is not limited to public market trades. Private LLC and LP investments, particularly when acquired through a private placement outside the firm, are generally treated as PSTs under FINRA Rule 3280, triggering specific notice, approval, and recordkeeping requirements. Both associated persons and firms share responsibility for ensuring compliance with these obligations to avoid regulatory scrutiny or sanctions.