FINRA Suspends, Fines Representative for Private Securities Transactions Without Proper Firm Notice

This is an excerpt from FINRA’s Quarterly Disciplinary Review, January 2017

FINRA settled a matter involving a registered representative who participated in private securities transactions without providing proper notice to his firm. Between 2010 and 2015, while registered with a FINRA member, the representative participated in close to 40 private securities transactions on three different occasions without providing proper notice to his firm. In total, 27 people, most of whom were firm customers, invested over $3.5 million through the representative.

In the first instance, in 2010, the representative requested and received his firm’s permission to act as a business planning consultant to an entity two of his customers had founded. The representative exceeded the scope of the firm’s permissive involvement with the entity by soliciting the firm’s customers to purchase the entity’s 13 percent “Senior Notes.” The representative participated in 35 transactions through which 27 individuals, most of whom were firm customers, invested more than $2 million in the entity’s notes.

In the second instance, in 2014, the founders of the entity that issued the Senior Notes purchased a distressed real estate development. To finance the development project, the entity issued 12 percent Senior Notes. The representative recommended to two customers that they invest in the development project by purchasing Senior Notes.

The two customers invested a total of $750,000 to assist with the capital-raising
effort for the real estate development project. In the third instance, the representative participated in undisclosed private securities transactions by facilitating the development project investors’ conversion of their Senior Notes to notes issued through the entity’s parent company.

In each instance, the investments were made outside the representative’s firm, and
the representative did not provide prior notice to his firm of his participation in these securities transactions. The representative’s participation in the private securities transactions without proper notice to the firm violated NASD Rule 3040* (private securities transactions) and FINRA Rule 2010 (ethical standards). For this misconduct, FINRA suspended the representative from associating with any FINRA member in any capacity for two years and fined him $20,000.