by Howard Haykin

For 14 years, a Centennial, CO-based broker-dealer (“Broker-Dealer”) had operated without a disciplinary action. The firm, whose business consists primarily of private placements and retailing equity securities, has 26 registered reps operating out of 3 branch offices.

But this Broker-Dealer apparently erred in 2016, and so it agreed to pay a $15K fine to settle FINRA charges that it failed to comply with its obligations to review, approve, document, and supervise private securities transactions ("PSTs") by 3 of its registered reps – in apparent violation of Rule 3280(c) and its own WSPs.

FINRA RULE 3280(C).    After a member firm has received written notice of a private securities transaction wherein an associated person has received or may receive selling compensation,' the firm must approve or disapprove the person's participation in writing. If the firm approves the associated person's participation in the transaction, the firm must then record the transaction on the firm's books and records and supervise the person's participation in the transaction as if the transaction was executed on behalf of the member.

FINRA FINDINGS.    In May 2016, the Broker-Dealer approved an outside business activity (“OBA”) of 3 registered reps - a limited liability company ("LLC"), whose membership interests the registered reps wanted to sell for the purpose of pooling investor funds to invest in a separate offering for which the Broker-Dealer was serving as placement agent. The 3 registered reps sold $2.5 million of LLC interests to customers, and then invested those funds in the separate offering for which they received selling compensation in the form of commissions paid by the Broker-Dealer.

However, FINRA was troubled by certain additional terms and conditions of the OBA. Since at least May 2016, the Broker-Dealer was aware that the 3 registered reps may receive additional compensation in the form of expense reimbursements, future profits, and an ownership interest in the LLC.

It was those additional terms and conditions that transformed the OBA into a PST. And even though the firm had properly posted the private placement on its books, and then properly accounted for the commissions paid to the registered reps on the original private placement, the Broker-Dealer erred when it failed to “supervise and maintain on its books and records” the transactions of the LLC as a separate and distinct PST.