FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationProfessional Conduct and Ethical ConsiderationsMedium
A registered representative is asked by a close family friend to invest a substantial sum of money in a private equity offering that is not sponsored by the representative's firm. The representative agrees to facilitate this investment outside of their firm's supervision. What is the most appropriate action the representative should have taken?
- ADecline the investment opportunity as it is outside the scope of their employment.
- BProceed with the investment, but disclose it to their firm only after the transaction is complete.
- CObtain prior written approval from their firm before participating in the investment.
- DInvest their own money alongside the client to demonstrate confidence in the offering.
Show answer & explanationAnswer & explanation
Correct answer: C. Obtain prior written approval from their firm before participating in the investment.
Engaging in private securities transactions (selling away) requires prior written consent from the firm. Without this, the representative is violating FINRA rules and potentially exposing the firm and themselves to liability.
Why the other options are wrong
- A. Declining is an option, but the question asks for the 'most appropriate action' if they were to participate.
- B. Disclosure after the fact is insufficient and still constitutes a violation of 'selling away'.
- D. Investing personal funds does not mitigate the need for firm approval for private securities transactions.
Selling Away (Private Securities Transactions)
Participating in a securities transaction outside the regular course or scope of an associated person's employment with a member firm, without the firm's prior written consent.
- Requires prior written approval from the firm.
- Firm must record the transaction on its books and records.
- Failure to obtain approval is a serious FINRA violation.
Memory trick: For private deals, get firm's 'Yes' in writing, or it's a big mess.