What is a Broker-Dealer? - Davis Polk & Wardwell
What is a Broker-Dealer? - Davis Polk & Wardwell
What is a Broker-Dealer? - Davis Polk & Wardwell
Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
§ 1A:8.2 BROKER-DEALER REGULATION<br />
right of resc<strong>is</strong>sion under th<strong>is</strong> section. 476 Section 29(b) renders void not<br />
only those contracts that “by their terms” violate the Exchange Act,<br />
but also those that involve a violation when made or as in fact<br />
performed. 477 Although a contract engaging an unreg<strong>is</strong>tered brokerdealer<br />
in a securities transaction may not be illegal by its terms, the<br />
performance of it may involve a violation of section 15(a) of the<br />
Exchange Act. 478 In such cases, some courts have found the contract<br />
to be void and have allowed resc<strong>is</strong>sion under section 29(b). 479<br />
Courts have held that, under section 29(b), a contract <strong>is</strong> only<br />
voidable at the option of the innocent party, not the unreg<strong>is</strong>tered<br />
broker-dealer, 480 and that the unreg<strong>is</strong>tered broker-dealer <strong>is</strong> not entitled<br />
to any fees as yet unpaid. 481 However, when the services contracted for<br />
have been performed by an unreg<strong>is</strong>tered broker-dealer, courts have<br />
been unwilling to grant restitution of payments made for such<br />
services, except for those by which the defendant unreg<strong>is</strong>tered<br />
broker-dealer has been unjustly enriched. 482<br />
A plaintiff in a section 29(b) action does not have to prove a causal<br />
connection between its harm and the defendant’s violation of the<br />
broker-dealer reg<strong>is</strong>tration requirements. 483 A plaintiff can avoid a<br />
contract by showing that:<br />
(i) the contract involved a “prohibited transaction;”<br />
(ii) he or she <strong>is</strong> in contractual privity with the defendant; and<br />
476. Transamerica Mortgage Adv<strong>is</strong>ors, Inc. (TAMA) v. Lew<strong>is</strong>, 444 U.S. 11<br />
(1979); Royal Air Props., Inc. v. Smith, 312 F.2d 210, 213 (9th Cir. 1962).<br />
477. Reg’l Props., Inc. v. Fin. and Real Estate Consulting Co., 678 F.2d 552 (5th<br />
Cir. 1982).<br />
478. See id.<br />
479. See id.; Eastside Church of Chr<strong>is</strong>t, 391 F.2d 357 (5th Cir.), cert. denied, 393<br />
U.S. 913 (1968); Western Fed. Corp. v. Erickson, 739 F.2d 1439, 1443–44<br />
n.5 (9th Cir. 1984); Boguslavsky v. Kaplan, 159 F.3d 715, 722 n.6 (2d Cir.<br />
1998).<br />
480. Mills v. Elec. Auto-Lite Co., 396 U.S. 375, 387-88 (1970); Berkeley Inv.<br />
Group, Ltd. v. Colkitt, 455 F.3d 195 (3d Cir. 2006); Schneberger v. Wheeler,<br />
859 F.2d 1477, 1481–82 (11th Cir. 1988), cert. denied sub nom.; SEC v.<br />
Levine, 881 F.2d 1165, 1176 (2d Cir. 1989); Reserve Life Ins. Co. v.<br />
Provident Life Ins. Co., 499 F.2d 715, 726 (8th Cir. 1974); Greater Iowa<br />
Corp. v. McLendon, 378 F.2d 783, 792 (8th Cir. 1967).<br />
481. Regional Props., 678 F.2d 552.<br />
482. Id.; Prudential-Bache Secs., Inc. v. Cullather, 678 F. Supp. 601, 607 (E.D.<br />
Va. 1987); Energytec, Inc. v. Proctor, 516 F. Supp. 2d 660 (N.D. Texas<br />
2007).<br />
483. Regional Props., 678 F.2d 552; Eastside Church of Chr<strong>is</strong>t, 391 F.2d 357<br />
(5th Cir. 1968).<br />
1A–108