What is a Broker-Dealer? - Davis Polk & Wardwell

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