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

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§ 1A:2.5 BROKER-DEALER REGULATION no-action relief to investment advisers that did not receive compensation for its activity of assisting securities transactions, 63 but denied no-action relief to investment advisers that proposed to receive transaction-related compensation. 64 The SEC has identified the receipt of transaction-related compensation as a factor in its decision to deny no-action relief to some stock bulletin boards. 65 Although the SEC has previously granted no-action relief under limited circumstances in which a celebrity acting as finder “sold his rolodex,” 66 and would receive a success-based fee, it has since publicly distanced itself from that precedent. 67 The SEC has brought enforcement actions against persons for violation of section 15(a) registration requirements partly based on the fact that they had received transaction-based compensation. 68 Receiving transaction-related compensation, however, is not the only factor that the SEC has considered in its decision to grant or deny no-action relief or bring enforcement actions. For example, even in the absence of commissions or other specific transaction-related fees, the SEC has declined to grant no-action relief regarding the broker-dealer registration of an investment adviser that proposed to locate issuers, solicit new clients, and act as a customers’ agent in structuring or 63. See McGovern Advisory Group, Inc., SEC No-Action Letter (Aug. 7, 1984) (the company assisted securities transactions by transmitting orders for securities to registered broker-dealers). 64. See Boston Advisory Group, SEC Denial of No-Action Request (Sept. 2, 1980). 65. See King & Spalding, SEC No-Action Letter (Nov. 17, 1992); National Royalty Exchange, SEC Denial of No-Action Request (Dec. 21, 1988). 66. A “finder” is a person who places potential buyers and sellers of securities in contact with one another for a fee. For more information about “finders,” see infra 1A:2.6[A]. 67. See Paul Anka, SEC No-Action Letter (July 24, 1991), in which the SEC granted no-action relief despite the fact that Anka received a transactionbased finder’s fee for units sold either to Anka himself or to investors he identified without any involvement of Anka in the sales. Although the Paul Anka letter is still part of the SEC staff ’s guidance, in a number of public speeches, the SEC staff has indicated that it would not provide no-action relief under a comparable fact pattern as regards compensation arrangements today. See, e.g., John W. Loofbourrow Associates, Inc, SEC Denial of No-Action Request (June 29, 2006); Comments by Kristina Fausti, Special Counsel, Office of Chief Counsel, SEC Division of Trading and Markets, at the Private Placement Broker and M&A Broker Panel at the SEC’s Forum on Small Business Capital Formation (Nov. 20, 2008); Brumberg, Mackey & Wall, P.L.C., SEC Denial of No-Action Request (May 17, 2010). 68. SEC v. FTC Capital Mkts., Inc. et al., Civil Action No. 09-cv-4755 (S.D.N.Y. May 20, 2009); SEC v. UBS AG, 100:09-CV-00316 (D.D.C. Feb. 18, 2009); SEC v. Clean Care Tech., Inc., et al., 08 CIV 01719 (S.D.N.Y. Feb. 21, 2008); SEC v. Black, No. 8:00CV383-T-26B (M.D. Fla. Feb. 25, 2000); SEC v. Milken and MC Group, 98 Civ. 1398 (S.D.N.Y. Feb. 26, 1998). 1A–18
What Is a Broker-Dealer? § 1A:2.6 negotiating transactions. 69 In addition, the SEC has brought enforcement actions for violation of section 15(a) against persons who had induced and attempted to induce the purchase and sale of securities for the accounts of others. 70 § 1A:2.6 Specific Contexts [A] Finders As noted above, the SEC staff has historically recognized a very narrow exception to the broker-dealer registration requirements for certain “finders.” 71 A “finder” is a person who places potential buyers and sellers of securities in contact with one another for a fee. There is no “finder exception” in the Exchange Act or SEC rules; instead, the finder analysis is based on SEC no-action letters. The SEC’s decision to grant no-action treatment in some cases to permit finders to engage in limited activities without registration as broker-dealers is presumably based on the idea that certain limited activities in relation to securities transactions do not create risks sufficient to warrant registration. [B] Business Brokers, Private Placement Agents, and M&A Advisers [B][1] Private Placement Agents Private placements agents must register as broker-dealers under the Exchange Act. A security sold in a transaction that is exempt under the Securities Act of 1933 (the “Securities Act”) is not necessarily an “exempted security” under the Exchange Act. 72 Therefore, a person who sells securities through private placements that are exempt from registration under the Securities Act is not exempted from registration as a broker-dealer under the Exchange Act, unless that person otherwise falls within the finder exception or within some other registration exemption. 73 69. See PRA Securities Advisers, L.P., SEC Denial of No-Action Request (Mar. 3, 1993). 70. See SEC v. Am. Energy Resources Corp., et al., Case No. 08-CV-01847-REB- BNB (D. Colo. Aug. 28, 2008); SEC v. Harbour Bay Fin. Co., Civil Action No. 90-3580 (E.D.P.A. May 25, 1990). 71. See, e.g., Paul Anka, SEC No-Action Letter (July 24, 1991). 72. See SEC Division of Trading and Markets, Guide to Broker-Dealer Registration (Apr. 2008) [hereinafter SEC Guide to Broker-Dealer Registration], available at www.sec.gov/divisions/marketreg/bdguide.htm. 73. See id.; John W. Loofbourrow Associates, Inc., SEC Denial of No-Action Request (June 29, 2006). (Broker-Dealer Reg., Rel. #9, 9/10) 1A–19
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SBS markets. In particular, with re
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