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

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§ 1A:2.6 BROKER-DEALER REGULATION [B][2] M&A Advisers Persons engaged in merger and acquisition activities are subject to the broker registration requirements when these activities involve, for example, a sale or exchange of securities. 74 Whether an intermediary in an M&A transaction would be considered to be a broker depends on the precise nature of the services performed. 75 The expectations or subjective understandings of the parties as to the role of the intermediary are not relevant. The SEC has taken the position that individuals who do nothing more than bring merger- or acquisitionminded people or entities together, and do not participate in negotiations or settlements between them, may not be brokers in securities or subject to the registration requirements of section 15 of the Exchange Act—especially where their compensation does not depend upon the size or success of the transaction. 76 On the other hand, persons (other than professionals such as lawyers or accountants acting as such) who participate in or otherwise facilitate negotiations in effecting mergers or acquisitions, and receive transaction-based compensation, are required to register as broker-dealers. 77 In addition, the activities of an intermediary in raising venture capital by soliciting investors may constitute an independent basis, apart from the intermediary’s activities in corporate mergers and acquisitions, for requiring registration with the SEC as a broker-dealer. 78 The analysis under section 15 for an M&A adviser is, therefore, similar to that for a finder. An M&A adviser, who acts as a “finder” by merely identifying and locating M&A prospects and bringing together buyers and sellers, and not participating directly or indirectly in the sale of securities nor sharing in any profits realized (for example, 74. Garrett/Kushell/Assocs., SEC No-Action Letter (Sept. 7, 1980). 75. Henry C. Coppelt d/b/a May Pac Management Co., SEC No-Action Letter (June 2, 1974); SEC v. Randy, 38 F. Supp. 2d 657, 667 (N.D. Ill. 1999). 76. Garrett/Kushell/Assocs., SEC No-Action Letter (Sept. 7, 1980); IMF Corp., SEC No-Action Letter (May 15, 1979); Henry C. Coppelt d/b/a May Pac Management Co., SEC No-Action Letter (June 2, 1974). 77. John R. Wirthlin, SEC Denial of No-Action Request (Jan. 19, 1999); Davenport Management, Inc., SEC No-Action Letter (Apr. 13, 1993); C&W Portfolio Management, Inc. SEC Denial of No-Action Request (July 20, 1989); Garrett/Kushell/Assocs., SEC No-Action Letter (Sept. 7, 1980); IMF Corp., SEC No-Action Letter (May 15, 1979); Equity Development Corp., SEC No-Action Letter (Dec. 10, 1976); Henry C. Coppelt d/b/a May Pac Management Co., SEC No-Action Letter (June 2, 1974); see also SEC v. Michael R. Milken and MC Group, 98 Civ. 1398 (S.D.N.Y. Feb. 26, 1998). 78. Henry C. Coppelt d/b/a May Pac Management Co., SEC No-Action Letter (June 2, 1974). 1A–20
What Is a Broker-Dealer? § 1A:2.6 receiving only a flat fee), may not have to register as a broker. 79 However, if the M&A adviser solicits potential investors or participates in the negotiation of the issuance or exchange of securities and receives a transaction-based fee, the advisor may have to register as a broker-dealer. 80 A key determining factor is whether the M&A adviser receives transaction-based compensation. 81 Naturally, if the transaction involves only a sale of non-securities assets and/or assumption of liabilities, no broker-dealer registration issue would be presented. [B][3] Business Brokers Business brokers have developed as a special case because for many years there was an open question as to whether sale of a business through conveying all the shares was a securities transaction. However, in 1985, the U.S. Supreme Court held that this type of transaction involves a sale of securities. 82 A business broker usually receives commissions in connection with the sale of a commercial firm. 83 A business broker will not have to register as a broker-dealer if there is no distribution, sale or exchange of securities. 84 However, if the sale of companies engaged by the business broker includes a transfer of securities, the business broker may have to register as a broker-dealer if he is engaged in the business of effecting 79. Victoria Bancroft, SEC No-Action Letter (July 9, 1987); Russell R. Miller & Co., Inc., SEC No-Action Letter (July 14, 1977); May-Pac Management Co., SEC No-Action Letter (Dec. 20, 1973); Ruth H. Quigley, SEC No-Action Letter (July 14, 1973); Corporate Forum, Inc., SEC No-Action Letter (Dec. 10, 1972). 80. Dominion Resources, Inc., SEC Revocation of No-Action Letter (Mar. 7, 2000) (the SEC withdrew a prior letter dated August 22, 1985, granting no-action relief to Dominion Resources, Inc. for the same activities; the staff clarified its position which is consistent with that in the following no-action letters) ; John R. Wirthlin, SEC Denial of No-Action Request (Jan. 19, 1999); Davenport Management, Inc., SEC No-Action Letter (Apr. 13, 1993); C&W Portfolio Management, Inc. SEC Denial of No-Action Request (July 20, 1989); May-Pac Management Co., SEC No-Action Letter (Dec. 20, 1973); Ruth H. Quigley, SEC No-Action Letter (July 14, 1973); Fulham & Co., Inc., SEC No-Action Letter (Dec. 20, 1972). 81. See Hallmark Capital Corp., SEC No-Action Letter (June 11, 2007). 82. See Landreth Timber Co. v. Landreth, 471 U.S. 681 (1985). In some cases, the sale of a business would involve the transfer of corporate assets without any transfer of stock by individual shareholders of the selling corporation; in other cases, the sale may involve the transfer of 100 percent of the outstanding stock by current shareholders to the purchasers. 83. See Pleger, Gary L., Esq./Pleger, Duderwicz & Prince, SEC No-Action Letter (Oct. 11, 1977). 84. See id.; Hallmark Capital Corp., SEC No-Action Letter (June 11, 2007). (Broker-Dealer Reg., Rel. #9, 9/10) 1A–21
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