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

§ 1A:2.6 BROKER-DEALER REGULATION
Exchange Act Rule 3a4-1 provides a non-exclusive safe harbor from
broker-dealer registration for “associated persons of an issuer.” 111
Compliance with the conditions to the safe harbor is not the only
means by which associated persons of an issuer may sell that issuer ’s
securities without registration as a broker-dealer. Rule 3a4-1, however,
does provide legal certainty to those persons whose activities meet the
conditions of the rule. 112
“Associated persons of an issuer,” under Rule 3a4-1, include any
natural person who is a partner, officer, director, or employee of the
issuer, and employees of companies or partnerships in a control
relationship with the issuer. 113 Under the rule, an associated person
of an issuer who participates in the sale of “the securities of such
issuer” 114 would not have to register as a broker-dealer if the associated
person, at the time of participation:
(i) is not subject to a “statutory disqualification,” as defined in
section 3(a)(39) of the Exchange Act; 115
(ii) is not compensated, directly or indirectly, by commissions or
transaction-based compensation in connection with the sale of
the issuer’s securities; 116
(iii) is not an associated person of a broker or dealer; 117 and
(iv) meets any one of three alternative conditions:
• Restricts his participation to transactions involving offers
and sales of securities to a limited class of financial
institutions, including Registered Broker-Dealers, banks,
No. 09-12950 (E.D. Mich. July 27, 2009) (quoting SEC v. George, 426 F.3d
786, 797 (6th Cir. 2005); SEC v. McMillin, et al., 07 CV 2636-REB-MEH
(D. Colo. Jan. 12, 2009); SEC v. Sarad, et al., Case No. 2:08-cv-02252-GEB-
DAD (E.D. Cal. Sept. 25, 2008); SEC v. Am. Energy Resources Corp., et al.,
Case No. 08-CV-01847 REB BNB (D. Colo. Aug. 28, 2008); SEC v. McDuff,
Civil Action No. 3:08-CV-00526 (N.D. Tex. Mar. 26, 2008); SEC v.
Rabinovich & Assocs., LP, et al., 07-CV-10547 (S.D.N.Y. Nov. 26, 2007);
SEC v. Martino, 255 F. Supp. 2d 268, 283 (S.D.N.Y. 2003).
111. See Rule 3a4-1; SEC Release No. 34-22172 (June 27, 1985) [hereinafter
Rule 3a4-1 Adopting Release].
112. Rule 3a4-1.
113. See Rule 3a4-1(c)(1).
114. The term “securities of such issuer” in Rule 3a4-1 is intended to cover the
issuer’s sale of its own securities through its associated persons. The rule
does not address situations where an issuer’s employees assist potential
buyers and sellers in connection with secondary market transactions in the
issuer’s securities. See Rule 3a4-1.
115. Exchange Act § 3(a)(39); Rule 3a4-1(a)(1).
116. Rule 3a4-1(a)(2).
117. Rule 3a4-1(a)(3).
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