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