Presenting a 90-Minute Encore Presentation of the Webinar with Live, Interactive Q&A Finders and Unregistered Broker-Dealers: Understanding the Risks and Recent Developments Avoiding the Pitfalls of Broker-Dealer Registration Violations, Lessons from Recent SEC Enforcement Actions and FINRA Guidance TUESDAY, JANUARY 10, 2017 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Steven R. Watts, Partner, Dinsmore & Shohl , Dayton, Ohio Parker Morrill, Clyde Snow & Sessions , Salt Lake City, Utah Arina Shulga, Attorney, Shulga Law Firm , New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Finders and Unregistered Broker-Dealers: Understanding the Risks and Recent Developments January 10, 2017 Parker B. Morrill Steven R. Watts Arina Shulga Associate Partner Partner Clyde Snow & Sessions Dinsmore & Shohl LLP Shulga Law Firm, P.C. Fifth Third Center 201 South Main Street, Suite 1300 99 Madison Avenue, 5th Floor One South Main Street, Suite 1300 Salt Lake City, Utah 84111 New York, NY 10016 Dayton, OH 45402 T (801) 322-2516 T (937) 449-2832 T (646) 481-8001 F (801) 521-6280 F (937) 449-6405 F (646) 453-7669 E pbm@clydesnow.com E steve.watts@dinsmore.com E arina@shulgalaw.com W www.clydesnow.com W dinsmore.com W www.shulgalaw.com Shulga Law Firm, P.C.
Finders and Unregistered Broker-Dealers: Understanding the Risks and Recent Developments Program Outline I. Federal Securities Laws Applicable to Activities of Unregistered Broker-Dealers II. Risks, Penalties and Enforcement Actions III. Determining Whether a Finder is an Unregistered Broker-Dealer IV. Exemptions V. SEC and FINRA Regulatory Guidance VI. SEC OCIE Examination of Broker-Dealer Issues in Private Investment Funds VII. Other Developments Shulga Law Firm, P.C. <6>
Federal Securities Laws Applicable to Activities of Unregistered Broker-Dealers <7>
Federal Securities Laws • Securities Exchange Act of 1934 – A broker is defined as “any person engaged in the business of effecting transactions in securities for the accounts of others .” – The federal securities laws have no formal definition of a finder. – It is unlawful to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security unless registered as a broker or dealer. <8>
Broker-Dealer Registration • Form BD • Register with the SEC • Register with FINRA • Register with the States – No registration pre-emption – Exemptions vary by state <9> <9>
SEC Broker-Dealer Guide – Questions to Ask • Do you participate in important parts of a securities transaction, including solicitation, negotiation, or execution of the transaction? • Does your compensation for participation in the transaction depend upon, or is it related to, the outcome or size of the transaction or deal? Do you receive trailing commissions, such as 12b-1 fees? Do you receive any other transaction- related compensation? • Are you otherwise engaged in the business of effecting or facilitating securities transactions? • Do you handle the securities or funds of others in connection with securities transactions? <10> <10>
Risks, Penalties and Enforcement Actions <11>
II. Risks, Penalties and Enforcement Actions A. Risks and Penalties 1. SEC Enforcement 2. State Enforcement 3. Controlling Person and Aider and Abettor Liability 4. Right of Rescission 5. Bad Actor Disqualification under Rule 506(d) 6. How can the SEC find out about a finder acting as an unregistered broker? B. Recent Enforcement Actions 1. Wrongful Conduct Plus B-D Registration Violation 2. In the Matter of Ranieri Partners LLC 3. In the Matter of Blackstreet Capital Management, LLC 4. Lawyers Offered EB-5 Investments as Unregistered Brokers <12>
A. Risks and Penalties 1. SEC Enforcement • Investigative authority and subpoena power • Administrative cease-and-desist proceedings o Accounting and disgorgement o Civil money penalty $5,000 to $100,000 natural persons $50,000 to $500,000 other persons • Federal court action o Injunction o Civil money penalties • Criminal for willful violations <13>
2. State Enforcement • States may bring similar enforcement actions for violations of state broker-dealer registration requirements <14>
3. Secondary Liability • Controlling Persons o Person who controls person liable is jointly and severally liable unless controlling person acted in good faith and did induce the violation • Aider and Abettor o Person who knowingly or recklessly provides substantial assistance to violator is deemed a violator <15>
4. Right of Rescission • Contracts in violation of broker-dealer registration requirements are void as to violator • Investor can rescind purchase of security from issuer, unregistered broker cannot collect fee <16>
5. Bad Actor Disqualification Under Rule 506(d) • Offering disqualified from relying on Rule 506 exemption in Regulation D if issuer or other person covered by rule has securities-related criminal conviction, regulatory or court order, or other disqualifying event that occurred on or after September 23, 2013. • Persons covered – issuer; directors, general partners, managing members, executive or participating officers; 20% beneficial owners; investment managers of pooled investment funds and their principals; compensated solicitors. <17>
6. How can the SEC find out about a finder acting as an unregistered broker? • Form D disclosure – Item 15 of Form D requires disclosure of sales commissions and “finders’ fees” • Tips from disgruntled investors or competitors of issuer or finder • Routine examinations <18>
B. Recent Enforcement Actions 1. Unlawful Conduct Plus B-D Registration Violation • SEC enforcement actions for violations of B-D registration requirements have overwhelmingly involved fraudulent, deceptive or illegal conduct in addition to B-D registration failure • Recent enforcement actions show SEC will pursue failure to register as B-D in situations not involving fraud <19>
2. In the Matter of Ranieri Partners LLC et al., Exchange Act Release No. 69091 (March 8, 2013) • SEC administrative cease-and-desist proceeding against private fund adviser and senior managing partner for violation of B-D registration requirements • Fund paid transaction-based compensation (1% of capital commitments) to unregistered consultant for actively soliciting investors • Consultant (1) sent offering materials to prospective investors, (2) urged investor to adjust portfolio allocation to accommodate investment, (3) provided investors with analysis of firm’s funds’ strategy and track record and (4) provided investors with confidential information about identity and capital commitments of other investors • Firm fined $375,000 and senior managing partner $75,000 • Separate enforcement action against consultant. Disgorgement of $2.4 million in compensation plus interest and barred from association with any securities firm. <20>
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