Fund Sales: Should the Marketer Be Registered?

FundmarketersreachouttopotentialInvestorstopromoteInvestmentsinthefunds.Becauseofthecompensationthese marketersreceive,theymayneedtoregisterasbrokers.ItisImportanttoconsiderthefullandprecisescopeofa marketer’s activitiesandhowheorsheIscompensated,inordertodeterminewhetherregulatorswillrequirethemarketertoregister asabrokerandtheextanttowhichthemarketerandthefundorganizationforwhichthesalesaremadearevulnerableto enforcementactionorcivilliabilityforrescission.Thisarticlediscussesthecurrentlegallandscapeaswellassomeefforts nowunderwaytosynthesizethevariouslaws,guidance,Interpretations,andcourtopinionswitha viewtoa morereasoned andrealisticapproachthatwillallowtheseIntermediariestooperatewithoutoverlyburdensomeorduplicativeregulation.

ETHANSILVERANDFAITHCOLISH

P”j”lhe offer and the sate of securities typically FINRA or, if individuals, registered representatives involvesnot only a buyer (the >and 2of a FINRAmember. a seller (which, in a private placement is usu The main function of a Fund marketer is to reach ally the issuer),but also a third party whose primary out to potential to promote a possible function is to facilitate the transaction by identifying investment in the Funds. Depending on the instruc potential investors—and frequently also explaining tions of the issuer (which, for this purpose includes the investment opportunity on behalf of the issuer. the Fund’s manager) and the skills and style of the The regulatory status of this third party, sometimes marketer, this could include active promotion of the referred to as a “marketer” or “finder,”has been the particular investment or merely making an introduc focusof muchlegaldevelopmentand discussion.This tion. Marketers may be employees of the manager article addresses these issues specificallyin the con of the Fund or work as independent contractors. text of marketers of interests in hedge funds, private Marketers are compensated in various ways, the equity funds, and venture capital funds (collectively, most common being transaction-based compensation “Funds”) and whether (1>they are “brokers” subject that is contingent on the occurrence of an investment to registration with the SecuritiesExchange Commis in the Fund. In analyzing the regulatory status and sion (SEC)under the SecuritiesExchange Act of 1934 appropriate classification of the marketer it is im (the “Exchange Act”)’ and the analogous blue-sky portant to consider the precise scope of his or her laws of the states in which they operate or find inves activities and the structure of the compensation tors, and (2) they are required to become members of arrangements. These factors may mfluencewhether the mtermediary would be classified as a ‘broker’ subject to registration or whether the intermediary should be subject to the current panoply of regulation See 15 tLSC 7Sola)(1) (2012). that follows from being a “brokee” We begin with an overview3 of the rationale and regulatory scheme for finders from the perspective Ethan Silveris a partner and Faith Colish is counsel in of the SEC. Next, we examine the importance of Carter Ledyard &MilbumLLP’sFinancial Institutions Regulatoly and Enlorcement practice group inNew York 2 See 15 USC. 78o(1,)(8) (2012). With exceptions not here City.The authors extend their gratitude toHugoArenas, relevant, all SECregistered brokers and dealers must be members an associate at the firm,forhis contributions to this article. of FlNRA FINRA isthe Financial Industry Regulatory Association, The authors mr’ be reached by email at silver’clmcom Inc, a selcregulatory organization. and coJish@cImcom, respectively ‘See IS USC, S78c(a)(4)(A) (2012).

Authorized Reprint — Journal of Taxation and Regulation of Financial institutions © Civic Researchinstitute transaction-based compensation in determining makeuse ofthemaiLsor anymeansor instrumental whether someone is a broker, and how the review ityof interstatecommerceto effectany transactions of this factor has been shaped over the years through in, or to induceor attemptto inducethepurchaseor the courts and SECinterpretations. Then we look at saleof, anysecurity. . . unlesssuchbrokeror dealer subsection(b) of the practical implications, risks, and other consider is registered in accordancewith this section.’ ations involved in whether registration is required for the marketer of a Fund. Our discussion includes The courts view Section 15(a)(1) as having an analysis of a recent significant SEC enforcement utmost importance because “registration facilitates action against an unregistered finder and the Fund both discipline ‘over those who may engage in the management who engaged him to perform this role, securities business’ and oversight ‘by which neces public statements by senior SECand FINRAofficials, sary standards may be established with respect to and evaluation of potential risks arising from the use training, experience, and records.” However reg Finally, we of unregistered intermediaries. discuss istration with the SECand concomitant membership key the positions and reactions of regulators to the in FINRA can be a time-consuming and expensive current regulatory environment. This discussion is process, and the consequences of registration and designed to shed light on the question at the heart of membership can be burdensome. As a response to this article: Should marketers of Funds be required this reality the SEC adopted Rule 3a4-1 under the to register as brokers with the SEC? Whatever the Exchange 5Act. Rule 3a4-1 is a non-exclusive safe harbor from the Exchange Act’s broker-dealer registration requirement. The rule excludescertain officers,direc 5tors, and employeesof issuers from the definition of “broker” under the Exchange Act.° This extends to officers, directors, and employees of certain affiliates of an issuer; in the case of a Fund this would include the personnelof the Fund’sadviser,In order to qualify answermay be,it isevidentthat the securitiesindustry under the rule, the associated person must satisfy needs more clarity and guidance as to how issuers, three essential conditions and at least one additional Funds, can use marketers to sell interests especially test,” which are more fully explained later in this in their Funds to investors. article.” Many Fund marketers have relied on Rule 3a4-1 to avoid the presumption of broker status and registration for the sale of interests in their Funds. HROKHIREGISTRATIONREQUIREMENTS However, as will be discussed below, the application goals enactment the Exchange One of the primary of of of Rule 3a4-1 in the context of Fund offerings has Actwas to protect the investingpublic “through regu been controversial and unclear in the past and it has securities exchanges and lation of transactions upon been left to the SEC and the courts to provide some This desire protect in over-the-countermarkets.” to guidance. through regulationresulted4 in the requirementto reg ister as a broker or dealers under Section 15(a)(1). This section states that: 6 5 78o(a)( I it shall be uniawfu for any broker or d akr wincE SE( v Krsruc, ‘8F Supp2d 3 0 1 a4 ME Pa 2 ii is either a person other than a natural person or a quoting Keg’lProperties, Inc v Eu & RealkarateConsii ring C iatural person not associated w th a brok r or dea er 678 kId 552, 561 is C r 1982, Ba tsidc hurch fChrst N e Plan, Inc 191 3B” 362 5t1 ir 1968 which is a persor other than a eatural person to 92d Astiuca ed Persons c xi Issue Dcci e sot c be Br k F d Keg 27,940 ul 9 198 d fled I K 240 3a4 is oi rp v S cx r Mgn rp. Supp d 94 ( FR 4 4 20 Era seu I t. fi 4 5 S 94 ‘1U II 200 ring nst & rut Hocffelde rules, in rule does not purport to defirc e enrir scope I 194 1976 Se’ uties markets nekide pci ate placements 1985, not a brokee A person who is outside the s e. uarbor may uevcrCue and not usr exchanges or other venues for less not be a broker, but the guidelines are much less clear transactions, Id. The Exchange Act separately defines “broker’s in Section 3 a 4 aid deale i Sccti I a eciritir t rred i is perform either or both I these roles and art frequently referred to as ‘brokerdealers” Harbor

32 Section 3(a)(4)(A) of the Exchange Act defines TRANSACTION-BASEDCOMPENSATION: a “broker” as any person who is engaged in the AHISTORICALPERSPECTIVE business of effecting transactions in securities for the account of others.’ These are extremely DistinguishingFinders From Brokers: Cases and broad terms, and a 3very fact-intensive analysis is No-ActionLetters. In Massachusetts Financial Services, required to determine whether someone falls within Inc. v.Secw’itiesInvestor Protection Corp., the federal the definition. The Exchange Act does not define district court for the District of I assachusetts had “effecting transactions” or “engaging in the busi to determine if the plaintiff, Massachusetts Financial ness” so courts require a showing that the “alleged Services,Inc., owed the defendant, SecuritiesInvestor broker was characterized by ‘a certain regularity of Protection Corp., mandatory membership fees for participation in securities transactions at key points engaging in broker activities.’ Ruling for the plaintiff in the chain of distribution.’”’ This showing may on a motion for 5summary judgment, the court be made by citing to an array of factors courts have concluded that the plaintiff’sinvestment management recognized as indicative4 of a person coming within services and advice to clients whose funds and the definition of broker and required to register un securities were held and transferred by third persons der Section l5(a)(1). These factors include whether (suchas trusteesor custodians)did not constitute a person: business as a broker.’°The court reasoned the meaning of “broker” under the ExchangeAct implied“a certain • Works as an employeeof the issuer; • Receivesa commission rather than a salary; • Sellsor earlier sold the securitiesof another issuer; • Participates in negotiations between the issuer and an investor; • Provideseither advice or a as to the merit of an investment;and • Actively,rather than passively,findsinvestors.’ 5 regularity of participation in securities transactions at Of these, the commission,or transaction-basedcom key points in the chain of distribution” and was not pensation, has historically been the single most im meant to be all-encompassing. portant factor in determining broker status.’ The underlying concern has been that transaction-based6 Regularity2of Participation. The “regularity of par compensation provides an incentivefor abusive sales ticipation” analysis° was elaborated by the federal dis practices since the person’s“salesmanstake” creates a trict court for the Southern District of New York in personal interest in the decisionto invest.’ SECv.Hansen? In Hansen, the defendant,HowardJ, The SECand 7 the courts have sometimestaken dif Hansen,1 foundeda businesswhichprovidedconsulting ferent viewsas to the importanceof transaction-based servicesto independentoil and gas producers.’ For a compensation.Understandinghow the courts and the period of three years he offered and sold to the public SEC have treated transaction-based compensation fractional undivided interests in his client’soil wells? and have balanced it with the other indicia of broker 3 Hansen was entitled to a 15 percent commission on status is pivotal when analyzing how Section 15(a) each interest he sold and over the three-year period (1) will be applied to intermediaries such as market he earned almost $400,000 in commissions, During ers of Funds. 24 the same three-year period, Hansen had not registered as a broker with the SEC? Also, he previously had

15 U.S..C,S78c(a)(4)(A). ‘SECv, Hansen, 1984 US. Dirt. LE.XIS 17835 )S.DNX. 19S4) ° (quoting Massadsusetis Financial Services,Inc. v.Svcurties Investor Massachusetts Financial Services, Inc., 411 ESupp. at 411 Protection Corp, 411 ESupp. 411,415 (D. MassL aff’d, 545 E2d (1976). 754 (1st Cit. 1976), ceo. denied, 431 U.S. 904 (1977). “ Kramer, 778 F. Supp.2d at 1334; Hansen, 1984 US. Dst, Id. at 415. LEXIS at Maiden Lane Partners. v. Perseus Realty 26; [IC Hansen (supra note 14L Partners, Ci’. II. LLC, 2011 Mass. Super. LEXIS 86 (Mass. Supp. 2011). Id. at ‘3. 23 tornhusker Energy Lextngton, LLC v. Prospect St. Wntures. Id. it was not disputed that these interest, were secunnes. 2006 U.S. Dst. LEXIS 68959, *20 (D. Neb. 2006). ° Id. 2 Id. Id, at ‘3’4.

t .. , ., ,“.,, S S r engaged in the offering and selling of securities of within the meaning of the Exchange Act and granted another issuer at various points before the period in the SEC’spetition to permanently enjoin him from question.’ As a result, the SEC brought an action to further violating Section 15(a)(1).’ permanentlyenjoinHansen from further violatingSec tion 15(a)(1)of the ExchangeActT Finder’s Exception In 1991, another layer was The court held that a conclusion that Section 15(a) added to the effort of defining “broker” under the Ex (1) had been violated “required a showing that the al change Act. Through a no-action letter” issued to the leged broker or dealer was characterized by a certain Canadian singer and songwriter Paul Anka, the SEC regularity of participation in securities transactions accepted the proposition that certain intermediaries at key points in the chain of distribution” Fur could engage in activities to find potential investors thermore, as previouslydescribed,28 the court provided for an issuer without having to register as a broker relevant factors to determine whether a person acted with the SEC” The SEC noted that the “finder’scx- ception” aptly applied to Mr. Anka,” Mn Anka had entered into an agreement with The Ottawa Senators Hockey Club Limited Partnership to provide it names of prospective buyers of limited partnership units is- sued by the Senators.’ Mr. Anka provided the names and telephone5 numbers only of individuals with whom he had a pre-existing relationship? Moreover, Mr. Anka did not participate in any advertisement, endorsement, or general solicitation on behalf of the units, and also refrained from providing any financial advice to the potential buyers.’° Although Mr. Anka received transaction-based compensation, the SEC staff took a no-action position on whether he was as a broker within the meaning of the Exchange Act. required to register as a broker. These were: ’4 Lack ofUnanimity on Impactof Transaction-Based Whetherthat person1)isan employeeof the issuer; Compensation. After the issuance of the SEC’SAnka 2>receivedcommissionsas opposedto a salary;3)is no-action lette4 the courts were unanimous in their selling,or previouslysold,thesecuritiesofotherissu application of the multi-factor test to determine if a ers;4) isinvolvedin negotiationsbetweenthe issuer person came within the definition of broker and was andtheinvestor;5) makesvaluationsasto themerits required to register under Section 15(a)(1 However, of theinvestmentor givesadvice;and 6>isan active >. ratherthan passivefinderof investors” they were not as cohesivewhen it came to determining how much weight should be given to the fact that a Applying the listed factors, the court made several person was receivingtransaction-based compensation findings. First, Hansen received transaction-based compensation Second, he had previously sold securities of another issuer,” Third, he had actively “Id. 3attempted to find investors through the use of adver “No-action letters are issued by ti..estaff of the SECand nate °tisement.correspondence,and seminars,’ And fourth, t.hatthe staff would not recommend that the SECinstitute enforce mert action if the requester conducted business in a specified man he offered extensive advice to2investors highlighting ner. They are not exemptive orders, rules, or le.aI interpretations the benefits of investing in his client’soil wells,” The and sometimes are withdrawn without notice. Howeve,, they are court concluded that Hansen had acted as a broker widely regarded as reliable indications, of the SEC’iviews and are relied on pe.rsonsother than the requester who can come w bin the four corners of the facts specified in the no-action iette.r, “Paul Anka, SECNrno-ActionSetter 1991 SECNo-Ace. LEXIS 925 July 24, 1991). Id. at ‘25 (quoting Massachusetts Frnancsai Services, 1uc, 411 FSupp at 415). 29 Id. at ‘26. “Id, “Id. 4’Id 41 Id. A.sdiscussed below, since at lease 201.0the SEC staff has ° Id, at ‘26’27. repeatedly and publicly advised the bar not to rely on the Anka “Id. at ‘27. no-action letter, for saies. For example, the federal district court for the case, the SEC brought an enforcement action against District of Nevada singled out transaction-based com the defendant, Kenneth R. Kramer, for violating the pensation as “one of the hallmarks of being a broker- broker registration requirement under Section 15(a) dealer. “42 On the other hand, the federal district court (1).° The SEC alleged that Kramer had acted as a for the Eastern District of Michigan included trans broker primarily because he had received transaction- action-based compensation in its multi-factor broker based compensation from an issuer, Skyway Com analysisbut did not giveit any special 43weight. munications Holding Corp., based on investmentsby The fact that the SEC staff has distanced itselffrom persons whom Kramer had 51identified, The SECalso its Anka no-action stance is evident from the 2010 alleged that Kramer had: (1) activelysolicited inves denial of no-action relief addressed to the law firm of 9tors (2) advised potential investors about the issuer, Blumberg, Mackey & Wall, P.L.C (BMW), In its no- (3) used a network of associates to promote the is action request, BMW explainedthat it sought to enter suer’ssecurities, (4) showed a regularity of participa into an agreement with a power electronics technol tion in the businesswhich was evidencedbytwo years ogycompany in order to assistthe company in raising of compensation from the issuer, and (5) promoted 43funds, BMW specified that its assistance would be securities of other 52issuers, limited to introducing the company to potential pur The court disagreed with the SEC and concluded chasers of “investmentsin equity or debt instruments that Kramer had not acted as a broker pursuant to of [the companyl,” and that its compensation would Section 15(a)(1). First, the court determined that be determined by the amount of fundingthe company the portion5 of his compensation that was transaction- raised from the introductions BMWfacilitated. The based did not trigger Section 15(a)(13’sregistration SECdenied BMW’Sno-action request4 and explained that BMW’sagreement with the company’ implied that BMWwould engagein a form of “pre-screening’ potential investors to determine their eligibility to purchase the securities, and pre-selling’ [the com pany’s] securities to gauge the investors’ 47interest.” More important, the SEC acknowledged that BMW’s transaction-based compensation was a crucial factor requirement because it was excused under the finder’s and noted that: exception.’ Second, the court concluded that the 4remaining compensation was not in fact transaction- The Staff believesthat the receipt of compensation based but compensation Kramer had earned from ser directly tied to successfulinvestment in [the corn vices he rendered.” Third, applying the multi-factor pany’sj securities by investors introduced to [the analysisthe court concluded that Kramer’sactions did trans-ction-based companyl by [the Firmj (i.e. com not rise to the level of broker activities encompassed pensation)would give [theFirmi a “salesmanstake” within Section 15(a)(1) in large part due to the close intheproposedtransactionsand wouldcrc-ateheight and pre-existing relationship that existed between enedincentive1or [theFirmito engagein salesefforts. Accordingly,the Staff believesthat your proposed him and the potential investors he identified. Lastly, activitieswould requirebroker-dealerregistration.” the court discussed—and rejected—the5 SEC’ssingle factor reasoning in Brumberg, Mackey’ & 57Wall, The The SEC’semphasis on transaction-based compen court stated: sation as the primary indicator that a person quali ties as a broker under the Exchange Act was further The [SECI’s proposed single-factor “transaction- based compensation” test for broker activity (i.e.. a demonstrated in the case of SEC v. Kramer, In this 49 person “engaged in the business of effecting transac nuns in securities for the accounts of others”) is an ‘ Comnbusker Energy, 2006 U.S. Dist. LEXIS at 20. SEC v. Bravata, 2003 U.S. Disc LEXIS 64609. ‘6-8 (E.D. MicE. 2009). Id. See Brurnberg, Mackey & Wall, RLC., SEC N-Acrion Latter, at 1337. 2010 SEC Ntt-Act, LEXIS 406 (May 17, 2010). Id. Id. Id. at 1341. “ Id. See Id.at 1339. “ Id Id. at 1340. ‘ Id. Id. at 1339-1340. ‘ Kramer, supra note 7. “Id. at 1341 11.54, inaccurate statement of the law.s this order role. This is especially true since it appears the SEC exhaustivelyexplains,an array of factors detcrrnme almost always deems a person to he a broker when the presenceof broker activity. In the absence of a transaction-based compensation is received.Therefore, statutory definition enunciating othcrss ise. the test understanding which form of compensation qualifies for brokeractivitymust remain cogent, multi .icet d, or does not qualify as transaction-based is pivotal for and controlledby the F.xehangeAct. intermediaries to asses if they might fall under the registration requirement of Section 15(a)(1). The SEC chose not to appeal h d tn c u

decision in Kramer, without urn LI h it nt FundersClub and AngelList No-Action Letters. pretation of the definition o h ok a i co r c The SEC staff provided guidance through two no’- Ilaimera ‘‘orkie, Deputy A o i U r r n th action letters issued in March 2013,62 In its letters the SF(‘s Trading and M rke Divi ion, 0tH hi I staff agreed not to recommend enforcement actions ounsel, has suggest d th t th fact of th Kr ii against Fund advisers for not registering as brokers a re unique and bould not be tak out of on with the SEC. i Specifically,Mr World not d that Mr Kram 63 The first no-action request, which was submit w s d nv and unlik lv to r a hi conduct o th ted on behalf of FundersClub Inc. and FundersClub d ri em of the mv s ng public. Tb current Management LLC (collectively “FundersClub”), in I the I w th elor r m in un I an.A no ii abo volved a venture capital fund adviser which operated Ii SF has distan ed it elf ruin i Ank no a ii n a website,’ FundersClub managed various investment ttc through publi tat m mit wit bout I rma liv funds4 designed to purchase the securities of start-up 65companies FundersClub would first identifyvarious start-up companies, or portfolio companies, for which it could potentially manage an investment 6fund, Before any substantial discussion with the start-up company could take place, FundersClub would in spect the company to evaluate whether investment in it was 67advisable. Once a company passed inspection, FundersClub would post information about potential investment in the company on its 65website. This in formation would he accessible only to FundersClub withdrawing it, and has not made any eItort to an members, all of whom would have to be accredited nounce that it no longer views transaction-based investors.6 FundersClubwould never reach out to any compensation, in and of itself, as enough to trigger 9of its membersand would discussany potential invest the registration requirement under Section 1S(a)(1). At least some courts, on the other hand, appear to ment possibilityonly with members who expressed an investmentinterest in the start-up of be resonating the reasoning provided in Kramer.” company.° None money the This leaves the state of the law on transaction-based the raised for start-up company would be handled by it would be deposited in a compensation developing and unclear. FundersClub; custody account to which FundersClubwould haveno What Doesn’t Count as Transaction4ased accessto for its own ’7use. FundersClub would collect Compensation? As the cases discussed above make cIca transaction-based compensation is a factor that AngelList LLC and AngelL,st Advisors EEC. SEC No will always affect the determination of whether a Action Letter, 2013 SEC No-Act. LEXIS 294 (March 28, 2013(; person IS required to register as a broker under FundersCiub In FundcrsClub Management LLC, SEC No’Acnon Section 15(a)(l), How much this factor affects Letter, 2013 SEC No-Act. LEXIS 271 tMarch 26. 2013.!.. the outcome of the determination remains unclear ° AngelList, 2013 SEC No’4cr. at 294; FondersClub, 2013 SEC No-3ct. at 271. hut it is unquestionable that it plays a significant ° FundersCluh. 2013 SEC No-Act, at 271.

141. 141, ° Id, See Maria Lokshin, on Funding Portals “Mrk May illuminate ° Id. Tailored Broker[)ealer Registration Paths, Bloomberg BNA Sec. & Reg. L Report. no. 33, Aug. 19, 2013, at 1524-1525, also avail ° Id. able at hrtp://news.bna.com/srln/display/batch print display.adp. ° Id. ad. n Id. ° See Maiden Lane Partners, supra note IS. n Id. an administrativefee,which would be fullydisclosed opportunity.” AngelList would never handle any to all investors,to cover only any costs related to the investmentfunds, which would be directlydeposited fund.’ FundcrsClubofficers,directors, or employees in a custody account.” Neither AngelList nor any would not be compensated for any work related to person affiliated with it would receive transaction- the sellingor offering of the start-up’s securitiesand based compensation based on the offeringor sale of certainly would not receive transaction-based corn a portfolio company’ssecurities.’ Lastly,AngelList pensatioa7 FundersClub would not be entitled to would be entitled to carried interest that amounted compensation1 for its role in starting and managing to a portion of the profitability or increase in value the various funds. Instead, compensation would be of the portfolio company.” As in the case of Funders limited advisory4 services carried interest would not be deemed to be to and consulting rendered Club, the by FundersClub, The permitted compensation, or transaction-based compensation. “carried interest,” would be based on profits gener ated7by the7 start-up company, or portfolio company, Key Factors in No-Action Positions. Although the and’it could’ not exceed30 percent of the investment SEC did not provide specific reasons why Funders fund’s77profits. Carried interest would not be consid Club and AngelList (collectively the “Advisers”) ered transaction-based compensation. did not need to be registered as brokers under Sec The second no-action letter involvedAngelListand tion 15(a)(1>,these no-action letters allow for certain AngelListAdvisors LLC (collectively“AngelList”)?’ conclusions: AngelListintended to becomeregisteredas an invest ment adviser with the SEC.’ Its operation is similar • No Active Promotion: First, the Advisersdid not to that of FundersClub. In addition to offeringtradi seemto engageactivelyin promoting the invest tional investmentadviceand consultingservicesto the ment opportunities.” Instead, the Adviserstook a portfolio companies,°5 it also wanted to assistin raising more passiverole by makinginformation available funds for these companies.u After performing due to all their membersand waited for the interested diligence,AngelListwould decide whether or not to membersto reach out for more information.” recommendinvestmentin the portfolio company. If • Compensation Not Directly Linked to Capital AngelListdecidedto recommendinvestment,°1 it would Raised:Second,and probably more important, the post the investment opportunity on its website.’ Its Advisersnever receivedcompensationthat was websitewould be accessibleonly to its members,3 who directlylinkedto the amount of investmentcapital would all be accredited 84investors. AngelListwould they were able to 1raise,’ This erasesthe concern engage in discussions about possible investment that the Adviserswould have a “salesmanstake” in the portfolio company only with members who in the transaction. On the contrary, by agreeingto first expressed an interest in the possible investment be compensatedbasedon a percentageof the in vestment’sprofitability,the Advisers’interestsand 11d. the investors’interestswere aligned,sincecompen ‘Id. sation for both would depend on the successof the investment, the Investors’decision ‘Id. and not to part with their cash.’ ‘Id. interest or the “carry” is a form of meentive corn pensarion that rewards or compensates a party an amount, typi Also,the SE( staff seemedto agreewith the kdvisers tally a percentage that is des rmmed by ñc in rase in value f that registration as a broker with the SR would be he mvcstmcnt or ñc profits generated the estmer t Th superfluous since they each needed to comp y w th taxation of arried interest s currently a topic generating moe s certain regulation and oversightthat applied to being )nt oversy see e g Russell 3 P edit asried I tar 515 TeeS neal and Tax Analysis” 26 2 3 lax r & Reg F ii Iitts. (Joy Aug 2013

Ange Li IL SEC No Ac , up ore Id

St Sec Angell its, SEC 10 c , upra i 6 F ad s( Id. SEC NoAct , supra note 62 ad. ‘°ee AngelList, 2013 SeC No Act, at 294; I’undersClob, 2013 SeC NoAt,at271 See id Id Accredited investor are d fred K I 101 1Regular o Ii under the Securities Act registered as an investment adviser or, in the case these persons will only be exempted from the broker of a venture capital fund adviser, an exempt report registration requirement of Section 15(a)(1) if: ing adviser’ By performing a more passive role and by changing3 the compensation scheme in a manner (A) Suchpersonandeachpersonassociatedwith that that eliminates the “salesman’sstake” resulting from person receivesno compensationin connection transaction-based compensation, an intermediary with the purchaseor sale of such ; may be able to avoid broker registration. Neverthe (B) Such person and each person associated with that person doesnot have possessionof customer less, the AngelList and FuudersClub no-action letters funds or securities in connection with the pur highlight an important open question: whether they chase or sale of such security;and will be interpreted as allowing a private Fund man (C) Such person is not subject to a statutory dis ager to compensate intermediaries through incentive qualification as defined in section 3(a)(39) of compensation rather than the traditional transaction- this title and doesnot haveany person associated based compensation without requiring the intermedi with that person to such a statutory disqualifi ary to register as a broker? 9catIon. New Securites Act Section 4(b). The outcome in In February 2013, the SEC provided some inter the FuadersClub and AngelList determinations may pretations relating to the new exemption of Securities appear less anomalous when considered in relation to Act Section 4(b) through the issuance of Frequently Section 4(b) of the Securities Act that was added by Asked Questions (FAQs).” First, and not surprisingly, Title II of the Jumpstart Our BusinessStartups Act (the the SEC stated that it defined “compensation,” as it is used in Section 4(b), broadly.° It explained that compensation, for the purposes°1 of Section 4(b), is not limited to transaction-based compensation but it included all economic benefits a person, or any of its associated persons, may derive from the sale and of fer of securities) Therefore, even the payment of a salary 0to an internal marketer of a Fund who effected a transaction’ and engaged in the business of securities for the account of others would fall under the defini “JOBS Act”).’ This new section provides an exemp tion of “compensation” for the purposes of Section tion from4 4(b).’° However, since Section 4(b) itself allows for the broker-dealer registration requirement 2 of Exchange Act Section 15(a)(1) for participants in the person in question to co-invest in the securities, the sale of securities through a private placement com proceeds from such investment will not be considered plyingwith Rule 506 of Regulation D of the Securities 103“compensation.” Moreover, the SEChas confirmed 5Act,’ The new section would apply to persons who that Section 4(b) may be relied on by venture capital “maintain a platform or mechanism that permits the funds and their advisers, so long as they meet the re offe; sale, purchase, or negotiation of or with respect quirementsfor exemption under the section, but would to securities or permits general solicitation, general be of littleusefor others “outside of the venturecapital advertisements, or similar or related activitiesby issu area,””‘ Thosewho would conceivablybe able to avail ers of such securities,”” ft would also apply if “that themselves of this would include a venture capital person or any person associated with that person co fund and its adviser that operates a website that lists invests in such secnr.ities,”and if “that person or any opportunities of investment in portfolio companies, person associated with that person provides ancillary services wii..hrespect to such 7securities.”’ However, “Sec .uri.tiesand Exchange Consm.ission.,Jumpsta.rt Our Business Startups Act Frequently Asked Questions About the Exemption “See id, From krokeDea1er Regisnation in Title Ii of the JOBS Act (201 3), available at http’J/w sec.gov/divisions/nsarketreg/exemption Jumpstart Our Business Startups Act, ilL. 112-1(6, 5201(c). broker-dealer-registratiori-jobs-act-faq,httn. 1264Stat, 306, 314-315 (2012). Id. ‘ Id. Id. “ Id. “‘See El. “id, Tnese ancillary service, would inc1ude thmgs like perform ing duediligence and prepanng documentation in connection with Id, the Regulation D oFfering. “'Id.

38 .jc,urg CF TAXCTCd .Fi.D F Cr FNAr,CA. 6l,3771i0NC and co-invests in those portfolio companies along (3> may not be compensated through transaction- with other 05investors.’ To synthesize,it appears that based compensation; and (4) may refrain from having a literal readingof the JOBSActprohibition on receipt discussions with the investor as to the merits of the of “compensation” isbroad enough to encompasscar investment, ried interest, and thereby prohibit application of the Since the balance may be more-or-less even, a JOBS Act exemption from broker registration to an Fund manager should consider other factors when entity compensated in such a way. Nevertheless, the determining if the Fund’s internal marketers should SEC staff considers that type of compensation not to register as brokers with the SEC. These additional present the typeof conflictof interestthat would justify factors are explored below, enforcement action for failure to registei Risks01EmployIngUnregisteredtntermediarles—1.essons FromRanierlPartners, Historically, some Funds have SALESOFFUNUSFROMTHEFUNDPERSPECTIVE taken the risk of employing intermediaries that were Up to this point we have focused largely on an over unregistered brokers without great concern, other view of how Section 15(a>(’s broker registration re than a potential rescission claim. This was because quirement generally affects the intermediary. But, as the SEC was primarily concerned with bringing previously stated, whenever a situation involves an enforcement actions against an unregistered broker intermediary, it automatically means there are at least only where there were also allegations of a fraud, and three parties: the investor, the issuer seeking the in vestment, and the intermediary connecting the two, We now turn to the issuer,specificallyFund managers sellingthe interests in the Funds they manage. In order to make sales, the Fund managers must find a way to reach out to interestedinvestors.The manner in which they choose to do this could trigger Section 15(a)(1)‘s broker registration requirement. A Fund manager es sentially has two options: either employ a registered broker or establish an internal marketing department limited its enforcement actions to that unregistered staffed by the Fund’sown personnel) broker. However,a 2013 SECenforcement action has Under the current legal0framework, discussed ear definitely increased the risk a Fund assumes when lier,some of the activitiesinternal’ marketers engagein employing an unregistered broker—and increases a may qualify under the multi-prong analysis the courts Fund’srisk whenever its internal employeesengage in apply in finding broker status and requiring registra the marketing of securities interests of the Fund. tion, while others do not, For example, an internal The enforcement action referenced above was marketer of a Fund (1) is an employee of the issuer; brought against a New York-based (2> typically receives transaction-based compensa firm, Ranieri Partners LLC, and its senior managing tion; (3>may communicate to an investor the merits partner, Donald W. 07Phillips.’ At issue were two of the investment; and (4) engages in active, rather Funds managed by Ranieri Partners)° Ranieri Part than passive, marketing techniques to find potential ners, through Phillips, engaged5 William M. Stephens investors, These are all factors that tend to require as an independent consultant to endeavor to find registration. investorsfor the two Funds, and paid him transaction- However, other factors tilt the other way and based compensation based on money raised from do not require registration because the marketer is those 09investors) According to Phillips,Stephenswas covered by the safe-harbor of Rule 3a4-1 For ex specificallytold that his role was limited to that of a ample, that same internal marketer of a fund (1) may finder (spotting potential investors and arranging a neither be selling nor previously have sold securities meeting between them and Ranieri Partners>and was of another issuer; (2>may not typically be involved explicitly told that he was not to provide substantive, in negotiations between the issuer and the investor; key information to potential 0investors° At that ‘°‘ ‘°‘RanIeri Partners LLC md Donald W Phillips, Exchange Act See Id, Release No, 3.563,2013 WL 873219 (March 8, 2013). ‘°‘ This internal marketing depart.menecouldinclude i.ndepen Iii Id. at “2. dent contractors as well is statutory employees. For purposes of this discussion they will be rekrred to as “cmployees or “agents” ‘“‘ Id, at “2-”3. of the Fund or the Fund’s managen l Id, at “3.

FukO SSLES Suiuii TuE siaRsilEl RE REO,STERED7 time, Stephenswas not registered with the SEC in desist from further violation of Section 1S(a)(1)and to any capacity and had previously been the subject of pay $375,000 in civilpenalties.” Philipswas ordered an unrelated SECenforcement action which resulted to cease and desist any further violations of Section in a two-year bar and civil penalties.” 15(a)(1); suspended from engaging in a ‘supervisory Despite these instructions, Stephens engaged in capacity with any broker, dealer, investment adviser, brokerage activities by: municipal securities dealer, municipal advise; trans fer agent, or nationally recognized statistical rating • Engagingin continued extensive communication organization for a period of nine (9) months”; and with potential investorsafter they had already assessed a $75,000 civil penalty.’ met with Ranieri Partners to discuss the potential °2 investment; NoFindingof Fraud or InvestorInjuryRequired. The • Providingkey and substantive information about Ranieri Partners settlement, which was the result of the investment funds to potential investors; findings in the course of an SEC examination of a • Givinginvestmentadvice to potential investors by newly registeredadviser,caught some members of the discussingthe advisabilityof investing in the funds private Fund industry by surprise and is significant and stressingthe desirability of an actual invest because it resulted in an enforcement action with no ment; and allegation of fraud or other actual injury to investors. • Making numerous businesstrips to meet with The messagethe SECappeared to send was that it was potential investorsto persuade them to invest in the increasing its enforcement of Exchange Act Section funds after introducing them to Ranieri Partners.” 15(a)(1), and this increase encompassed various 2 participants in a . This message By engaging in these activities, Stephens raised $569 was confirmed shortly thereafter in April 2013, in million for the funds from investors he enlisted,” and a speech to the Trading and Markets Subcommittee he earned approximately $2.4 million 3in transaction- of the American Bar Association by David W. Blass, based compensation.’” the Chief Counsel in the SECDivision of Trading and The SEC’senforcement action included Stephens Markets,’ and both Ranieri Partners and Phillips. The SEC al 1 Blass’s speech centered on Section 15(a)(1)’s leged that Ranieri Partners caused Stephens to violate registration’ requirement as it applied to placement Exchange Act Section 15(a)(1)and that Phillips aided agents, finders, M&A advisors, businessbrokers, and and abetted and caused Stevens to violate Section those selling interests in private 12Funds.’ He began 15(a)(1).” The SEC charged that Ranieri Partners by stating that the “[SECI is putting an increased and5 Phillips were in the best position to oversee Ste examination focus on private fund advisers, both vens, since they could easily have controlled accessto due to the new regulatory requirements and our own the substantive, key information and monitored and observations in the private fund 23space.” Although curbed the extensivecommunication between Stevens generally speaking private Fund advisers are comply and potential investors,” The SECespeciallyfrowned ing with the Investment Advisers Act of 1940, Blass upon Phillips’ failure to monitor because (1>he was stressed that the private fund adviser community aware of Stevens’sprior violations, and (2) when he should not turn a blind eye to activities which could became aware of the considerable communication trigger the broker registration requirement of Sec between Stevensand the potential investors he failed tion 1S(a)(1),h24 According to Blass, these activities to stop jt.” ranged from “[m]arketing securities. . to [potential] The en.forcement action rrsulted in a settlement investors, [s]oliciting or negotiating transactions, or with Ranieri Partnt.rs and 11Pi..iiiips. As part of the settlement, Ranieri Parts ers was ordered to cease a.nd ’ “ Id. 120 Id, at “6°? “ Id. at “2-°3. “ David W Bias., Division of Tfading and Markets Chief ‘° I at *3,*5 Counsel, Securities and Exchange Commission, “A Few Observa ‘° Id, at *5 tions in the Private Fund Space,” Addrcss at the .Meetingof the American Bar Association Tsading and Ma.rkets Subcommittee “° Id. (Apr. 5, 2013), available at bttp:/Iwww. ,sec.,govfNewSpeech/ Id, at 6, Deta.ilfSpeech/1365171515178. “ Id, at *5 ‘°Seeid, 120 Id, [hIandling customer funds and securities.”° Not by the SEC.another possibleconsequenceof acting surprisingly, Blassemphasized that “[tjhe importance as an unregisteredbroker-dealeris the potential right 5 to rescission,in ether words, securitiestransactions of each of these activities is heightened where there also is compensation that depends on the outcome intermediated by an inappropriately unregistered or size of the securities transaction—in other words, broker-dealer could potentially be rendered void. Given the significantconsequencesof acting as an Taking all of transaction-based compensation.” unregisteredbroker-dealerand the increased atten this into consideration,32 he continued, “a private fund tion beinggivento thisissuebythe SECstaff,private adviser. . . should think through how the adviser goes fund advisersshould consider reviewingtheir prac about obtaining new investors and retaining existing tices to determine whether any activities that may investors,” To emphasize’ this point, Blassused the be approaching or crossing the line would require Ranieri Partners enforcement action as an example broker-dealerregistration.” of the serious consequences of engaging in brokering activities without being registered as a broker with It is clear from the Ranieri Partners settlement the 25SEC,’ and the Blass speech that by choosing to employ In his speech, Blass described a situation that, an unregistered third-party intermediary, a Fund in his view, would trigger the broker registration manager may risk liability if it is determined that the requirement of Section 15(a)(1).’ He said that “a intermediary should have been registered. But what dedicated sales force of2employees working within a marketing’ department’ may strongly indicate that they are in the business of effecting transactions in the private fund, regardless of how the personnel are compensated.” ‘ The broker registration requirement could also be triggered if an employee’ssole responsi — bility is to solicit 31investors.’ Also, the compensation employees who solicit investors receive, “bonuses or other types of compensation that is linked to suc cessful investments,” is pivotal since it may qualify if the Fund manager chooses not to engage a third- as transaction-based compensation and trigger the party intermediary? There are other related factors registration requirement of Section 15(a)( that are of import to Funds when deciding whether to Although the speech overall emphasized that the engage in an activity that might fall within the scope private Funds community should exercise caution of Section 15(a)(1)‘sbroker registration requirement. to comply with, or to avoid violating, the broker This is especially true if one considers the possible registration requirement of the Exchange Act, a com legal ramifications a Fund might face if it chooses ment at the end of Blass’sspeech strongly stressed to forgo a third-party intermediary and engage in this point: raising investments through an internal marketing department. I raiseall theseissues to bringthemto the attention ofprivatefundadvisers,, . sotheycan grapple with Rule3M-i’sSateHarbor.Many private Fund managers themhopefullyin advanceof a visit fromthe SEC’s have taken the position that their personnel, including examiners. Also,whilesomeout there mightthink internal staff, can offer and sell the Fund’s securities that actingas an unregistered broker-dealer should to investorswithout registeringas a broker in rchancc be stewed as inly a technical iolaeion I waneto on Rule 3a4 I But this may be unwise. As pres usl take a iioment at d aution that engaging ii tScse activitieswithout registeringcan have seriouscon stated, this non exclusive safe harbor cxc udes from sequencesin additior o beingsubjectto sanctions the definitionof “broke “ccrtair associatedpersonsof ssuers,mainly the ssuers officers,directors, pa ‘encra, and employees Howevei as Chief Counsel B s

noted n his kpr 12013 speech Rule 3a4 I genera I not used Fy p vate [Flund ad i ces” Ther a o for this, he explained, was that a p i ate Fund ads se Id , Id, Id

1 tR 4 3a4 Id supra note 121 would find it very difficult to satisfy one of the three • The person marketing the Fund would have sub requirements of the ru1e.’’ These being that: stantial other duties for the Fund or the manager, such as investor relations. • [Tjheperson limitsthe offeringand sellingof the • Transaction-based compensation would not be issuer’ssecuritiesonly to broker-dealersand other the only form of compensation of the marketers, specifiedtypes of financial institutions; although their success in asset-gathering could be a person performs substantial duties for the • [Tihe factor in determining their overall compensation. issuer other than in connectionwith transactions m securities,wasnot a broker-dealeror an associ atedpersonof a broker-dealerwithinthe preceding As contemplated, this no-action relief would probably 12months, and doesnot participate in sellingand be available only if the marketer is raising money for a offeringof securitiesforanyissuermorethan once Fund advised by an SEC-registered investment adviser every 12 months;or or an exempt reporting adviser. The SEC staff’s con • [TIheperson limitsactivitiesto deliveringwritten sideration of no-action relief for internal marketers of communicationbymeansthat do not involveoral Funds appears to depend on regulatory oversight over solicitationbythe associatedpersonof a potential the adviser, plus the anti-fraud requirements of the In U? purchaser. vestment Advisers Act of 1940.138 Although there appears to be no immediate likeli hood of an amendment of Rule 3a4-1 or the adoption of a new rule specifically for Fund marketers, if some sort of no-action relief might become available, we would suggest that the SEC staff consider taking a no-action position with respect to the first alternative requirement of the rule, which depends on offers and sales being made only to registered broker-dealers and other identified financial institutions, to extend this to transactions with certain other types of purchas ers, such as accredited investors. The staff might also consider granting no-action relief with respect to the Moreover, in order to come within the Rule 3a4-1 safe second alternative requirement of the rule to cover harbor the marketer cannot be compensated, directly transactions by someonewho has been associated with indirectly, on the basis of sales, include or This could a broker-dealer within the preceding 12 months. a straight salary or bonus. In the end, these suggestions and whatever no- It is true that Rule 3a4-1 would not provide a safe action relief the SEC can provide will allow for the harbor to personnel of a Fund because it is highly expansion of the use of Rule 3a4-1 ‘s safe harbor by unlikely that theywouldsatisfythesecriteria.Thisis pri private Funds, But until then, the reality is that a marily becauseprivate Funds offer their securitiescon private Fund can make little use of it. tinuouslywith multipleclosingseachyear.In hisspeech, Blassalso invitedcommentson whethera broker-dealer Other Legal Considerations and Related registration exemption written specificallyfor private Distinctions. Another important factor which Blass is Fund advisers needed. At the time of this writing in drew to the attention of Fund managers isthe exposure December2013, there have been some indicationsthat to non-SEClitigationas a resultof usingan unregistered the SECstaff,without amendmentof Rule 3a4-l, would broken°’ ExchangeAct Section29() declares void any entertain a request for no-action relief broadening the contract made in violation of the Exchange Act and safe-harbor’s applicability private Funds, Such to po permits rescission of a contract based on violation of tential reliefcould include allowing a Fund to employ the broker registration requirement of Section 15(a) internal personnel to market the Fund’sshares so long (1)’° Section29(b) therefore could act as a sword by as the SEChas jurisdictionoverthe adviserto the Fund. all parties to a transaction in securities The Fund, its The reliefmight depend on the following factors: 41 personnel, and even the investor could make use of It. Individuals involved in marketing would be associ ated persons of the manager of the Fund or of a ‘ 15 1SC S50b-$ 2O1O. company affiliated with the manager. ‘° Blass, sup-ra note 121. ‘ 15 US,C. 78cc(b3 ‘2O12. Id. °‘ See id, SimIlar rescission rights are avatlable under the laws see 17 C.F.R. 240.3a4-1. of many states,

n’- , fl 3,, U “ -1 1 This addsa levelof uncertaintyto the Fund’scontractual Workie was quick to reject the suggestion that the obligations and therefore is highly undesirable, SEC’s position on transaction-based compensation, Moreover, as was made crystal clear by the Ranieri as it relates to Section 15(a)(1), had changed merely Partners settlement, a Fund that markets securities becauseit had chosen not to appeal the district court’s directlythrough an employeecould be held responsible Kramer 47ruling.’ According to Workie, “if a person if that employeeisfound to be actingas an unregistered is soliciting investors and promoting investment of broker under Section 4215(a)(1).’ This is especially securities, earning transaction-based compensation, true if the employee is being paid for his marketing and involved in key points of the securities distribu efforts through transaction-basedcompensationthat is tion, then that person is going to be required to reg contingentupon the occurrenceof an investment. ister as a broker-dealer.”’ Moreover, in discussing Finally,Fund managers should be aware of the dif the importance of the Ranieri Partners settlement, ference between regulatory requirements for a solici Workie noted4 that it “demonstrate[di that the [SECI tor of separate client accounts and a person marketing is serious about the consequences of engaging in un securities in the form of interests in a Fund. The latter registered broker-dealer activity, even in the absence clearlyraises the issueof broker registration under the of 45fraud.” Exchange Act, as well as state broker-dealer registra As for Chief Counsel Blass, his speech, discussed tion requirements. However,an arrangement between earlier, emphasized the SEC’sseriousness in enforcing an SEC-registered investment adviser and a solicitor of separate client accounts is subject to Rule 206(4)-3 under the Investment Advisers Act of I 94O.’

SECANDFINRAREACTIONSANDRESPONSES The SEC appears to be struggling to find the right balance with its public statements since the Ranieri Partners settlement. On one hand, the SEC wants to convey to the markets that it takes Section 1S(a)(1)’s broker registration requirement seriously and that it is willing to increase enforcement of it by going after parties that are not necessarily the alleged unregis tered broker. On the other hand, the SEC also appears to be telling the markets that it does not seek to over- Section 15(a)(1) in the context of “the private fund regulate by unnecessarilyrequiring parties to register adviser world.” Howeve; based on the previously as brokers with the SEC. This is clearly seen in state mentioned°5 developments to potentially broaden the ments made by two SECofficials:Chief Counsel Blass scope and application of Rule 3a4-1 through no- and Deputy AssociateDirector Workie. action relief, and statements IMassmade in a Septem Deputy Associate Director Workie commented ber 2013 panel discussion, his tone and that of the on the SEC’Sopenness to considering a “customized SEC has appeared softer.’ In the September panel, regulatory scheme,” or an alternative registration Blass explained that’5 his speech to the Trading and requirement, for “issues related to finders or people Markets Subcommittee was “part of a larger SEC acting in a limited broker-dea.ler 44capacity.” This, Staff effort to review th.e broker-dealer registration he explai.ned,could more or less he patterned on the requirements and exemptions, .nd did nor reflectany regulatory scheme established by the JOBS 145Ace. attem.ptto targe.tthe çrivate fund industry. “° On thc. “The JOBS Act takes a broker-dealer light approach to the regulation of funding portals.”’’ However, ‘j” Id. ‘‘ Id.

•‘‘ Ranieri Partners, 2013 WI. at 873219. Blass, supra note 121. ‘°Compare 17 CFR. 275,206(4(-3 (201 3(, with iS US.C. S 78o(a((). In some states, soiic,tors ,(cIients for investment advis See Update on SEC Staff Position on Pnvate Fund Broker- ers must be registered as Investment advisers or, if individuals, as Dealer Issues” (Ropes & Gray Alert, Ocr. 4,2(113). available at htrpoi Investment adviser representatives. www.ropesgray.cominews-and-insights/lnsighrsi2o I 3/l0fUpdate- on-SEC-Staff-Posinon-on-Private-Fund-Broker-Dealer-lssues. supra note 59. aspx (report on David B1asss commt-nts made on September 26, ‘-“ Id. 2013 during a Practising Law institute panel discussiomu. -‘ld. Id.

‘UND SAtES. SHOULD liii MAttE [ES: BE RLG:S7EEED contrary, he just wanted to start a dialogue with the of limited brokers in FINRRs limited broker project industry before the commencement of any potential for which FINRA is proposing rules relates to “lim enforcement actions.” He also commented on how ited corporate financing brokers,” defined as firms the SEC was 3shifting its focus to Rule 3a4-1 and its engaged solely in activities such as advising an issuer relation to fundraising personnel in the private Fund about its securities offering or advising a company industry) Specifically,he firstnoted that “typical in about itscorporate restructuring or merger.The term vestor activities, such as sending account statements, would not include any broker or dealer that carries fielding complaints, and sending other communica customer accounts, handles customer funds or securi tions werearguably not securitiesactivity,”in the con ties, accepts orders to purchase or sell securities, pos text of “non-securities activities needed to qualify for sessesinvestmentdiscretion, or engagesin proprietary the safe harbor” of Rule 3a4-1 ,‘ Blass also discussed trading or market-making. FINRA’sBoard of Gover permissiblecompensation for fundraisingpersonnel in nors met in December 2013 and authorized FINRA the private Fund industry.’’ He noted that, although to publish a Regulatory Notice seeking comment on Rule 3a4-1 flatlyrejects transaction-based compensa the proposed rules.” In the June 2013 interviewwith tion, the rule “permits sales activity” that was “based Colby,he indicated that the first set of limited broker on such factors as overall firm profitability, assets rules FINRA would publish would relate to “brokers under management or firm performance.”’ that help sell interests to institutional FINRA, which is charged57with carrying out the clients—no funds, no securities, institutional client day-to-day regulation of broker-dealers, has made it 162base,” Although Colby added that the new rules clear that it is seeking simplification and rationaliza should be published for review and comment toward tion of the regulation of certain categories of its mem the end of 2013, nothing has been released by FINRA ber broker-dealers,’ Tothis end, FINRAis seekingto relating to a limited fund marketer,” identify certain categories of broker-dealers for which 3 a simplified5 regulatory regime might be suitable) Robert Colby, FINRA’sChief Legal Officer,5 has ex CONCLUSION ’ Thisarticlehas identifiedthe basiclegalrequirementsfor plained that a limited broker for the purposes’ of this project would include only brokers who do not touch SECregistrationas a broker; the varietiesof interpreta customer funds or securities and who perform speci tions of these requirements by the SEC in its enforce fied limited roles in transactions)’° The first category mentactionsand courtsin interpretingand applyingthe law; and efforts being made by the Fund industry,its legal counsel, the SEC. its staff, and FINRA to facili tate wholesomemarketing activities by private Funds “ Id. without jeopardizingthe fundamentalgoalsof investor “‘Id, protection.Althoughthe subjectiscomplex,we believe it is sign “ Id. that a hopeful that the regulatory bodiesare showing genuine willingness address “ Id. a to these prob lemsin a constructivemanner.Staytuned! “‘See Interview by Chip Jones with Robert Colby, Chief Legal OfficegFINRA(Jun. 11,2013) lhereusafter,“ColbyInterv,ew”l,avail able at hnp//wwssfinra.orgJIndusrry/ReguIation/C,uidance/Commu Update: FINRA Board of Gor’ernors Meeting, FINRA ns,anonstoF,nns/P278036?utm source-MM&unnjned,um=email& (Dec 6, 2013), available at http:/twww.finra.org/Industry/ utni e,impaign’-WeeklyUpdate 061213 FINALpubhc. Regulanon/Guidance/CommunicanonstoFirms/P40 151 S. Id Colby Interview, SUPtS lot 158 Id 6 Id ©flrch Authorized Electronic Copy

This electronic copy was prepared for and is authonzed solely for the use of the purct,asertsubscnber This matenal may not be photocopied, e-maded, or otherwise reproduced or distributed without permission, and any such reproduction or redistribution Is a irolatlon ofcopyngflt law

For permissions, contact the Covnaht Clearance Center at http iiwww coovnaht comi

You may also fax your request to 1-978-646-8700 or contact CCC with your permission request viaemail at infocopynght corn Ifyou have any questions or concerns about this process you can reach a customer relations representative at 1-978-646-2600 from the hours of 800-530 eastern time

Journal of Ttzration and Regulation of Financial Institutions Authorized Copy Copyright © 2014 Civic Research Institute, Inc. This article is reproduced here with permission. All other reproduction or distribution, in print or electronically, is prohibited. All rights reserved. For more information, write Civic Research institute, 4478 U,S. Route 27, RO. Box 585, Kingston, NJ 08528 or call 609 6834450. Web: http :Pwww,civicresearchinstitute.comltfi. html,