The Securities and Exchange Commission’s (SEC) position on the payment of finder’s fees to non-registered broker-dealers has been further clarified in a recent request for a No-Action Letter which was denied by the SEC. That clarification bodes poorly for those who are looking for a more expansive interpretation of the finder exemption from broker-dealer registration. Historically, in determining whether a person should be registered as a broker-dealer, the SEC has primarily considered five factors in evaluating the conduct of the unregistered participant: (i) whether the person participates in the negotiations surrounding the transaction; (ii) whether the person makes recommendations or gives advice concerning the transaction; (iii) whether the person receives transaction based compensation in connection with the transaction; (iv) whether the person has engaged in previous securities transactions; and, (v) whether the person takes physical possession of the securities or monies to be transferred between the parties introduced. The SEC has stated numerous times that the presence of any one of the factors would not necessarily cause the SEC to conclude that the person is acting as a broker in the transaction. The SEC denial to the request for No-Action Letter appears to change that presumption.

Thus, while the activities of finders and subsequent payments to finders for the referral of potential clients have been the subject of numerous decisions and interpretations by the SEC, it appears that the SEC is moving away from its historical reliance on the balancing of the five factors as to whether it will require broker-dealer registration. The denial of the request for No-Action Letter clearly reflects that the current position of the SEC, which appears to have transitioned to point where the payment of transaction based compensation may be the primary factor to be considered with respect to the requirement to register as a broker-dealer.

Daniel E. LeGaye, Author