SEC Relief For "M&A Brokers:" Not Required To Register As Broker-Dealers


The Chief Counsel of the SEC’s Division of Trading and Markets recently issued an important no-enforcement letter regarding the status of a person engaged in effecting transactions in connection with the transfer of ownership of a privately held company. This SEC letter is notable not only for the conclusions that it reaches but also for the fact that it follows a significant speech by the same SEC staff lawyer regarding the same and related broker-dealer status questions. These follow a decades-long discussion of the circumstances in which a person who assists in the sale of securities – whether they are securities of the issuer in a non-public offering, securities of the issuer in a transaction that results in a business combination with another company, or securities of an issuer engaging in a financing transaction with an entity that is functioning like a lender – is a “broker” required to be registered as such with the SEC.

When Is an M&A Broker Not a “Broker?"

The SEC no-enforcement letter concludes that a person facilitating the sale of the company will not be a “broker” so long as, among other things: 

  • the company being sold is privately-held;
  • the privately-held company is an operating company that is a going concern and not a “shell” company;
  • the facilitating person does not have the ability to bind a party to the transaction; and
  • the facilitating person does not have custody, control or possession of or otherwise handle funds or securities.

This update highlights key takeaways from this SEC no-enforcement letter and offers practical advice.

Background on Prior Concerns About Who Could Be Characterized as a “Broker”

For a number of years, it has been an open question as to when a person’s activities can migrate from permissible introductions and related social activities into a set of activities that could reasonably be characterized as “engaging in the business of effecting transactions in securities for the account of others”—the definition of “broker” in Section 3(a)(4) of the Securities Exchange Act of 1934. In general, the consequences of being wrong are the risks that the SEC will insist on registration and/or consider some range of civil punishment for effecting transactions while the person was improperly unregistered and the potential collateral effects on the issuers involved in the transactions.

The breadth of the potential status questions has included: 

  • transactions effected by banks before and after the enactment of Title II of the Gramm-Leach-Bliley Act and the lengthy and final joint rulemaking with the Board of Governors of the Federal Reserve System styled as Regulation R; 
  • finders and consultants who specialize in identifying potential investors in venture capital, private equity and hedge funds; 
  • employees of venture capital, private equity and hedge funds who stray outside the boundaries of Rule 3a4-1 under the Exchange Act; 
  • employees of operating companies engaged in buying and selling properties owned by the operating company but held in some kind of corporate format to advance business and/or tax goals of the operating company; and 
  • finders and consultants who specialize in identifying potential investments, whether on behalf of venture capital, private equity or hedge funds, or the entity seeking the potential infusion of equity capital or debt.

Some or all of these potential “transactions” may involve only private companies, and the transactions themselves may be effected in non-public transactions of one kind or another; however, the person attempting to facilitate the transactions may wish to be paid a success fee or something resembling an underwriting fee that could be characterized as “transaction-based compensation,” historically a hallmark of a person who is a “broker.” Numerous legal arguments have been raised about how to apply the definition of “broker” in each of these (and many other) scenarios, but suffice it to say that the potential ambiguity, and the potential risk, of being “wrong” has been of great concern to corporate and securities lawyers.

Recent Guidance from Chief Counsel of the SEC Division of Trading and Markets

In this context, the speech given by the Chief Counsel of the Division of Trading and Markets at the ABA Business Law Section’s Spring Meeting in 2014 raised the level of concern even though its author carefully noted that he was speaking for himself, not the SEC staff, and not the SEC, since his position at the SEC is with the Division that has administrative responsibility for the broker-dealer regulatory provisions in the Exchange Act. The conciliatory remarks at the end of this speech were taken seriously by the securities bar, as was the discussion in this speech of the ABA Business Law Section’s long-standing legislative proposal to create a “broker-dealer lite” regulatory framework for the kinds of activities identified in the last five bullet points noted above where the precise activity in which the person would engage would not require capital, would involve private companies in private transactions, and would not affect the public securities markets or retail brokerage customers.

Other Key Takeaways from the SEC’s No-Enforcement Letter

The facts addressed in the SEC’s recent no-enforcement letter, whether a person engaged in effecting transactions in connection with the transfer of ownership of a privately held company was a “broker,” seemed tailor-made for a decision whether it was possible to engage in the business of facilitating a narrow set of transactions without necessarily having to become registered as a “broker.” This remarkable letter also appears to: 

  • not prohibit “transaction-based compensation;” 
  • allow the facilitating person to participate substantially in negotiations, including advising on whether to sell assets or securities, as long as that person lacks the power to bind the parties; 
  • not require determination of the facilitating person’s fees before the transaction is to occur; 
  • allow the sale of less than 100% of the securities of the operating company and allow a relatively low (25%) ownership requirement that should apply to leveraged recapitalization transactions and potentially even growth equity deals; and 
  • not require the facilitating person to list the assets, rather than the securities, that are for sale.

No-Enforcement vs. No-Action. At the more jurisprudential level of analysis, the Chief Counsel of the SEC’s Division of Trading and Markets refers to this letter as a “no-enforcement” letter, as distinct from a “no-action” letter, and expressly disavows agreeing with the legal arguments that were advanced by those who were seeking the response. Although courts are not required to defer to SEC staff no-action letters, and some courts have not, the legal status in a court of a no-enforcement letter seems especially problematic for a defendant attempting to argue that the SEC itself does not require registration for the activities described in the no-enforcement letter. The Gramm-Leach-Bliley Act amended the Exchange Act to give the SEC the ability to accept exemptive applications, a process long relied upon by the SEC in administering both the Investment Company Act of 1940 and Investment Advisers Act of 1940 to issue orders exempting the applicant from some specific prohibition based on policy grounds and prophylactic conditions. The issues addressed by this no-enforcement letter might have been better raised using that administrative process rather than the more limited approach necessitated with issuing no-action or no-enforcement letters.

No Limitation on Transaction-Based Compensation. The absence of any limitation on compensation, especially “transaction-based compensation,” is very interesting. For at least the last several decades, the existence of “transaction-based compensation” in a particular fact situation has made legal analysis exceedingly difficult, particularly if the person who would receive that success fee was “in the business” of engaging in that activity. This SEC letter gives us hope that, in the future, it will be possible to analyze whether a person is a “broker” without having to place an unnecessary amount of weight on that particular factor.

Trap for the Unwary

Could M&A Brokers Still Be Deemed Investment Advisers…or Brokers Under State Law? This SEC no-enforcement letter is silent on the status of the facilitating person under the Investment Advisers Act. Whether or not the compensation to be received by the facilitating person is “transaction-based compensation” or is impermissible under the Exchange Act, it seems clear that it would be “compensation” within the meaning of the Investment Advisers Act: it would be received by person who was engaged in the business of giving investment advice, and the investment advice would be rendered to “others,” fully satisfying the necessary elements in the definition of “investment adviser” in the Investment Advisers Act. It is, however, unlikely that such a person would have the necessary regulatory assets under management and be giving investment advice on a continuous basis to be eligible to register with the SEC and would therefore be required to register with the appropriate state investment adviser authorities. This SEC letter is silent on this status question, perhaps because of the nature of the question that was asked or perhaps because of the bureaucratic fact that the Division of Trading and Markets is not responsible for the administration of the Investment Advisers Act within the SEC. Whatever the actual reason, the fact that this letter is silent should not lead one to the conclusion that there is not a status question under the Investment Advisers Act that needs to be resolved, too. In addition, this letter does not address whether a person facilitating the sale of company could be a “broker” required to be registered as such under applicable state law. 


All things considered, and leaving aside the questions that it raises, this SEC no-enforcement letter is a very good development and will bring needed certainty to what has been a very troublesome area. We hope it might not be too much to anticipate that this letter will be the first of several letters that will deal with situations like those described above in a way that makes it possible to structure transactions that do not need the full panoply of broker-dealer regulation to protect the sophisticated persons engaging in those transactions.

Additional Information

This update provides a summary of key takeaways from the no-enforcement letter recently issued by the Chief Counsel of the SEC’s Division of Trading and Markets. You can read the full text of this no-enforcement letter here. You can read the full text of the speech given by David Blass at the ABA Business Law Section’s Spring Meeting in 2014 here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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