In April 2020, the Investor Protection Bureau of the New York State Attorney General’s office (OAG) announced its efforts to modernize the state’s securities laws. As part of this initiative, the OAG proposed the registration of “solicitors” as investment advisers and “finders” as brokers. The OAG adopted final rules requiring solicitor registration commencing February 1, 2021, as discussed in our prior alert, however, the requirement for finder registration was declined. The changes for solicitors and finder are briefly summarized below.
The OAG’s proposal sought “to clarify the registration and exam requirements for certain currently-undefined subclassifications of . . . investment advisers that are paid to match up investors with securities industry participants.” Currently, under the OAG’s new rule, each solicitor with more than five clients in the State of New York must register as an investment adviser.
The term “solicitor” is defined as a person who as part of a regular business, engages in the business of providing investment advice to the limited extent that such person receives compensation for introducing a prospective investor or investors to an investment adviser, including a Securities and Exchange Commission (SEC) registered investment adviser, subject to certain exceptions. The definition of “solicitor” is intended by the OAG to be consistent with the SEC’s definition in the Solicitation Rule under Investment Adviser Act Rule 206(4)-3.
Solicitors required to be registered are subject to the same registration and examination requirements as investment advisers. In addition, principals and representatives of such solicitors are subject to the same registration and examination requirements as investment adviser representatives.
Under federal law, a person engaged in the business of effecting transactions in securities for others’ accounts is generally considered a broker and thus, required to register as such with the SEC.
However, certain persons act as finders and not as brokers, and argue that registration is not required. The term finder is not a legal term, but rather a term that has grown up around an industry of persons who, although receiving compensation for introducing investors to companies looking to raise money, assert such activity does not rise to the level of acting like a broker and, therefore, registration was not required.
The SEC has provided guidance in this area, which has historically left open the possibility of receiving transaction-based compensation without the necessity of registration. In October 2020, the SEC proposed an exemption from registration for certain “finders” and the proposal is still pending.
The OAG proposed to define “finders” to require registration under New York State law. However, when adopting final rules, the finder registration was dropped in deference, for now, to the SEC’s current rulemaking on finders. However, the OAG noted that “[f]inder conduct is a subset of conduct defined under GBL §359-e(1)(b), and thus already requires registration. . . . OAG intends to issue guidance on the types of finder activity that constitute broker activity under GBL §359-e(1)(b) and any registration requirement for such finders.”
 When counting clients, exclude certain enumerated financial institutions and institutional buyers.