New York Proposes Investment Industry Modernization And

The New York State Investor Protection Bureau of the Department of Law ("IPB") announced on April 6, 2020, its proposal to update its rules for broker-dealers and investment advisers (the "Proposal").¹ While part of the IPB's ongoing modernization efforts, the Proposal defines and classifies "Finders" and "Solicitors" and, for the first time, explicitly requires registration and exam requirements for both. The Proposal was published in the New York State Register on April 15, 2020, and is available for public comment until June 15, 2020.²

Background

Historically, finders have sought to operate outside of the definition of "broker" or "dealer" in an undefined area of securities law. The staff of the US Securities and Exchange Commission ("SEC") has acknowledged the existence of finders and provided regulatory relief from broker-dealer registration requirements for specific activities on a number of occasions, but the SEC has never formally defined or exempted finders.³

Some defining traits of a finder were that a person could "find" merger and acquisition candidates for clients and provide financial analysis but not participate in public offerings or in negotiations between its client and the merger and acquisition candidates.⁴ The SEC's view of finders evolved through the 1980s, with the high-water mark being the recognition-albeit narrow-that certain persons could receive transaction-based compensation.⁵ In recent years, the SEC has distanced itself from the position taken in the Paul Anka letter, and it is unlikely that staff would issue that letter today.⁶

Today, SEC staff view transaction-based compensation as indicia of being "in the business," fulfilling an essential element in the definition that triggers a registration obligation. Consistent with the early view, however, finders that facilitate certain narrowly defined private, non-passive, change-in-control transactions need not register as a broker or a dealer.⁷ SEC Division of Enforcement staff has taken the position that there is no exception generally available to finders that would put them outside of the broker-dealer registration requirement.⁸ SEC staff has recognized, however, that certain online "portals" that receive a form of transaction-based compensation need not register as a broker or a dealer because they are not deemed to be "in the business."⁹ These portals typically facilitate a broker-dealer's online operations and may have varying compensation arrangements that call into question their status as a broker or a dealer.¹⁰

Discussion about a class of persons distinguishable from brokers or dealers referred to as finders or portals remains a subject requiring rigorous analysis.¹¹

The Proposal

"Finder" and "Solicitor" Registration and Examination Requirements

The Proposal deviates from the SEC's historical approach to finders by explicitly defining "finders"¹² and "solicitors"¹³ and requiring that they comply with relevant broker-dealer or investment adviser registration and examination requirements, respectively. While the update to these definitions is styled as a clarification of the status of persons who match investors with securities industry participants, the Proposal may create state law concerns for finders and other similar business brokers that have relied upon the SEC's approach to finders.

Under the Proposal, a "finder" would have to comply with the following filing requirements:

Finders not associated with a registered broker-dealer must file Form M-1.
Finders associated with a non-Financial Industry Regulatory Authority, Inc. ("FINRA") member broker-dealer must file Form M-2.
Finders associated with a FINRA member broker-dealer must file Form U4.

Finder registration periods for non-FINRA members are four years, while FINRA members must follow applicable FINRA registration rules.

Notice Filing Requirements

The Proposal also provides for certain notice filings for federal "covered securities" sold by or to persons who are New York residents. Securities dealers who participate in offerings of federally covered investment company, Regulation D, or Regulation A Tier 2 securities will be required to file the relevant Form NF, Form D and Uniform Notice of Regulation A - Tier 2 Offering, respectively, and any related supplemental filings or amendments with the New York State Department of Law through North American Securities Administrators Association's ("NASAA") Electronic Filing Depository ("EFD"). The Proposal also adjusts the timelines for the required submission of such filings harmonizing them with federally set timelines.

Other Updates

The Proposal also would codify certain recordkeeping requirements for investment advisers registered with the state of New York for the verification of a client's "accredited investor" and "qualified client" status. The Proposal also adjusts the provisions to account for technological updates and corrects certain outdated terms and other minor errata.

Footnotes

¹ Attorney General James Moves to Modernize and Streamline Securities Filings in NYS (Apr. 6, 2020), https://ag.ny.gov/press-release/2020/attorney-general-james-moves-modernize-and-streamline-securities-filings-nys.

² Investment Advisers Defined Under General Business Law, section 359-eee, XLII (No. 15) N.Y. Reg. 8 (Apr. 15, 2020); Brokers, Dealers and Salespersons Defined Under General Business Law, section 359-e, XLII (No. 15) N.Y. Reg. 10 (Apr. 15, 2020).

³ See, e.g., Exch. Act Rel. No. 86,129 (June 18, 2019) ("The status of persons that provide introductions or otherwise solicit potential investors for an issuer (generally, 'finders') is not discussed within this release. The Division of Trading and Markets is reviewing the status of finders for purposes of Section 15(a) of the Exchange Act"); SEC No-Action Letter, M&A Brokers (Feb. 4, 2014); Speech by David Blass (Apr. 5, 2013) ("I have in mind the broker-dealer registration requirements as they apply to ... placement agents, finders, and business or M&A brokers"). SEC Guide to Broker-Dealer Registration (Apr. 2008) (mentioning "finders" and "business brokers"); SEC No-Action Letter, Paul Anka (July 24, 1991).

⁴ See, e.g., SEC No-Action Letter, Corp. Forum., Inc. (Dec. 10, 1972).

⁵ See SEC No-Action Letter, Paul Anka; see also SEC No-Action Letter, Int'l Bus. Exch. Corp. (Dec. 12, 1986).

⁶ See, e.g., Comments by Kristina Fausti at the SEC's Forum on Small Business Capital Formation (Nov. 20, 2008) ("from the staff point of view, there is no progeny of Paul Anka").

⁷ SEC No-Action Letter, M&A Brokers (Feb. 4, 2014).

⁸ See, e.g.,SEC Brief in File No. 3-15764 (Sept. 26, 2016) (asserting that "there is no 'finder exception' to the broker-registration requirement of the federal securities laws").

⁹ See, e.g., SEC No-Action Letter, Evare, LLC (Nov. 30, 1998); SEC No-Action Letter, Charles Schwab & Co., Inc. (Sept. 18, 1997); SEC No-Action Letter, Charles Schwab & Co., Inc. (Nov. 27, 1996); SEC No-Action Letter, Quick America Corporation (June 28, 1993).

¹⁰ See SEC No-Action Letter, Swiss American Securities, Inc. and Streetline, Inc. (May 28, 2002) (SEC staff permitted an arrangement where a portal received per-order fees without registering as a broker-dealer); cf. Special Study: On-Line Brokerage: Keeping Apace of Cyberspace, Report of Comm'r Laura S. Unger to the SEC (November 1999) (The Report recommended "alternative compensation arrangements" in response to the prevalence of success-based fees.).

¹¹ See, e.g., SEC, 2019 Small Business Capital Formation Report 9 (Aug. 14, 2019) ("the Division of Trading and Markets is considering recommending that the Commission propose rules concerning the status of finders for purposes of Section 15(a) of the Securities Exchange Act of 1934").

¹² Under the Proposal, "finder" would mean "a person, firm, association, or corporation who as a part of a regular business, engages in the business of effecting transactions in securities for the account of others within or from this state, to the limited extent that such person, firm, association or corporation, receives compensation for introducing a prospective investor or investors to any broker, dealer or salesperson."

¹³ Under the Proposal, "solicitor" would mean "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 or a federally covered investment adviser unless such person would be excluded from the definition of investment adviser under an enumerated exception.."

Article originally published on 7 May 2020

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