FINRA and Finder Fees; Broker Dealers by Laura Anthony, Palm Beach - YouTube

I’m attorney Laura Anthony founding partner of Legal & Compliance, a full service corporate,

securities, and business transactions law firm.

Today is the continuation in a LawCast series talking about finder fees.

Broker-dealers, in general, lack an incentive to engage in small private capital-raising

transactions.

In addition to regulatory and liability concerns, the amount of a capital raise by a small and

emerging company is often less, say about $5 million than for a larger company and accordingly,

the potential commission for a broker-dealer is limited as compared to the time and risk

associated with the transaction.

Most small and middle market bankers have base-level criteria for acting as a placement

agent in a deal.

That criteria includes the amount of commission they would need to collect in order to become

engaged.

From a regulatory perspective, when acting as a placement agent in a private offering,

broker-dealers must consider FINRA filing rules, general know-your-customer rules, suitability

standards, as well as statutory liability under Dodd-Frank and the SEC antifraud provisions.

Even when a broker agrees to act as placement agent, it can often be difficult to locate

investors for small or emerging or start-up companies.

It would be helpful if unlicensed individuals could refer investors to the broker-dealer,

who would then ensure that proper disclosure has been made to the investor, and that the

investment is suitable for such investment.

However, FINRA Rule 2040 prohibits the payment of transaction-based compensation by member

firms to unregistered persons.

FINRA Rule 2040 expressly correlates with Section 15(a) of the Securities Exchange Act

and prohibits the payment of transaction-related compensation unless a person is licensed or

properly exempt from such licensing.

Rule 2040 prohibits member firms from directly or indirectly paying any compensation, fees,

concessions, discounts or commissions to: (1) any person that is not registered as a

broker-dealer under Securities Exchange Act Section 15(a) but, by reason of receipt of

any such payments and the activities related thereto, is required to be so registered under

applicable federal securities laws and Securities Exchange Act rules and regulations; or (2),

any appropriately registered associated person, unless such payment complies with all applicable

federal securities laws, FINRA rules Securities Exchange Act rules and regulations.

FINRA guidance on the Rule states that a member firm can: rely on published releases, no-action

letters or interpretations from the SEC staff in determining when a payment can be made,

can seek no SEC no-action relief itself; or (iii) obtain a legal opinion from an independent,

reputable U.S. licensed attorney knowledgeable in the area.

This list is not exclusive and FINRA specifically indicates that member firms can take any other

reasonable inquiry or action in determining whether a transaction fee can be paid to an

unlicensed person, in any given scenario.

FINRA Rule 2040 specifically allows the payment of finders’ fees to unregistered foreign

finders where the finder’s sole involvement is the initial referral to a member firm of

non-U.S. customers and certain conditions are met, including but not limited to that

the person is not otherwise required to be registered as a broker-dealer in the U.S.,

the compensation does not violate foreign law.

the finder is a foreign national domiciled abroad, the customers are foreign nationals

domiciled abroad, the payment of the finder’s fee is disclosed to the customer, the customers

provide written acknowledgment of receipt of the notice related to the payment of the

fee, proper records regarding the payments are maintained, and each transaction confirm

indicates that the finder’s fee is being paid.

In other words, finders’ fees can generally be paid for regulation S and 144-A transactions

but not for U.S. based other Reg D transactions.

I’m securities attorney Laura Anthony, founding partner of Legal & Compliance, and producer

of LawCast.

Should you have any questions about today’s topic, please visit SecuritiesLawBlog.com

and LawCast.com, or contact me directly.

Inquiries of a technical nature are always encouraged.