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Commentary: FINRA's Latest Attempt to Deal with Finders
Traders Magazine Online News, January 13, 2010
It happens at this point in every business cycle.
It all starts when broker-dealers lay off a lot of their employees. It is often impossible for these former employees to replace what was lost. Even if they find a job at another firm--and most of them will not--the compensation will be less, often much less, and the working conditions will be terrible.
The inability to find work, more than anything else, inspires entrepreneurial zeal. Since no firm will hire them, laid off employees put themselves to work by starting their own businesses. Former investment bankers, institutional sales-traders and retail brokers call up their old customers to see if something can be done, essentially attempting to perform the same functions they used to accomplish with their former employers. Former customers may be happy to hear from their old rep, particularly if they think that the same work can be performed for a lower fee.
Sadly, these activities are unlawful if they are not conducted by a registered broker-dealer. It isn't easy, and costs a fair amount of money, to register a broker-dealer. People who are out of work generally are not in a position to make this sort of commitment.
But, isn't there such a thing as a "finder?" This is a question I have been asked at least once each year during my career as a securities lawyer, more often at times like these. The answer is that finders may exist, but I have never met one. Finders are something like the Loch Ness monster, Bigfoot or unicorns--mythical creatures.
The finder concept, as it exists in the securities laws, emerges out of a Second Circuit decision that sought to interpret the terms "broker" and "dealer" in the Securities Exchange Act of 1934. These definitions are important because anyone that is a "broker" or a "dealer" as defined in the Exchange Act is required to register with the SEC.
The term "broker" is defined as any person that is engaged in the business of purchasing or selling securities for the account of others. A "dealer" is engaged in the business of purchasing or selling securities for its own account. The Court reasoned that a person that purchased and sold securities for the account of others, or for its own account, but was not actually "engaged" in that business, must not be a broker or dealer. Such a person might be a "finder."
There was a case involving a baker in Rochester, New York, who realized that one of his clients was looking to buy a business, while another was looking to sell. The baker hooked them up, and to express their delight, they wished to pay him for thinking about them. However, since the transaction involved the purchase of securities, the cautious lawyers involved decided to ask the SEC's views before advising their clients to pay the baker. With extreme reluctance, the SEC agreed that the baker probably was not "engaged in the business" of purchasing or selling securities for the account of others and therefore was entitled to receive payment for his efforts. The SEC's no-action letter strongly suggested that the baker should not try to do this twice.
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