SEC Takes Action Against Unregistered Broker-Dealers

The US Securities and Exchange Commission (SEC) recently settled with StraightPath Venture Partners, LLC and PMAC Consulting after alleging that both firms engaged in unregistered broker activity under the Securities Exchange Act of 1934. The settlements will require these firms to pay significant civil penalties and fees. These actions underscore the SEC’s commitment to holding unregistered broker-dealers accountable and serve as a vital reminder for those involved in securities transactions to carefully consider their broker-dealer status before engaging in broker activities or working with third parties.

Under the 34 Act, individuals or entities engaged in the regular buying and selling of securities must register as a broker or dealer and comply with the regulations outlined in the Act. Broker-dealers must file and update Form BD, join a self-regulating organization, and submit a Form U-4 for any associated person. The definition of an associated person encompasses a broad range of individuals, including managers, directors, part-owners, or employees of a broker-dealer, as well as those with common control. The Investment Advisers Act of 1940 has similar regulations for determining associated persons for investment advisors.

Third-party arrangements, such as private equity funds paying finders or business brokers to connect investors, may trigger broker-dealer status under the 34 Act. Factors considered by the SEC include whether fees are contingent on investment, increase with investment size, and the timing and nature of broker activities performed by the individual receiving the payments.

In a settlement with the SEC, VCP Financial LLC’s principals were found to have acted as unregistered brokers by selling membership interests in limited liability companies purportedly investing in pre-IPOs. The SEC alleged that, due to receiving transaction-based compensation, these principals violated Section 15(a) of the 34 Act. VCP was also accused of failing to disclose conflicts of interest, violating Section 206(2) of the Advisers Act.

Similarly, PMAC Consulting and its owner were charged with engaging in unregistered broker activity despite a previous ban on such activities. The owner transferred clients from a previous organization and assured them that business operations would not change, leading to a settlement with industry and penny stock bars, and a significant civil penalty.

In light of recent SEC enforcement actions and the agency’s focus on fraud prevention, individuals and entities involved in securities transactions should exercise caution when dealing with third parties or engaging in activities that may require broker-dealer registration. The ArentFox Schiff Capital Markets team is available to assist in determining broker-dealer and investment advisor status and ensuring compliance with securities laws.