SEC Proposed Finder Rule Clarifies Little

January 29, 2021
Murky water, similar to what the SEC is doing with their finders exemptive relief proposal

The SEC’s proposed order has implications for all sellers. While meant to open private capital markets and expand finder activities, the unintended consequence may be the blurring of the lines between finders and sellers, subjecting unwitting investment advisers and insurance producers to claims for unlicensed securities sales.

By Paul Vorndran

Issued October 7, 2020, the SEC’s proposed exemptive order would make certain finders exempt from the obligation to be licensed to sell securities. The order, which is designed to provide small business access to capital by creating new categories of finders exempt from registration requirements, is raising real concerns. Two SEC Commissioners, the North American Securities Administrators Association (NASAA) as well as 30 state administrators are among those who have issued statements and comments strongly opposed to the direction the SEC is taking in opening up private markets and making private placement finders less accountable to the law. Dissenters claim that releasing finders in the private market without an appropriate regulatory framework gives bad actors greater freedom to perpetuate fraud. In its comments to the SEC, NASAA goes so far as to say the proposal could harm the same small businesses the SEC is trying to help by “harming issuers and repelling investors”.

The SEC’s finder exemption attempts to carve out a clear position on compensation for various securities sales activities. Under existing laws, investment advisers cannot sell a security and receive transaction-based compensation. Yet, an investment adviser who acts as a finder under this order could be permitted. Further, this order could affect insurance producers and investment advisers who bring investors to the table. Rather than clarifying the seller position in these situations, this order would create a hybrid position for finders and sellers acting as finders, further dirtying already murky waters.

The proposed order would provide a new broker-dealer exemption for private placement finders as part of a larger exemptive framework that the SEC is pursuing. The order would be limited to natural person finders introducing accredited investors to private companies in connection with a private placement of securities. Finders recruiting investors could collect compensation but would still be restricted from offering investment advice. 

The SEC’s proposed order would not be a statutory change. NASAA’s opposition could mean that states will go another route, in an opposite direction to the SEC and undermine advances the SEC expects to make for capital market expansion.

This is not an area that is well understood by licensed individuals and sellers, which can include broker-dealers, securities sales representatives, investment advisers and insurance producers. The proposed order has implications for all sellers, and it comes down to how individuals are compensated. What is clear is that ‘finders’, including investment advisers and insurance producers, could be considered both sellers and targets of fraud when recruiting investors to buy securities based upon the order’s new category of finders.

While expanding finder activities, there is no question this order, if adopted, would muddy the water for sellers. Sellers, including investment advisers and insurance producers, acting as finders without a compliance arm to vet their responsibilities, make this population of actors highly exposed. It is the unwitting that get caught. The new administration and new SEC Commissioners, however, could make all bets off for the passage of the order.

Paul Vorndran has represented the Colorado Securities and Insurance Commissioners and brought enforcement actions against both promoters and non-securities licensed, independent insurance agents. Now he works the other side, advising and defending licensed insurance agents and investors. He can be reached at pvorndran@joneskeller.com.

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This information is not intended as legal advice. Readers should seek specific legal advice before acting with regard to the matters addressed above.