Broker-Dealer - Third Party Marketing on behalf of Funds in the United States - July 2018
In general if a person sells or markets securities or similar products for third parties then they need to affiliated with a broker-dealer and be registered (usually holding the various FINRA licenses). The legislative authority comes from S.15(a)(1) of the Securities and Exchange Act of 1934 which provides that a person that acts as a broker or dealer in interstate commerce requires to be registered. Under S.3(a)(4)(A) a “broker” is a person engaged in business of effecting securities transactions for others. When it comes to funds if the person is acting as a third party marketer this means that the person needs to be registered.
The only situation in a private fund context where an unregistered person is legally allowed to sell securities is where they are a partner or employee of the issuer/ manager and they are only “selling" their own fund in a passive manner. This “safe harbor” exception to the rule requiring a person be registered as a broker is where an “associated person” of the issuer is involved in limited securities sales or offerings. SEC Rule 3a4-1 codifies the requirements to use that safe harbor. One the primary rules is that the associated person cannot receive payment of commissions, bonus or remuneration based on the sales of securities. The additional requirements are that the associated person must not be disqualified and must not be otherwise affiliated with a broker dealer.
Any products sold by an unlicensed broker dealer may be subject to rescission by investors (which means the investors could request their original investment back at any time).
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