SEC Signals Zero Tolerance for Unregistered Broker Activity

The SEC has made it unmistakably clear: if you are paid for selling securities, you must be a registered broker.

Word of advice from a securities lawyer: if it’s a gray zone, go get registered. It’s not that hard, and it’s certainly not worth the risk.

In a string of January 2025 settlements, the Commission reaffirmed that transaction-based compensation remains the defining hallmark of broker-dealer status under Section 15(a) of the Securities Exchange Act of 1934 (“Exchange Act”). Individuals and firms operating as “finders” in private placements—often under the mistaken belief that they fall into a regulatory gray zone—are finding themselves squarely within the SEC’s enforcement crosshairs.

The Legal Framework: Section 15(a) of the Exchange Act

Section 15(a)(1) of the Exchange Act provides that “any broker or dealer… engaged in the business of effecting transactions in securities for the account of others” must register with the Commission. Broker-dealer registration entails not only SEC oversight, but also membership in the Financial Industry Regulatory Authority (FINRA) and the attendant compliance obligations.

Courts and the SEC have long identified a set of indicia of “broker activity,” including:

• Solicitation of investors (Massachusetts Financial Services, Inc. v. SIPC, 411 F. Supp. 411, 415 (D. Mass. 1976), aff’d, 545 F.2d 754 (1st Cir. 1976), cert. denied, 431 U.S. 904 (1977));

• Negotiating terms of transactions;

• Providing advice or promotional materials designed to induce purchases; and

• Receipt of compensation contingent on the success or size of a securities transaction (see Brumberg, Mackey & Wall, SEC Staff Denial of No-Action Relief (May 17, 2010)).

Transaction-Based Compensation: The “Salesman’s Stake”

The Commission has consistently emphasized that receipt of transaction-based compensation is “a hallmark of broker-dealer activity” because it creates a direct financial incentive to push securities sales, regardless of investor suitability (see id.; see also Dominion Resources, Inc., SEC No-Action Letter (July 23, 1985), revoked Mar. 7, 2000). In the January 2025 settlements—PMAC Consulting, LLC, Exchange Act Rel. No. 102230 (Jan. 17, 2025); Tamir Shabat, Rel. No. 102174 (Jan. 14, 2025); Danny Z. Spiegel, Rel. No. 102175 (Jan. 14, 2025); Joseph J. Orlando Jr., Rel. No. 102176 (Jan. 14, 2025)—the SEC again stressed this principle.

Importantly, the SEC construed “compensation” broadly. In one matter, the finder received “heavily discounted shares” in lieu of cash commissions. The Commission viewed this arrangement as no less problematic, underscoring that the form of payment is irrelevant—what matters is whether the economic arrangement creates a “salesman’s stake” in the outcome.

Expanded Liability Theories

The recent orders also highlight the SEC’s willingness to assert broad liability:

• Dual-Hat Conflicts: One respondent, employed at a registered investment adviser, was found to have engaged in broker activity outside of his advisory role. The fact that his compensation was transaction-based—and not tied to advisory fees—was dispositive (see VCP Financial LLC, Investment Advisers Act Rel. No. 6819 (Jan. 14, 2025)).

• Aiding and Abetting: In another action, the SEC alleged that a finder not only acted as an unregistered broker himself, but also “caused” and “aided and abetted” the unregistered broker activity of others he recruited into the scheme.

• Absence of Fraud Allegations: Notably, several cases proceeded without parallel fraud charges. The message: violations of Section 15(a) are independently actionable, even absent misrepresentation or scienter.

Implications for the Proposed Finder Exemption

The Commission’s aggressive stance appears inconsistent with the spirit of its 2020 proposed exemptive order, which would have provided a limited safe harbor for “Tier I” and “Tier II” finders engaged in narrow solicitation activities. That proposal was never adopted, and the latest enforcement actions suggest it remains on indefinite hold. Market participants should assume that no de minimis exception exists where transaction-based compensation is involved.

Practical Consequences

Violations of Section 15(a) can carry draconian consequences: rescission rights for investors (Exchange Act § 29(b)), disgorgement of all compensation received, civil penalties, prejudgment interest, and industry bars. Companies that engage or pay unregistered finders risk being deemed to have aided and abetted these violations, exposing themselves to secondary liability.

The Commission has sent a straightforward message—echoing the title of its latest enforcement campaign: no commission without permission. Until the SEC adopts a formal exemption, issuers and intermediaries should assume that any person receiving compensation tied to securities sales must be a registered broker-dealer or associated person of one.

* * *

Attorney Advertising — we provide this information as a service to clients, prospective clients, and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship.