One of the things I’ve learned since returning to private practice three years ago is that people like to raise money for profitable enterprises when they can. And why not? It can be lucrative. And if the people raising the money have the right connections, maybe even easy! But these people don’t always love the idea of becoming registered as a broker-dealer. They will imagine many reasons why they don’t have to do such a thing. Some of those reasons are legitimate, but others can be shaky. At times, for example, these people will say, Well, we’re going to affiliate with a registered broker-dealer, so we don’t have to register ourselves.
Watch out for that reason. Because the SEC went a way toward taking the wind of its sales in May with a case it brought against Rafferty Capital Markets, a registered broker-dealer in New York. The short version is, Rafferty allowed an unregistered firm to use its license to execute securities trades about 100 times. Here’s the key part of the press release:
"According to the SEC’s order instituting settled administrative proceedings, Rafferty agreed to serve as the broker-dealer of record in name only for approximately 100 trades in asset-backed securities that were actually introduced by the unregistered firm. While Rafferty held the necessary licenses and processed the trades, it was the unregistered firm that managed the business. Five of the firm’s employees became registered representatives with Rafferty but they performed their work in the offices of the unregistered firm, which retained sole authority over their trading decisions and determined their compensation. Rafferty had no involvement in the trading or compensation decisions while the registered representatives executed the trades through Rafferty’s systems on behalf of the unregistered firm. Based on the agreement, Rafferty kept 15 percent of the compensation generated by these trades and sent the remaining balance to the unregistered firm.
The SEC’s order found that Rafferty (1) willfully violated Section 17(a) of the Exchange Act and Rules 17a-3(a)(1) and 17a-4(b)(4) (record-keeping violations, basically), and (2) willfully aided and abetted and caused the as-yet unnamed unregistered firm’s violation of Section 15(a) of the Exchange Act.
I think the lesson here is fairly simple: if you’re not a registered broker, but you’re acting as one, you can’t escape liability by simply running the transactions through a properly registered firm. The SEC doesn’t love it and could seek to bring an enforcement action to sanction it. This unregistered firm may be up next.
