SEC Needs more than Transaction-Based Compensation to Prove Broker Activity


A Florida court has rejected the Securities and Exchange Commission’s single-factor transaction-based compensation test for broker activity, perhaps signaling a more favorable view toward “finders” in the future. The court held that an array of non-exclusive factors should be evaluated to determine whether a finder engaged in broker activity. These factors include - in addition to receipt of transaction-based compensation - participation in securities transactions at key points, negotiation of the terms or details of a transaction, offering of advice or valuation information, and the aggressive pursuit of investors, for example.

In SEC v. Kramer, No. 8:09-cv-455-T-23TBM (M.D. Fla. Apr. 1, 2011), Kenneth Kramer and Bruce Baker were business partners. Baker had facilitated a reverse merger on behalf of Skyway Communications Holding Corp. and continued to be compensated, pursuant to an agreement, for his efforts in promoting Skyway. As his partner, Kramer helped Baker promote Skyway and soon reached an understanding with the company that he would be compensated directly if he introduced potential investors who in fact invested in Skyway. Neither Baker nor Kramer was a registered broker.

In 2003, Kramer arranged a successful meeting between Skyway management and a broker interested in promoting Skyway shares, and Skyway paid Kramer handsomely for the introduction. Kramer also received a twenty percent commission in the form of Skyway shares from Baker when Kramer’s family, close friends, and business acquaintances bought shares in Skyway. Kramer had done nothing more than tell these acquaintances that Skyway was a good company and good investment and encourage them to read Skyway press releases and visit the company’s website.

The Commission sued Kramer alleging that his conduct violated the Exchange Act’s broker registration requirement. Following a bench trial, the court found for Kramer. According to the court, “the Commission’s proposed single-factor ‘transaction-based compensation’ test for broker activity. . .is an inaccurate statement of the law.”

This holding harkens back to the view taken by the Commission in a 1991 No-Action letter. In that letter, the Commission stated it would not recommend enforcement of the broker registration requirement against celebrity Paul Anka who had been offered a contingent investment commission in exchange for providing a list of potential investors - and nothing more - to a professional hockey team. The Anka analysis became a touchstone for those engaged in finder activity. While the SEC has abandoned that finder-friendly viewpoint, it has never rescinded the Anka No-Action Letter.

The Kramer court analyzed legal precedent concluding that “the distinction between a finder and a broker. . .remains largely unexplored.” The court took issue with the Commission’s reliance on No-action letters describing a No-action letter as an informal process to seek compliance advice from the Commission and repeatedly stating that they have no binding legal authority. The decision may undermine the ability of the Commission to rely on its own informal opinions in enforcement actions. The court noted: “[a]s this order exhaustively explains, an array of factors determine the presence of broker activity. In the absence of a statutory definition enunciating otherwise, the test for broker activity must remain cogent, multifaceted, and controlled by the Exchange Act.”

The court’s verdict in this case is likely not the final note. The SEC has ample reason to appeal. The court was highly critical of the Commission’s conduct as well as its misinterpretation of law. The court allowed Kramer to depose the SEC regarding the facts that formed the basis of the Commission’s claims, and the court refused to admit into evidence the transcript of Baker’s statement to the Commission. The court stated that rather than exercise diligence in procuring his attendance, the Commission had “ostentatiously” failed to locate Baker prior to trial. While the order appears to render further discovery moot in the Kramer case, it sets the stage for defendants in the future to depose SEC counsel.

Those engaged in “finder” activity should also note that although the court found for Kramer, Baker might still be in the soup. Baker’s conduct - entering into a promotional contract, promoting Skyway, being intimately involved in transactions, receiving transaction-based compensation, and paying others to promote Skyway - likely fits the definition of a “broker,” even under the Kramer court’s verdict.

For more information, please contact one of the Haynes and Boone attorneys below. You may also view the alert in the PDF linked below.

Katherine Addleman

Darrel A. Rice


 Ronald W. Breaux

Taylor H. Wilson

 Timothy Newman

Rick A. Werner


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