Under Section 15 of the Securities Exchange Act of 1934, most “brokers” and “dealers” must register with the SEC. A “broker” is defined broadly as “any person (individual or entity) engaged in the business of effecting transactions in securities for the account of others.” A “dealer” is defined as “any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise.”
On the SEC’s Broker-Dealer page, it notes that “[s]ometimes you can easily tell if someone is a broker or dealer. For example, a person who executes transactions for others on a securities exchange clearly is a broker. And a firm that advertises publicly it makes a market in securities is obviously a dealer. Other situations can be less clear.”
If an individual or entity is a broker or dealer, it must be properly registered before it provides brokerage services and receives compensation in return.
SEC Enforcement Actions
SEC Enforcement Action Against Private Equity Fund On June 1, 2016, the SEC announced that a private equity fund advisory firm, Blackstreet Capital Management, and its owner have agreed to pay more than $3.1 million to settle charges that they engaged in brokerage activity and charged fees without registering as a broker-dealer. According to the SEC’s order, Blackstreet fully disclosed to its funds and investors that it would provide brokerage services in exchange for a fee, yet the firm failed to comply with the registration requirements to operate as a broker-dealer.
In addition, the SEC investigation revealed that the owners engaged in conflicted transactions and inadequately disclosed fees and expenses. Notably, the SEC has recently made violations by investment advisers and companies an enforcement priority.
SEC Enforcement Action Against Offshore Broker-Dealers
On April 18, 2013, the SEC charged Gibraltar Global Securities, Inc. a Bahamas-based broker-dealer, $25 million for unlawfully operating as a broker-dealer in the United States. According to the SEC’s complaint, the Bahamas-based broker-dealer clearly targeted and solicited U.S. customers though its website by:
- Offering “offshore” brokerage services with commissions comparable to those on the “mainland.”
- Stating that “[u]sing a Gibraltar offshore brokerage account will enable you to trade on most stock exchanges in the world at a cost equivalent to that incurred using mainland brokers, without paying taxes on the profits.”
- Promising prospective customers an “extra layer of confidentiality” to protect assets from “government seizures or frivolous divorce settlements.”
- Showing price-volume graphs solely for U.S. markets.
- Only charging fees in U.S. dollars – with no provision for currency exchange.
Using these marketing tactics, the Bahamas-based broker-dealer was able to sell approximately $100 million of low-priced microcap securities on behalf of U.S. customers, charging them commissions of between 2-3%.
SEC Fines Florida-based Mining Corp. $8.5 Million
In August 2017, the SEC charged Florida-based Hidalgo Mining Corp. $8.5 million after the company and two of its executive mislead investors in a Mexican silver mine. According to the SEC’s complaint, the company raised $10.35 million from approximately 85 investors by misleading investors about the investment and violating federal securities laws, which included:
- Failing to register with the SEC in order to lawfully sell the securities
- Making personal written guarantees to some investors that the company’s executives would “assume full responsibility” for repaying investors if the company defaulted (which they could not)
- Failing to disclose this guarantee to the other investors
- Failing to disclose to investors that 10% of their investments would be used to pay commissions directly to the executives and the sales team to push their securities offering
In 2014, the Hidalgo Mining Corp. defaulted and the company executives could not repay the investors. The company allegedly defaulted due to lack of capital and low silver prices. This scheme appears to be prevalent in Florida. In December 2014, the SEC brought a similar enforcement action against a Florida-based gold mining investment company, Aurum Mining LLC. According to the SEC’s complaint, the company and its executives raised approximately $4 million from investors in Florida by making false statements about the investment. The executives then used the funds to purchase personal luxury items, including upscale apartments in Lima and other living and travel expenses.