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Attorneys are individuals who are licensed to give legal advice to his or her clients. They are trained to advise their clients about the legal impact of the client’s financial investment decision, such as tax implications. At times, the line between an attorney and an investment broker becomes blurred. An investment broker is a person or company that is in the business of purchasing or selling securities on behalf of his or her client, for its own account or both. The services provided by a broker may vary widely, and unless exempt, brokers must register with the United States Securities and Exchange Commission (SEC) and be a registered member of Financial Industry Regulatory Authority (FINRA).
The Securities Exchange Act of 1934 (Act) regulates our nation’s securities markets and its brokers and dealers. Section 3 of the Act stipulated the SEC’s definition for the term “broker.” A broker is any person or business engaged in the business of effecting transactions in securities for the account of others. Individuals who fit this description are required under the Act to become a legally registered broker. There are various situations where individuals who are not licensed brokers or dealers may be required to become licensed.
The SEC has set forth four questions that, if answered “yes”, are an indication that an individual may need to register as a licensed broker. They include: (1) Do you participate in important parts of securities transaction, including solicitation, negotiation, or execution of the transaction? (2) Does your compensation for participation in the transaction depend upon, or is it related to, the outcome or size of the transaction or deal? Do you receive any other transaction-related compensation? (3) Are you otherwise engaged in the business of effecting or facilitating securities transactions? and (4) Do you handle the securities or funds of others in connection with securities transactions?
Attorneys are often, although not so obviously, required to become licensed investment brokers when making investment deals in return for a contingent payment from their client. The law on the requirement to become a licensed investment broker varies from state to state; however, the SEC has provided the previously listed four activities the person or business actually performs in order to ease the question of whether or not one is obligated to register as a licensed broker. Attorneys who receive contingency payments and answer “yes” to numbers three and four in the aforementioned questions, provided by the SEC, may be required to register as brokers. Federal or state securities laws require brokers, investment advisers, and their firms to be licensed and important information must be made public.
The registration of a broker is very important because clients may be put at a risk of not recovering their investments if the firm or unregistered broker goes out of business. The SEC will not notify individuals on whether or not they should be registered. It is the responsibility of the individual acting as a broker to be licensed and registered and it is the responsibility of a client to ensure that their attorney is licensed.