The Slippery Slope of Private Fund Manager Issuer Exemption


ACA Foreside

Publish Date



  • Distribution

For firms marketing privately-issued securities, whether as a private fund manager or issuer, ensuring their activity is compliant with the Financial Industry Regulatory Authority (FINRA) and U.S. Securities and Exchange Commission (SEC) regulations is essential to avoid costly consequences, both monetarily and from a reputation standpoint. It’s important for these firms to remember that regulators like FINRA and the SEC are in place to ensure firms and their employees avoid conflicts of interest, abide by applicable rules and regulations, and act in investors’ best interests.

The best way for firms to ensure their activities are compliant is to understand if their firm's products and the marketing activities of their sales staff require affiliation with a registered broker-dealer or rely on the private placement issuer exemption. A company or individual acting as an unregistered broker-dealer is in violation of applicable registration requirements and faces possible SEC and state enforcement action, monetary penalties, and investor lawsuits seeking rescission of the investment and recovery of the purchase price paid. We’ve broken down broker-dealer registration requirements and exemptions below.

Which individuals require broker-dealer registration in the U.S.?

Under the SEC’s Dodd-Frank Wall Street Reform and Consumer Protection Act, we’re seeing many private equity and hedge fund managers evaluate whether their marketing efforts require broker-dealer registration. Simply stated, unless the firm meets an exemption, registration is not only necessary when securities are bought and sold, but also when an individual is facilitating, assisting, or inducing the sales of a security. This includes:

  • Registering with a FINRA member broker/dealer to function as a wholesaler because you will offer securities to other FINRA member firms. [FINRA Rule 1210]
  • Registering when dealing with Exempt Securities and/or Exempt Transactions. The terms "Exempt Securities" and "Exempt Transactions" mean these particular securities or transactions (private placements or intrastate offerings) are exempt from the filing requirements of the Securities Act of 1933.
  • Registering when participating in a capital raise; individuals soliciting investors on a regular basis or who are specifically compensated for their efforts (e.g., paid a commission) may be required to register as a broker or to be associated with a registered broker-dealer firm.

Which individuals are permitted to market investments without being a registered broker-dealer?

Rule 3a4-1, or the “Safe Harbor Rule”, is the most commonly cited exception to broker-dealer registration requirements. It allows a limited group of people to sell or otherwise promote an unregistered investment fund without broker-dealer registration, assuming certain conditions listed in the Rule are met.

Is the broker-dealer exemption worth applying?

We’re seeing many advisers of unregistered funds choose to not rely on the exemption because of its stringent requirements and/or their desire for those individuals promoting the funds to be compensated. It can be complicated to limit activity sufficiently enough by regulators’ standards.

Can one avoid the obligation to register an employee as a broker-dealer agent without relying on Rule 3a4-1 safe harbor?

To stay compliant, it is recommended to employ one of the following options: (i) use an outside solicitor who is associated with a broker dealer or (ii) use an internal sales team, which may trigger a need for them to register with a broker-dealer.

How can association with a FINRA-member broker-dealer help?

A FINRA-member broker-dealer can serve as an outsourced provider that is focused on and experienced with broker-dealer compliance matters. The broker-dealer can provide marketing material review, oversight of registered rep activities, conduct product due diligence, and may act as a placement agent.

What are the penalties for individuals and firms that violate the private placement exemption?

In addition to monetary sanctions and/or industry suspensions, another negative impact of non-compliance can be a permanent stain on an individual or firm’s reputation.


Registering with a broker-dealer, or using a registered broker-dealer to solicit investors is the best way to ensure compliance for private fund managers or issuers that are unable to rely on the Safe Harbor Rule.

How we help

You may not need to create an affiliated broker-dealer to become compliant when promoting unregistered funds. ACA Foreside, through its’ limited purpose broker-dealers, is positioned as an elite partner to hold your promotional staff’s FINRA licenses and oversee their activities from a compliance perspective. Holding over 2,000 Rep licenses across 300 managers, ACA Foreside enables the compliant marketing of Private Funds, UCITs, ETFs, Mutual Funds and Interval/Tender Funds.

Our clients find enabling their staff via our Registered Representative Licensing services opens doors to broaden their investor base.

Reach out to your ACA consultant, or contact us here to find out more about our Registered Representative Licensing services.

Contact Us