SEC Division of Trading and Markets no-action letter: Nemzoff & Company, LLC

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

DIVISION OF
TRADING AND MARKETS
November 30,2010
Ernest E. Badway, Esq.
Fox Rothschild LLP

100 Park Avenue, Suite 1500

New York, NY.10017
Re: Denial of No-Action Request of Nemzoff & Company, LLC Dear Mr. Badway:
In your letter dated April 20, 2010, you request assurance that the staffofthe Division of Trading and Markets ("Staff') would not recommend enforcement action to the Securities and Exchange Commission ("Commission") under Section 15(a) ofthe Securities Exchange Act of 1934 ("Exchange Act") ifNemzoff & Company, LLC (''Nemzoff') provides financial consulting services to not-for-:profit hospitals without registering with the Commission as a broker-dealer pursuant to Section 15(b) ofthe Exchange Act, in reliance on the exemption from broker-dealer registration available for charitable organizations under Section 3(e) ofthe Exchange Act Based on your letter, I understand the facts to be as follows:
Nemzoff is a consulting company and business broker providing a range offinancial consulting services to not-for-profit hospitals, including consulting services for business combinations. Nemzoff categorizes its operations into three areas: (i) Options Assessments; (ii) Divestiture Planning and Implementation; and (iii) Merger and Acquisition Services. As explained in your letter, Options Assessments can consist ofhelping not-for-profit hospitals enter into joint ventures or business combinations with other not-for-profit hospitals. You indicate that Divesture Planning encompasses providing assistance to hospitals before and throughout the sales process. As part ofDivesture Planning, Nemzoff creates plans for selling the hospital that includes, among other thirigs, a confidential memorandum with key facts about the selling hospital and potential purchasers. Nemzoffs Merger and Acquisition Services include assisting not-for-profit hospitals throughout the merger process as well as providing valuations ofpotential acquisitions and issuing fairness opinions. You indicate that during the business combination process, Nemzoff advises and may assist clients in such things as buying and selling membership interests of non-profit hospitals, mergers and membership substitutions, and in some instances, may participate in negotiations. In exchange for these services, Nemzoffproposes to be compensated by a fixed fee, an hourly

Mr. Ernest E. Badway, Esq.
November 30, 2010 fee, a commission or any combination thereof. This proposed compensation may be based on the consideration received by the selling not-for-profit entity in a business combination. In your letter, you cite to Section 3(e) ofthe Exchange Act, which provides a limited exemption for charitable organizations from the broker-dealer registration requirements of
Section 15. In particular, Section 3(e) provides, in pertinent part, that a charitable organization
or any trustee, director, officer, employee, or volunteer (collectively, the "Qualifying Persons") of such charitable organization acting within the scope of such person's employment or duties with such organization, shall not be deemed to be a broker or dealer if such organization or person buys, holds, sells, or trades in securities for its own account in its capacity as trustee or administrator of, or otherwise on behalf of or for the account ofsuch organization. Section 3(e)(2) provides that thislimited exemption is available only ifthe person relying on it"is either a volunteer or is engaged in the overall fund raising activities ofthe charitable organization and receives no commissions or special compensation based on the number of donations collected for the fund." You request assurances that Nemzoff, as a consultant to not-for-profit hospitals, would not have to register as a broker-dealer in reliance on the exemption in Section 3(e) ofthe Exchange Act. Response Based on the facts and representations set forth in your letter, the Staff is unalJle to assure you that it would not recommend enforcement action to,the Commission ifNemzoff engages in the activities described in your letter without registering as a broker-dealer under Section 15 of the Exchange Act. In particular, Nemzoff, as a consultant, would not be a Qualifying Person under Section 3(e). Moreover, Nemzoffs potential receipt oftransaction-related compensation is inconsistent with the compensation limitation in Section 3(e)(2).

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Fox Rothschild LLP
...nORfl[YS loT UN
100 ParI( A'.enue. SUIte 1500
New York. NY 10017 iel2128787900 fax 212692.0940 ".,," /~C:~5~r d com Ernest E. B:ldway Direcl Dial: (212) 878-7900 Email Address:cbadw3).g:foxrolhschild.com April 20, 20 I0 VIA FEDEX James Eastman, Esq. Office of Chief Counsel Division ofTrading and Markets Securities and Exchange Commission 100 F Street NE Washington, D.C. 20549 Re: Provision of Financial Consulting Scn'ices to Non-Profit Entities Dear Mr. Eastman:
We represent Nernzoff & Company, LLC ("'Nemzoff'). We now write to request assurance that the staff of the Division ofTrading and Markets ("Division") will not recommend enforcement action (0 [he Securities and Exchange Commission ("Commission") under Section 15(a) of the Securities Exchange Act of 1934, as amended C"Exchange Act") against NemzotT for providing financial consulting services to non-profit entities, FACTUAL BACKGROUND Nemzoff is a consulting company and business broker that provides a range of financial consulting services to not-for-profit hospitals. 'emzoffprovides advice to not-for-profit hospitals regarding business opportunities, including potential business combinations with other not-for￾profit hospitals. Specifically, Nemzofrs services arc categorized into three distinct areas: (i) Options Assessment: (ii) Divestiture Planning and Implementation; and (iii) Merger and Acquisition Services. Options Assessment consists of providing an analysis of various options for not-Ior-protit hospitals to further their business. ranging from maintaining the S/(IIlIS quo to enlering inlo joilll n:ntures or business combinations with other not-for-prolit hospitals, Divestiture Planning and Implementation consists of providing assistance to hospitals belore and throughout the sale process. Ncmzoff creates a plan for the selling hospital. mainly focusing on confidentiality. rapid transaction closure. and minimal disruption of hospital operations. To further this plan, NemzolTprepares a N",':(r" { , ,.,. l F' ,(!,j

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Fox Rothsch ild LLP
....nOOlNEYs.:.r vow
James Eastman, Esq.
April 20, 2010 confidential memorandum detailing, among other things, key facts aboul the selling hospital and potential purchasers. Merger and Acquisition Services include assisting not-for-profit hospitals throughout the merger process and helping them through challenging issues, such as control of the post-merger entity. These services will also include valuation of potential hospitals for purchase as well as the issuance of fairness opinions. During the business combination process, I emzoff advises and may assist the non-profit client on every step of the transaction. This includes advising the client on various types of business combinations, such as (i) buying and selling assets of non-profit hospitals, (ii) buying and selling membership interests of non-profit hospitals, and (iii) mergers and membership substitutions of non·profit hospitals. This may also include assisting with the negotiations if requested by the client. However, notwithstanding any role that Nemzofftakes in negotiations, it does not have the power to bind the client regarding such business combination. Each of the clients represented by NemzotT is a going concern and not a "shell" entity. Although the potential business combinations may include the transfer of assets and/or membership interests of the client, Nernzoff will not advertise or otherwise promote the sale of securities. Any decision to effect the transfer of the non-profit business by means of a securities sale will be made solely by the purchaser and seller. Although Nemzoff may provide valuation services to the non￾profit client, it will not assess the value of any securities sold, other than by valuing the assets of tile client as a going concern. Nemzoffwill not assist purchasers with obtaining financing to complete the business combination, other than providing introductions 10 third-party lenders (without compensation) and assistance with completing papen.vork necessary to apply for financing. In exchange for its services, Nemzoffwill be compensated by a fixed fee, an hourly fee, a commission or any combination of the foregoing, and it may be based on the consideration received by the selling non-profit entity in the business combination. This compensation is payable in cash and will be determined prior to any decision as to the effect the sale of the non·profit hospital. The compensation will not vary depending on the type of transaction, such as a sale of securities versus a sale of assets. LEGAL ANALYSIS Definition of "Broker" and "De:llcr"
Section 3(a)(4) of the Exchange Act defines the teml "broker," in relevant part. as "3ny
person engaged in the business of effecting transactions in securities for the account of others."'
Section 3(a)(5) of the Exchange ACI defines the lenn "dealer," in relevant part. as "any person
t:ngaged in the business of buying and selling securities for such person's own accaunl through a broker or otherwise."' In interpreting Sections 3(a)(4) and 3(a)(5). the Commission and the Division 1.'1 117~7d04f20/10

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Fox Rothschild llP
AITORNEYS AT LAW
James Eastman, Esq.

April 20, 2010

have considered the receipt of transaction-based compensation as a key factor in considering

whether a person is "engaged in the business" o[transacting securities, and therefore subject 10

broker-dealer registration.

In providing guidance on the definition ofa "broker," the Commission and the Division

have stated that a person effects transactions in securities "ifhe or she participates in such

transactions 'at key points in the chain of distribution. '" Such participation includes "assisting an

issuer to structure prospective securities transactions, helping an issuer to identify potential

purchasers of securities ... and soliciting securities transactions." In its clarification of what

constitutes being "engaged in the business," the Commission and the Division have listed various

factors, such as receiving transaction·related compensation, holding oneself out as a broker. and

participating in the securities business with some degree of regularity. I

Notwithstanding the foregoing, subject to certain exceptions, Section 3(e) of the Exchange Act provides an exemption from the registration requirements for non-profit entities. ~'Iore specifically, a charitable organization or any trustee, director, officer, employee, or volunteer of such charitable organization acting within the scope of such person's employment or duties with such organization shall not be deemed to be a "broker" or "dealer" solely because such organization or person buys, holds, sells, or trades in securities for its own account in its capacity as trustee or administrator of, or otherwise on behalf of or for the account of such a charitable organization. Application to Ncmzoff We recognize that a consultant for business combinations may, depending on the circumstances, be required to register as a broker dealer under Section 15 of the Exchange Act. However, we believe that Nernzoff is not required to register because, since it will solely provide consulting services to, and assist in the business combinations of non-profit hospitals, it is acting under the spirit of the exemption from registration provided by Section 3(e) of the Exchange Act. Although Section 3(e) of the Exchange Act does not specifically state that consultants are exempt, NemzofTis acting in a similar capacity that an officer or employee of the non·profit entities would act, and, therefore, should be exempt from registration as a broker-dealer pursuant to Section 3(c) of the Exchange Act. CONCLUSION On the basis of the foregoing, we respectfully request that you advise us that the StalTwill

nol recommend that the Commission lake any enforcement action ifNcmzotTprovides consulting

1 Bondglobe, Inc., SEC StalY No-Action Letter (available February 6. 200 I). J.VII1790-lh30-l110110

Fox Rothschild llP
James Eastman, Esq.

April 20, 2010

services 10 not-for-profit hospitals without registering with the Commission under Section 15 of the Exchange Act as a broker-dealer. On behalf ofNcmzofr, we appreciate your consideration of this request. If you have any questions regarding this request or need any additional infonnation, please do not hesitate to contact mc. Very truly yours, Ernest I.:dward Hadway LVI I li9C)·li,J04,!O ltl