Brandon Becker, Esq.
Wilmer, Cutler & Pickering
2445 M Street, N.W.
Washington, D.C. 20037-1420
Re: Stockback.com, LLC
Dear Mr. Becker:
This responds to your letter dated July 27, 2000 ("Letter"), relating to the proposed participation of Merchants in Stockback's Consumer Stock Ownership Program. Capitalized terms used in this letter, unless otherwise defined, shall have the meanings defined in your Letter.
Based on the facts and representations set forth in your Letter, and without necessarily agreeing or disagreeing with your analysis, the Division of Market Regulation ("Division") will not recommend that the Commission take enforcement action pursuant to Section 15(a) of the Securities Exchange Act of 1934 ("Exchange Act") if the Merchants engage in the activities described in your Letter without the Merchants registering as brokers pursuant to Section 15(b) of the Exchange Act.
In reaching this position, the Division notes in particular your representations that (1) prospective Members may enroll in the Consumer Stock Ownership Program only at Stockback's Web site, and not at [*2] the Merchants' Web site, (2) Members are not required to pay fee to join the Consumer Stock Ownership Program; (3) Members will receive rebates only in cash (not securities), (4) all cash rebates will be forwarded to and held in Member accounts at Stockback Capital, (5) Members may redeem their cash rebates for cash, goods or services, or shares in the Fund, (6) Stockback Capital will present Members with all investment decisions, and Merchants' will have no role in a Member's investment decision, (7) Members have the right to change their investment decision at any time and to order Stockback Capital to either redeem the Member's shares of the Fund or issue a check for the cash in the Member's account, and (8) all securities related questions, including, but not limited to, questions concerning investment and redemption decisions and the operation of the Consumer Stock Ownership Program, will be answered by Stockback Capital, and not by the Merchants.
The Division also notes that you represent that Stockback Capital, a registered broker-dealer, will perform all the securities related aspects of the Consumer Stock Ownership Program. Such functions include, but are not limited to, [*3] (1) distributing the mutual fund's prospectus and sales literature, (2) establishing and maintaining Members' securities accounts, (3) presenting Members with investment decisions, (4) executing orders to purchase and redeem shares of the mutual fund, (5) responding to Members' questions concerning their investments, and (6) providing Members with periodic account statements and information.
The Division further notes that Merchants will not receive compensation from Stockback, Stockback Capital, or any of their affiliates that varies or depends on the size or success of a securities offering or transaction. The price for goods and services provided by Merchants to Members will not vary from that charged to non-members. In addition, the Division notes that the Merchants will not hold themselves out as brokers or dealers. In particular, the Division notes that Merchants will only be able to advertise their participation in the Consumer Stock Ownership Program in accordance with the following statements: (1) that the Merchant participates in the Stockback Program, (2) that the Merchant will rebate in cash a specified percentage of Members' expenditures, and (3) that additional information [*4] about the Stockback Program is available from Stockback. These statements may appear in advertisements that include a hyperlink to Stockback's Web site.
This position concerns enforcement action pursuant to Section 15(a) of the Exchange Act only and does not represent a legal conclusion regarding the applicability of statutory or regulatory provisions of the federal securities laws. Moreover, this position is based solely on the representations that you have made. Any different facts or conditions might require a different response.
Sincerely,
Catherine McGuire
Chief Counsel
INQUIRY-1:
WILMER, CUTLER & PICKERING
2445 M STREET, N.W.
WASHINGTON, D.C. 20037-1420
TELEPHONE (202) 663-6000
FACSIMILE (202) 663-6363
DIRECT LINE (202) 663-6979
INTERNET BBECKER@WILMER.COM
July 27, 2000
Securities Exchange Act of 1934
Section
15
By Messenger
Catherine
McGuire, Esq.
Chief Counsel
Division of Market Regulation
Securities
and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: Stockback.com, LLC
Dear
Ms. McGuire:
On behalf of Stockback.com. LLC ("Stockback"), its
affiliates, and its participating merchants ("Merchants"), we request that the
Staff of the Division of Market [*5]
Regulation advise us that it will not recommend any enforcement action to the
Securities and Exchange Commission ("Commission") based on the participation of
Merchants engaged in commerce in Stockback's proposed Consumer Stock Ownership
Program, as described below.
The Consumer Stock Ownership
Program
Stockback and its affiliates intend to operate a Web
site (http://www.stockback.com) through which
consumers who enroll ("Members") will receive cash rebates from Merchants when
they obtain access to the Merchant's Internet site through www.stockback.com (or otherwise
identify themselves as Members to the Merchant) and make a purchase (the
"Consumer Stock Ownership Program"). Consumers would become Members by
completing an enrollment form online by which they would also open an investment
account with Stockback Capital, LLC ("Stockback Capital"), a registered
broker-dealer that is a member of both the National Association of Securities
Dealers, Inc. and the Securities Investor Protection Corporation. There would be
no fee to join the Consumer Stock Ownership Program. After enrollment, each time
a Member makes a purchase from a Merchant in a manner that permits the Merchant
to [*6]
recognize the customer as a Member, the Merchant would rebate in cash a
specified percentage of the purchase price to Stockback Capital, for the benefit
of the Member.
Members would have a choice as to how Stockback Capital
would handle their cash rebates. They could direct it either to use their cash
rebates to purchase shares of the Stockback Fund (the "Fund") or to hold their
rebates in cash in an account with Stockback Capital. The decision process would
take place entirely online at www.stockback.com on the pages of the
site controlled by Stockback Capital. A Member will have the right to change his
or her decision at any time and to order Stockback Capital to either redeem
shares of the Fund or forward the cash in his or her account at any time.
The Fund will be registered with the Commission under the Securities Act
of 1933 and the Investment Company Act of 1940. Stockback Advisers LLC, a
registered investment adviser, will have responsibility for the management of
the Fund's investments, for providing various administrative services to the
Fund, and for supervising the Fund's daily business affairs (subject to the
overall authority and supervision of the Fund's Board of Trustees). [*7]
Merchants who agree to participate
in the Consumer Stock Ownership Program would not receive compensation from
Stockback or any of its affiliates for securities transactions. Rather,
Merchants' source of compensation will be the revenue they receive from Members'
transactions with them. Merchants will charge Members the same price that the
Member would have paid if he or she had purchased the goods or services without
being a Member. Merchants' incentive to participate in the Consumer Stock
Ownership Program is to enhance customer loyalty and increase consumer
purchases.
Merchants will be permitted to provide Members and
prospective Members with the following statements: The Merchant participates in
the Consumer Stock Ownership Program, the Merchant will rebate in cash a
specified percentage of Members' expenditures, and additional information about
the Consumer Stock Ownership Program is available at the Stockback Internet site
which will be accessible through a hyperlink to such site.
Only
Stockback Capital, a registered broker-dealer, will perform the aspects of the
Consumer Stock Ownership Program that a broker-dealer is expected to perform.
Those functions include distributing [*8] the
Fund's prospectus and sales literature, establishing and maintaining Members'
securities accounts, holding Members' cash, presenting Members with investment
decisions, executing orders to purchase and redeem shares of the Fund,
responding to Members' questions concerning their investments, and providing
Members with periodic account statements and information. Thus, investors
receive the full protection of complete regulatory oversight.
The Merchants Would Not Be Brokers
The Merchants
would not be brokers within the meaning of Section 3(a)(4) of the Exchange Act,
and therefore would not be required to register pursuant to Section 15 of that
Act because they would not be "engaged in the business of effecting transactions
in securities for the account of others." "To qualify as a broker, the
activities of the alleged broker must be characterized by a certain regularity
of participation in securities transactions at key points in the chain of
distribution." SEC v. Zubkis, No. 97 Civ. 8086, 2000 WL 218393,
* 9 (S.D.N.Y. Feb. 23, 2000); accord SEC v. Hansen, No. 83 Civ.
3692, 1984 WL 2413 (S.D.N.Y Apr. 6 1984), Massachusetts Financial Services, Inc. v. Securities
Investor Protection Corp., 411 F. Supp. 411, 415 [*9] (D. Mass. . 1976), aff'd
545 F.2d 754 (1st Cir. 1976), cert. denied
431 U.S. 904 (1977); MuniAuction, Inc., SEC No-Action Letter,
2000 WL 291007 (March 13, 2000). This test requires an analysis of the role the
entity plays at each stage of securities transactions. Among the factors
relevant to the determination of whether an entity is a broker are whether the
entity: (1) receives transaction-based compensation, such as commissions or
referral fees; (2) is involved in negotiations between the issuer and the
investor; (3) makes valuations as to the merits of the investment or gives
advice; and (4) is an active rather than passive finder of investors.
Zubkis, 2000 WL 218393, at * 9; Hansen, 1984
WL 2413, at * 10; MuniAuction, Inc., SEC No-Action Letter, 2000 WL 291007 (March
13, 2000); Charles Schwab & Co., Inc., SEC No-Action Letter, 1996 WL 762999
(November 27, 1996); Angel Capital Electronic Network, SEC No-Action Letter,
1996 WL 636094 (October 25, 1995). [*10] As the
following discussion demonstrates, analysis of each of these factors and the
role the Merchants play at each stage of securities transactions confirms that
they are not brokers.
Neither Stockback nor any entity with which it is
affiliated will compensate Merchants for their customers' securities
transactions on a commission or any other basis. Rather, Merchants' source of
compensation will be the purchase price they receive from Members for the goods
and services they sell, and those prices will not differ between Members and
non-members. Merchants' incentive to participate in the Consumer Stock Ownership
Program is to enhance customer loyalty and increase consumer purchases.
Merchants will have no involvement in Members' investment decisions or
in any of the interactions between Stockback Capital or the Fund and the
Members. Members will receive their cash rebates and be able to direct
investment of those cash rebates only through Stockback Capital (or by
withdrawing their cash rebate from their Stockback Capital investment account
and investing it outside Stockback Capital), and Stockback Capital will execute
all transactions and maintain Members' investment accounts.
Merchants
[*11] will
not make valuations as to the merits of any investment or provide investment
advice. As noted above, Merchants will be permitted to provide Members and
prospective Members with the following statements: The Merchant participates in
the Consumer Stock Ownership Program, the Merchant will rebate in cash a
specified percentage of Members' expenditures, and additional information about
the Consumer Stock Ownership Program is available at the Stockback Internet site
which will be accessible through a hyperlink to such site. Merchants will not
provide Members with, or have access to, any information concerning their
Stockback Capital investment accounts; rather, all information and
correspondence will come from Stockback Capital. Members and prospective Members
will be able to register for the Consumer Stock Ownership Program or receive
Fund prospectuses or other investment-related promotional or sales literature
only through Stockback Capital.
Finally, Merchants will not be actively
involved in finding investors. As discussed above, participation in the Consumer
Stock Ownership Program does not necessarily involve investing because Members
will receive their rebates in cash. In any [*12] event, the Merchants will have no
involvement in preparing or distributing the Fund prospectus or advertising or
promotional material relating to the Fund, and will not respond to questions
concerning the Fund or the Consumer Stock Ownership Program. Stockback Capital
will perform these functions.
Requiring Merchants to register under
these circumstances would not provide Members or prospective Members with
additional protection. All of the securities transactions associated with the
Consumer Stock Ownership Program already have been assigned to registered
entities. The Merchants' interest is in effecting sales of goods and services,
not securities. We therefore respectfully request that the Staff advise us that
it will not recommend any enforcement action to the Commission if the Merchants
participate in the Consumer Stock Ownership Program without registering as
brokers or dealers under Section 15(b) of the Securities Exchange Act of 1934.
As you know, Stockback is anxious to launch its complete Consumer Stock
Ownership Program. We therefore respectfully request a response as soon as
practicable. If you have any questions or concerns relating to this request,
please contact me at [*13]
202.663.6979 or Jeffrey Roth at 202.663.6179.
Very truly yours
Brandon Becker
Wilmer, Cutler &
Pickering