Effective hedge fund capital raising requires effective marketers, and incentivizing effective marketers requires paying them for performance.  But paying in-house marketers for performance – paying them what the law calls “transaction-based compensation” or a “salesman’s stake” – requires the manager that employs those marketers to register as a broker.  How, then, can hedge fund managers attract, retain and incentivize top-tier marketers while avoiding a broker registration requirement?  This question has been looming over the hedge fund industry for years, but the question has been perceived as more theoretical than practical because of the absence of specific enforcement activity or speeches by SEC officials directly on the topic.  However, this all changed on April 5, 2013, when David W. Blass, Chief Counsel of the SEC’s Division of Trading and Markets, delivered a speech to the American Bar Association, Trading and Markets Subcommittee, generally addressing this topic.  See “Do In-House Marketing Activities and Investment Banking Services Performed by Private Fund Managers Require Broker Registration?,” Hedge Fund Law Report, Vol. 6, No. 16 (Apr. 18, 2013) (analyzing the Blass speech).  The Blass speech was notable for highlighting questions and SEC concerns rather than providing conclusive answers or concrete guidance.  Blass noted, for example, that “[t]he SEC and SEC staff have long viewed receipt of transaction-based compensation as a hallmark of being a broker” – which the industry already knew – but he did not describe the types of compensation structures or scenarios that, in the SEC’s view, could constitute transaction-based compensation.  Nor has any other SEC speech, enforcement action or other category of authority particularized the “transaction-based compensation” analysis in a comprehensive manner.  In the absence of relevant and reliable regulatory guidance, this article – the second in a three-part series – distills best industry practices for determining when compensation paid to in-house hedge fund marketers constitutes transaction-based compensation.  Or, put another way, this article outlines strategies for structuring the compensation of in-house marketers to avoid the transaction-based compensation designation, and thereby avoid a broker registration requirement.  This article also discusses the Rule 3a4-1 issuer safe harbor and describes how managers can operate in-house marketing activities within the “spirit” of the safe harbor to minimize the risk of triggering a broker registration requirement.  The first installment in this series explored the activities that could trigger a broker registration requirement, as well as other factors that bear on the registration analysis, including the time devoted to marketing by an employee, the employee’s job title and the employee’s other responsibilities.  See “How Can Hedge Fund Managers Structure Their In-House Marketing Activities to Avoid a Broker Registration Requirement?  (Part One of Three),” Hedge Fund Law Report, Vol. 6, No. 35 (Sep. 12, 2013).  The third installment will examine alternative solutions for managers looking to structure in-house marketing activities in a manner that accomplishes the fundamental business goals (most notably, capital raising) without triggering a broker registration requirement.