On June 1, 2016, the Securities and Exchange Commission (the SEC) announced a $3.1 million settlement with a private equity fund adviser. The SEC alleged that the adviser had engaged in brokerage activity and had charged fees without registering as a broker-dealer, in addition to several other securities law violations.

According to the settlement order, the Limited Partnership Agreements (the LPAs) of the funds managed by the adviser expressly permitted the adviser to charge transaction or brokerage fees. The adviser was not registered as a broker-dealer and did not employ an investment bank or a registered broker-dealer to “provide brokerage services with respect to the acquisition and disposition of portfolio companies, some of which involved the purchase or sale of securities.…” The adviser performed these functions itself, including “soliciting deals, identifying buyers or sellers, negotiating and structuring transactions, arranging financing, and executing the transactions.” The adviser received approximately $1.9 million in connection with such activities. The SEC did not specify the exact language regarding brokerage services used in the LPAs or whether any such fees were offset against the respective fund management fees.

The SEC also alleged a number of additional violations by the adviser: (1) that the adviser improperly charged operating partner oversight fees to two portfolio companies without express authorization in the LPAs; (2) that the adviser used fund assets to make both political and charitable contributions and to pay for entertainment expenses without express authorization in the LPAs, and also that the adviser did not adequately keep track of whether entertainment expenses were for business or personal entertainment; (3) that the adviser improperly purchased portfolio company interests from a departing employee when the relevant agreements required the interests to be repurchased by the portfolio company; (4) that the adviser’s principal acquired fund interests from defaulting and selling limited partners on terms contrary to the provisions of the LPA (including waiving the principal’s obligation to make future capital contributions with respect to the transferred interests); and (5) that the adviser failed to adopt written policies designed to prevent violations of the Advisers Act and its rules arising from the improper use of fund assets, the receipt of undisclosed fees, the purchase of interests from limited partners and certain conflicts of interest.

Although the applicability of the broker-dealer registration component of this settlement to private equity advisers in general remains unclear, we will continue to monitor the situation and keep our clients informed of new developments.

View the settlement order.