On June 1, 2016, the Securities and Exchange Commission (the “SEC”) announced the settlement of charges against a Maryland-based private equity fund advisory firm and its owner, Blackstreet Capital Management (“Blackstreet”) and Murry N. Gunty (“Gunty”), respectively. According to the SEC’s order, Blackstreet engaged in brokerage activity and charging fees for brokerage services without registering as a broker-dealer, as required by Section 15(a) of the Securities and Exchange Act of 1934 (the “‘34 Act”) and various sections of the Investment Advisers Act of 1940 (the “Advisers Act”). The SEC further found that Gunty caused Blackstreet’s violations.

The SEC’s order contains the following additional findings:

  1. Blackstreet charged fees for providing operating partner oversight absent disclosure of such fees in the fund’s limited partnership agreement, resulting in a conflict of interest;
  2. Blackstreet used fund assets to pay for contributions (political and charitable) and entertainment expenses without authorizing such expenditures in governing documents or requesting or receiving consent;
  3. Gunty, through a personally controlled entity, acquired fund interests from certain limited partners and then directed the fund’s general partner (another Gunty controlled entity) to waive his obligation to make future capital calls in connection with new investments, in violation of the terms of the governing documents, rendering the limited partnership agreement materially misleading for failure to disclose the waivers;
  4. Blackstreet failed to disclose its financial interest or receive consent to acquire shares in a fund portfolio company from a departing employee, resulting in a conflicted transaction; and
  5. Blackstreet failed to adopt and implement reasonably designed compliance policies and procedures to prevent violations of the Advisers Act and its rules arising from the above-described conduct.

In the settlement, Blackstreet agreed to be censured and must cease and desist from providing brokerage services for compensation until properly registered as a broker-dealer. Blackstreet and Gunty will pay a combined disgorgement of $2.339 million, including $504,588 that will be distributed to the impacted clients. In addition, they agreed to pay $283,737 in interest and a $500,000 penalty. Combined, they paid more than $3.1 million to settle the charges.

Given the SEC’s increasingly aggressive enforcement approach and heightened scrutiny of the fees of advisory firms, advisers should review their current compliance programs in order to confirm that they have not breached their fiduciary duties and responsibilities under the ‘34 Act.