The SEC Chief Counsel of Division of Trading and Markets, David Blass, has commented on the failure of certain private fund managers to regis-ter as BDs. He focused on two pitfalls: transac-tion-based compensation and the internal opera-tions of the private fund managers’ personnel.
The SEC views transaction-based compensation a strong indicator that BD registration is required. Although fees may be characterized as not trans-action-based, e.g. “investment banking activity,” such fees may in fact be tied to “effecting a securi-ties transaction,” which may require BD registra-tion. Mr. Blass indicated that the method and categorization of compensation and fees will be heavily scrutinized.
Having a dedicated staff within a “marketing” department may also require BD registration, be-cause it suggests that the entity is “in the business of effecting transactions.” In particular, Mr. Blass indicated that the duties and responsibilities of such staff in connection with solicitation or mar-keting efforts will be carefully reviewed.
In light of Mr. Blass’s statement, private fund managers may wish to review their fee structure and internal and external activities, particularly regarding compensation arrangements and the responsibilities of internal personnel. Private fund managers may also want to review how per-sonnel who solicit investors are compensated and whether these individuals receive bonuses or other compensation linked to successful invest-ments. The comments made by Mr. Blass are available here.