A few years ago, David Blass, then Chief Counsel of the SEC’s Division of Trading and Markets, created a stir when he said in a speech that private fund advisers should be concerned about some activities that could require them to register as brokers. Apparently, Mr. Blass and, most likely, the SEC, were concerned that private equity fund advisers were receiving transaction-based compensation for activities relating to their funds’ portfolio companies. Such fees often are described as compensation for “investment banking” services including negotiating financing and corporate transactions, identifying and soliciting purchasers and/or sellers, and structuring transactions. Not surprisingly, Mr. Blass’s comments raised a significant amount of discussion at the time, as did a number of contemporaneous SEC examination findings which suggested that private equity fund advisers were receiving transaction-based compensation related to securities transactions for the portfolio companies of their managed funds. 

The SEC remained relatively quiet on the issue until last week when it announced that a private equity fund advisory firm and its owner had agreed to pay more than $3.1 million to settle charges that included engaging in brokerage activities and charging fees without registering as a broker-dealer, as well as committing a number of violations of the Investment Advisers Act. The firm and its managing member allegedly performed in-house services related to the acquisition and disposition of portfolio companies for a pair of private equity funds that the firm advised, and disclosed to its funds and fund investors that it would provide brokerage services for a fee, without being registered as a broker-dealer. 

It’s difficult to determine whether the facts of this particular case caused it to stand out and warrant special consideration, or whether it is a signal that the SEC is re-engaged on the issue of private equity advisers acting as broker-dealers without proper registration and will be looking to bring more of these types of actions. But 60 percent of the more than $3.1 million in disgorgement, prejudgment interest and civil money penalties that were paid represented the transaction-based fees received by the adviser. Moreover, the headline on the SEC’s press release is “Private Equity Fund Adviser Acted As Unregistered Broker,” which illustrates clearly the importance that the SEC was placing on the unregistered broker issue. 

Whether this is the opening salvo of an SEC enforcement sweep related to these kinds of activities, or simply an outlier based on facts more egregious than is apparent from the SEC’s press release or the order issued in the case, one thing is sure — private equity advisers should be taking a good look at their activities and performing a fresh analysis of whether some of those activities require registration as a broker-dealer.

If you would like to learn more about this issue, please read our Client Alert relating to this matter.