Recent SEC Actions Focus on Broker-Dealer Activity of Private Funds, Highlight Perils, and Generate Controversy

April 22, 2013

A recent public statement by a member of the senior staff (“Staff”) of the Securities and Exchange Commission (“SEC”) and recent SEC enforcement actions have reminded private equity and other private fund managers (such as hedge fund and venture capital advisers), M&A firms and consultants, about the perils of raising capital or engaging in transactions without paying attention to the broker-dealer registration requirements of the Securities Exchange Act of 1934 (“Exchange Act”). A recent pair of enforcement cases underscores these issues, and rescission by investors remains a rare, but potent, ancillary consequence.

On April 5, 2013, David W. Blass, Chief Counsel of the SEC’s Division of Trading and Markets discussed In the Matter of Ranieri Partners (“Ranieri”), recent SEC enforcement actions against a private equity manager and its finder, and warned an American Bar Association (“ABA”) committee, in a speech that attracted considerable attention, that more actions along the lines of Ranieri could be expected. The Ranieri cases, in particular, are noteworthy because the SEC brought enforcement actions not only against a finder who was acting as an unregistered broker on behalf of private equity funds, but also against the funds’ investment manager and a managing partner.

Mr. Blass also identified factors that private funds and others should consider in determining whether an adviser and its internal sales staff might be subject to broker-dealer registration requirements. He focused on, among other things, the receipt of transaction-based compensation both by internal sales staff based on the initial investments, as well as by the managers of private equity funds receiving transaction fees. He said the Staff understands that the latter practice is common among private equity funds using a leveraged buyout strategy. This OnPoint discusses the comments made by Mr. Blass, together with the SEC’s recent action in Ranieri.

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