SEC Charges Private Equity Adviser for Unregistered Brokerage Activity

June 14, 2016

The U.S. Securities and Exchange Commission (SEC) on June 1, 2016 announced a settled enforcement action against a private equity fund manager (Adviser) for acting as a broker-dealer without registering. The case is significant because it calls into doubt certain compensation practices that became nearly universal among private equity firms following SEC staff guidance.

According to the SEC, the Adviser received at least $1,877,000 in transaction-based compensation for providing brokerage services to the funds it managed and to the portfolio companies owned by the funds.

Without admitting or denying the findings, the Adviser agreed to be censured, and one of its principals (Principal) agreed to cease and desist from further violations and, jointly and severally, to pay disgorgement of over $2.3 million, including over $500,000 to be distributed to affected clients. The Adviser also agreed to pay approximately $280,000 in interest and a $500,000 penalty.

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