In remarks before the American Bar Association, David W. Blass, Chief Counsel, SEC Division of Trading and Markets, addressed a key concern—what activity could cause a private fund adviser to be required to register as a broker-dealer under the Exchange Act?
The answer is not so simple. It is fairly fact intensive. Blass offered the following questions as examples of the types the SEC asks when making that kind of determination:
- How does the adviser solicit and retain investors? Caveat: a dedicated sales force of employees working within a marketing department may strongly indicate that they are in the business of effecting transactions in the private fund, regardless of how the personnel are compensated.
- Do employees who solicit investors have other responsibilities? If so, what are they.
- How are personnel who solicit investors compensated? Do they receive bonuses or other types of compensation that is linked to successful investments? Caveat: a critical element to determining whether one is required to register as a broker-dealer is transaction-based compensation.
- Do you charge a transaction fee for trades? Caveat: consider the fees you charge and in what way, if any, are they linked to a security transaction.
Noting a recent enforcement action against PE fund Ranieri Partners LLC (discussed in a prior post), Blass further emphasized that “there are serious consequences for acting as an unregistered broker, even where there are no allegations of fraud.” In that case, the SEC found that Ranieri Partners paid transaction-based fees to an unregistered consultant for the purpose of actively soliciting investors for private fund investments and imposed a significant fine.
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