SEC’s Division of Trading and Markets Delivers a Message to Private Fund Sponsors about Potential Broker-Dealer Registration Issues

18 April 2013
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Key takeaways:

  • David Blass, the chief counsel of the SEC’s Division of Trading and Markets, recently gave a speech focusing on whether the marketing and certain other activities of private fund sponsors require them to register as broker-dealers under the Securities Exchange Act of 1934.
  • Mr. Blass suggested that private fund sponsors (including private equity and hedge fund managers) should evaluate their marketing activities with respect to the solicitation of investors and discussed several questions that a private fund sponsor should consider, including whether the fund sponsor has a dedicated sales force working within a marketing department.
  • Mr. Blass also discussed at length the receipt of transaction-based compensation (such as deal fees) by private equity fund sponsors for “investment banking services” provided to portfolio companies, particularly where the transaction fee is not fully offset against the investment advisory fee (i.e., the management fee).
  • Mr. Blass stated that these are not mere “technical” concerns; that sales of fund interests or portfolio company transactions intermediated by an unregistered broker could be rendered void; that private fund sponsors should consider whether any of their activities raise any of the concerns discussed by Mr. Blass; and that private fund sponsors should be prepared to address these issues during SEC examination or in queries from other areas within the SEC.