Broker-Dealer Registration: Marketing and Private Funds

David Blass, the SEC’s Chief Counsel, Division of Trading and Markets recently spoke with the American Bar Association regarding the types of firms and individuals who may be required to register as a broker-dealer. Specifically, Mr. Blass mentioned two types of practices that many private fund advisers use that may create a broker-dealer registration requirement:

  • Marketing or fund-raising activities in which transaction-based compensation is paid to adviser personnel or to third party marketers whose primary functions are to sell interests in the private funds; and
  • Receipt of fees related to “investment banking activities” in which a private fund adviser, generally in the case of a private equity fund, in connection with the acquisition or disposition (including an IPO) of a portfolio company or the recapitalization of a portfolio company. This fee may be commonly referred to as a “success fee.”

Mr. Blass encouraged private fund advisers to think through the whether they use these practices in their own firms and hopefully to do so in advance of a visit from SEC examiners. Acting as an unregistered broker-dealer could result in a private fund adviser being subject to SEC sanctions or even to rescission of the securities transactions of the adviser. A transcript of Mr. Blass’ speech can be found via the following link:


SEC Presence Exams

SEC Commissioner Elisse Walter recently spoke at the 2013 NASAA Public Policy Conference. In her remarks, Commissioner Walter stated the following: 

  • The SEC has launched “presence exams” in order to establish a presence and credibility with a significant percentage of newly registered private fund advisers. These exams usually consist of a thorough and rigorous review of one or two areas of an adviser’s operation. These exams enable the SEC to assess the quality of an adviser’s control environment and key control functions.
  • The agency has also enhanced its risk-based targeting of adviser examinations using algorithms to analyze available quantitative data to help the SEC better identify the advisers that pose the greatest risk to investors.
  • The SEC has also hired “specialists” who can provide a straightforward, “real-world” viewpoint to the financial industry. These individuals include former industry professionals with experience managing portfolios, sitting at trading desks, investing in derivatives and grappling with valuation issues.

 A transcript of Commissioner Walter’s speech can be found via the following link:

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