SEC broker-dealer views lack conviction

Private equity firms remain uncertain as to whether or not they should consider registering staff as broker-dealers, according to panellists at the PEI Private Fund Finance and Compliance Forum in San Francisco.

Speaking at the forum on Wednesday, panellists said that regulatory guidance on, and action relating to the matter is not considered decisive. A number of GPs said that, while broker-dealer registration was clearly on the regulator’s agenda, output from the US Securities and Exchange Commission to date suggests a clampdown is not a top priority.

One GP, whose firm has registered broker-dealers, said the SEC doesn’t seem too concerned about the matter, but it took the decision to register as it didn’t want to become a case study.

Echoing this sentiment, a second GP said for some firms, registration was something of an insurance policy, rather than a necessity.

To date, just one private equity firm, Blackstreet Capital Management, has been fined for not having registered its advisers as broker-dealers.

In Blackstreet’s case, the SEC alleged the firm provided brokerage services to its portfolio companies and received transaction-based compensation in connection with acquisitions and dispositions.

As a result it should have been registered not only as an investment advisor under the Investment Advisers Act of 1940, but also as a broker-dealer, notwithstanding disclosure of the brokerage services made to funds managed by the firm and investors in those funds.

A third GP said the Blackstreet case put broker-dealer registration back on the agenda for private equity firms, but most are not convinced it’s an SEC priority.

“Until the Blackstreet case it was generally on the watchlist, but not something we were worrying too much about. [Even since the case]consensus remains that most SEC areas are not viewing broker-dealer registration in private equity as a priority,” the GP said.

Triggers

While uncertainty as to the importance of the matter to the regulator prevails, there are certain cases in which a firm must consider registering broker-dealers, the delegates agreed.

“If you are raising multiple funds in a year, or you’re moving into a new asset class, then broker-dealer registration should be a consideration,” the second GP said.
“Large firms are also in a better position to be able to bear the costs of registration, so it’s advisable for them to consider it.”

There is also a case for all firms to at least carry out an assessment of whether it should register broker-dealers.

“Being able to provide documents to evidence to the SEC that you have taken the matter into consideration, regardless of your conclusion, could be invaluable in the case that the regulator steps in to investigate your firm,” a fourth GP said.

The SEC is expected to publish more explicit advice on broker-dealer registration before the end of the year.