SEC Official Raises BD Registration for Private Equity Firms
The Chief Counsel of the SEC’s Division of Trading and Markets, David Blass, raised significant concerns that private equity fund sponsors are ignoring broker-dealer registration and licensing requirements when selling fund shares or transacting with portfolio companies. Mr. Blass explained that broker-dealer registration and representative licensing requirements are triggered when firm personnel focus on selling fund shares and receive transaction-based compensation. He described activities that may require broker-dealer registration: marketing fund shares, soliciting or negotiating transactions, and handling investor funds or securities. He explained that the issuer exemption (Rule 3a4-1) is very narrow and would not likely be available to most private equity personnel involved with fundraising. Mr. Blass also said that broker-dealer registration may be required where fund sponsors receive investment banking or success fees for transactions involving portfolio companies. Mr. Blass rejected any policy argument that private equity firms should be exempt from broker-dealer registration: “Unless prepared to register as a broker, a person should not engage in activities that trigger registration.” He also explained the consequences of failing to register including possible rescission of all securities transactions involving unregistered personnel.
OUR TAKE: This is not a new regulatory problem for private equity fund sponsors. However, prior to registering pursuant to Dodd-Frank, private equity firms did not have to worry about SEC examiners looking for broker-dealer issues.