After years of rumblings and rumors that the Securities and Exchange Commission might eventually provide clarity on whether private equity managers and others must register as securities brokers, it appears that any clarity will come from the SEC's Enforcement Division filing lawsuits rather than other divisions proposing rule changes or providing guidance.
The most recent action came on June 1, when the SEC sued Maryland-based PE fund advisor Blackstreet Capital Management for handling the acquisition and disposition of portfolio companies—a role the SEC alleged should required Blackstreet to register as a securities broker.
According to the SEC, Blackstreet collected fees for services such as "soliciting deals, identifying buyers or sellers, negotiating and structuring transactions, arranging financing, and executing the transactions." The SEC characterized the $1.8 million received by Blackstreet for these services as "transaction based compensation," a key factor in determining whether an advisor is acting as a broker.
Blackstreet's limited partnership agreements expressly permitted Blackstreet to charge transaction or brokerage fees, suggesting perhaps that Blackstreet did not believe or understand that it needed to register as a broker. Nevertheless, rather than challenging the SEC's allegations, Blackstreet agreed to settle the matter, paying nearly $3 million in disgorgement and penalties.
The PE/broker registration issue arose with a bang in 2013 when the SEC brought an enforcement action against private equity firm Ranieri Partners and related parties in connection with solicitation of over $500 million in capital commitments and a month later a senior SEC official gave a speech that alarmed some in the PE community by suggesting that PE advisors acted in the capacity of brokers when they marketed interests in private funds or collected transaction-based fees in connection with portfolio company transactions.
An obvious way for the SEC to reduce or eliminate alarm and ambiguity on the issue would have been to implement rules or issue no-action letters, but the SEC's furtive attempts in this area over the past several years have not brought much in the way of clarity.
In February 2014, the SEC issued a no-action letter with respect to "M&A brokers" who broker the sale and purchase of businesses, indicating that persons in that business may advice without registering as brokers even when the brokers receive transaction based compensation.
