About our Contributors
ICS Group is a regulatory compliance consulting firm specializing in providing compliance support to the financial services and insurance industries. We help our clients comply with regulatory requirements and industry standards. Our clients include: registered investment advisers, private equity funds, hedge funds, mutual funds, broker-dealers, insurance companies and state pension plans. Our team of highly experienced compliance professionals know from first-hand experience what regulators are looking for, the industry standards that apply, and how to develop and implement cost-effective business-oriented solutions.
Does your firm routinely solicit investors and/or co-investors? Does it market its funds to endowments, pension funds and high net worth individuals? Does your firm advise companies on mergers and acquisitions and debt offerings? If your firm receives compensation for any of these services, then you could be engaging in broker-dealer activities for which registration as a broker-dealer is required.
The SEC has been inconsistent with their enforcement actions against firms who engage in broker-dealer services which has caused confusion in the industry. The SEC has now put a stake in the ground and made its position clear.
Just last week, a Maryland-based private equity adviser, Blackstreet Capital Management (“Blackstreet”) paid $3.1 million to the SEC to settle charges that they performed brokerage services and charged fees without registering with the Commission as a broker-dealer or even being affiliated with a registered broker. Blackstreet had earned approximately $1,877,000 in transaction fees for soliciting deals, identifying buyers or sellers, negotiating and structuring transactions and for arranging financing and executing the transactions. The services were in lieu of using investment banks or broker-dealers to handle the acquisition and disposition of portfolio companies for private equity funds advised by Blackstreet.
The director of the SEC’s Enforcement division, Andrew Ceresney, stated that “Blackstreet clearly acted as a broker without fulfilling its registration obligations. The Rules are clear: before a firm provides brokerage services and receives compensation in return, it must be properly registered within the regulatory framework that protects investors and informs our markets”.
Given this new enforcement action and the above statement from the director of the SEC’s enforcement division it is clear that the SEC will no longer be forgiving private equity firms who engage in broker-dealer services. Private equity firms who engage in these types of services for compensation have now been put on notice that they must register as broker-dealers.
You may need to register as a broker dealer if:
- You participate in important parts of a securities transaction, including solicitation, negotiation, or execution of the transaction;
- Your compensation for participation in the transaction depend upon, or is related to, the outcome or size of the transaction or deal, you receive trailing commissions, such as 12b-1 fees, or you receive any other transaction-related compensation;
- You otherwise engaged in the business of effecting or facilitating securities transactions;
- You handle the securities or funds of others in connection with securities transactions.
The SEC’s Guide to Broker-Dealer Registration can help your firm determine if it should register as a broker-dealer.
Think twice before registering as a broker-dealer. As regulatory regimes go, oversight of broker-dealers is much stricter than for investment advisers. Brokers receive more frequent audits and examinations – only 9% of investment advisers are examined annually, compared with 55% of broker dealers. Furthermore, broker-dealers face capital requirements and greater legal liability. Significantly, clients who have been harmed by the bad acts of broker-dealers have much stronger rights than investment adviser clients because broker-dealer clients can sue to recover for investment losses. Similarly situated customers of investment advisers can only seek recovery of fees paid to the adviser, but not recovery of investment losses.
As always, ICSGroup can help. We will work with you to assess your firm’s activities and determine if it’s in your best interest to register as a broker-dealer. We can help your firm register as a broker-dealer and provide guidance on the legal requirements of being registered as a broker-dealer. Contact us for assistance with this or any other compliance issues.