GPs gain (some) clarity on broker-dealer registration

A SEC no-action letter clarifies that private business brokers do not necessarily need to be licensed to pitch deals, while formal guidance on private equity broker-dealer registration may arrive in the coming months, PE Manager has learned. 

Private equity firms can strike deals with private business brokers with a little more ease.

The SEC’s Division of Trading and Markets issued a no-action letter stating that “M&A Brokers” of private companies could, subject to certain conditions, engage in that activity without having to register as a broker-dealer.

Private equity firms often rely on consultants, finders and other intermediaries for deal opportunities and acquisition targets.

“Before the no-action letter, we were afraid to buy from certain boutique M&A firms unless they were registered as broker-dealers,” said one US-based private equity COO. “But the new guidance says we’re ok to do that…so it just provides some helpful clarity.”

Legal experts say the letter could not be construed as an exemption for certain private equity firms that may have to register as broker-dealers.

In April, the SEC fired a warning shot that it would be looking into transaction fees charged to private equity-backed companies, and whether it represented unlicensed broker-dealer activity.

At the time, SEC attorney David Blass floated the argument that GPs charging transaction fees are doing the job of an investment bank and should be regulated as such. Marketing and IR staff that receive extra compensation for helping execute fund commitments were also put under the SEC’s scope.

The no-action letter sets out conditions that GPs would not typically be able to meet, for instance not coming into possession of the funds or securities issued or exchanged in connection with the transaction.

However, in private conversations with industry representatives, Blass gave the opinion that with respect to charging portfolio companies transaction fees, fund advisors that offset 100 percent of the fees charged against management fees would not necessarily need to register as a broker-dealer, PE Manager has learned.

With respect to fundraising, it is understood that the SEC is considering releasing formal guidance on unregistered in-house private equity employees that receive a commission (or other type of compensation) directly tied to the success of the fund’s marketing activity in the coming months.

In a previous speech, Blass said it would not be fair to flatly prohibit compensation for that activity, presumably when it is based on overall firm profitability, assets under management or firm performance.

However, legal sources stress the agency is under pressure with various other rulemaking initiatives and related priorities, making it uncertain when or if guidance on the matter will be issued.

For expert legal opinion on how firms can best assess their broker-dealer status, see exclusive related coverage to the right.