News & Analysis

PEVC Forum: Broker-dealer compliance concerns resurface

Failing to register as a broker-dealer is once again popping up on fund managers' SEC deficiency letters, private equity practitioners heard at the 2015 PE/VC Finance and Compliance Forum.

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The US Securities and Exchange Commission (SEC) is once again flagging broker-dealer registration as a compliance concern in post-inspection deficiency letters, delegates were surprised to learn at the 2015 PE/VC Finance and Compliance Forum in San Francisco.

The issue first surfaced in April 2013 when former SEC attorney David Blass said during a now famous speech 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 especially were put under scrutiny.

However, Blass' departure from the agency in July 2014 put broker-dealer registration concerns on the agency's back burner, one private equity legal advisor informed the audience of 100 or so private equity finance and compliance professionals. “It was really his pet cause,” the attorney said.

In 2014, the SEC also issued a no-action letter that clarified private business brokers do not necessarily need to be licensed to pitch deals, but specific guidance on private equity broker-dealer registration is still being sought by the industry.

Nonetheless, “this is an issue that has not gone away, and has generated a lot of market confusion since the SEC's 2013 speech,” said Duane Morris private equity attorney Scott Gluck, in an email exchange with pfm. Gluck regularly speaks with SEC officials on industry matters through a special private equity regulatory taskforce assembled by the Association for Corporate Growth, a trade body.

“There has been a lot of turnover in the SEC's Division of Trading & Markets over the past few years, which I believe has contributed to the lack of additional clarity on the issue,” Gluck said.

Indeed, in the past few months, an increasing number of private equity firms are receiving deficiency letters requesting the GP to provide justification why it had not registered as a broker-dealer, delegates at the conference heard.

“We don't know where this issue is going, but it's back, and we're not 100 percent sure why,” one attorney at the conference said.