Whistleblower behind broker-dealer worries

A senior private equity executive flagged broker-dealer registration issues with the SEC before the agency made it a priority in the industry.

A senior private equity executive tipped off the US Securities and Exchange Commission (SEC) that private equity firms may be breaking securities laws by accepting transaction fees, PE Manager has confirmed. The news was first reported by Crain's New York, which identified the whistleblower as a “senior private equity insider”.

The whistleblower’s attorney, Jordan Thomas, a former SEC official, and now partner with Labaton Sucharow, said in an interview with PEM that if “private equity firms wish to engage in broker-dealer activities, which include negotiating merger and acquisition transactions, structuring debt and equity offerings or offering investment advice for the portfolio companies for a fee, they need to be registered as a broker-dealer.”

Thomas continued: “If they don’t want to register then they are required to use registered broker dealers to do these transactions. That’s it. This is one of those moments where it is not complicated.”

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.

The private equity industry argues there is no benefit in having private equity firms register as broker-dealers because GPs are transacting on their own behalf.

In the interview, Thomas countered: “Without registration there can be no monitoring, examinations, risk analysis or enforcement proceedings. Essentially it can be the Wild West.”

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