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Red Oak Blog

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Monday, May 13 2013

SEC Official Raises Broker-Dealer Registration Question for Private Equity Firms

The Chief Counsel of the SEC’s Division of Trading and Markets, David Blass, raised concerns during his speech given April 5th, that private equity fund sponsors may be ignoring broker-dealer registration and licensing requirements when selling fund shares or transacting with portfolio companies. Mr. Blass explained that broker-dealer registration and representative licensing requirements are triggered when firm personnel focus on selling fund shares and receive transaction-based compensation. He described activities that may require broker-dealer registration: marketing fund shares, soliciting or negotiating transactions, and handling investor funds or securities. He explained that the issuer exemption (Rule 3a4-1) is very narrow and would not likely be available to most private equity personnel involved with fundraising. Mr. Blass further stated that broker-dealer registration may be required when fund sponsors receive investment banking or success fees for transactions involving portfolio companies. Mr. Blass rejected any argument that private equity firms should be exempt from broker-dealer registration and stated: “Unless prepared to register as a broker, a person should not engage in activities that trigger registration.” He also discussed the consequences of failing to register including possible rescission of all securities transactions involving unregistered personnel.

To read the full text of his speech please click here.