Potential Broker-Dealer Pitfalls for Private Investment Funds and their Managers


April 23, 2013

Following on its recent enforcement action (the “Ranieri Order”) against a private equity fund manager for causing a third-party finder’s failure to register as a broker-dealer, the Securities and Exchange Commission (the “SEC”) continues to signal that it has a particular interest in identifying whether managers of private investment funds – and particularly of private equity funds, whose managers have in many cases only recently become registered investment advisers – are mindful of applicable broker-dealer registration requirements. In recent remarks, David W. Blass, the Chief Counsel of the Division of Trading and Markets of the SEC, identified a number of issues relating to broker-dealer registration under the Securities Exchange Act of 1934 (the “Exchange Act”) that private investment funds and their managers should be keenly following, flagging in particular:

•situations in which broker-dealer registration is required in connection with the sale of interests in the private investment fund, including where the offering activity is conducted by the private investment fund itself (or its sponsor or adviser, or their personnel); and

•“success fees” and similar “investment banking” fees collected by private equity managers in connection with portfolio company transactions that may give rise to a broker-dealer registration requirement.

In light of the Ranieri Order and David Blass’s recent remarks, private investment funds and their advisers and sponsors should consider themselves on notice that the SEC is aware of the various ways that they market interests in their private funds and is increasingly eager to pursue enforcement when they perceive that a broker-dealer registration obligation has not been complied with.

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