SEC Comments On Broker-Dealer Registration By Private Fund Advisers

by Stinson Leonard Street - Dodd-Frank and the Jobs Act

David W. Blass, Chief Counsel, Division of Trading and Markets, SEC, recently gave a speech before the American Bar Association Trading and Markets Subcommittee on April 5, 2013. The topic of the speech was whether and when investment advisers to private funds are required to register with the SEC as broker-dealers. 

As a result of Title IV of the Dodd-Frank Act, most advisers to private funds (hedge funds and private equity funds) are required to register with the SEC, whereas these funds had previously taken advantage of a registration exemption known as the “private adviser exemption,” which was eliminated by the Dodd-Frank Act and replaced with several narrower exemptions.  So more private fund advisers are now subject to SEC regulation, and the SEC will be stepping up its private fund adviser examinations due to the new regulatory requirements and the SEC’s own observations about the conduct of private fund advisers.  The purpose of the speech by Mr. Blass was to provide private fund advisers with the tools necessary to examine their own conduct (which will be under new scrutiny from the SEC due to the investment adviser regulation) vis-à-vis broker-dealer activity (which they may have previously overlooked) so that the private fund advisers can be prepared for broker-dealer registration or can alter their practices so as to avoid registration.

As a reminder, the general rule is that any person engaged in the business of effecting transactions in securities for the account of others must register as a broker-dealer.  The determination of whether a person is “engaged in the business . . .” is based on a case-by-case analysis of the facts, but one factor in particular – the receipt by the person of transaction-based compensation (a “salesman’s stake”) – has been said to be a “hallmark” of broker-dealer status.

Mr. Blass provides a road-map for private fund advisers to begin a self-analysis to determine whether they might be approaching broker-dealer status.  He advises that private fund advisers should examine their practices with the following points in mind:

  • With regard to soliciting and retaining investors, a dedicated sales force of employees carrying out a marketing function “may strongly indicate that they are in the business of effecting transactions in the private fund.”
  • If employees who solicit investors have no other duties, or if they spend the great majority of their time carrying out the investor solicitation function, then the adviser might be a broker-dealer.
  • Compensating employees who solicit investors in any way (bonuses, etc.) that is linked to successful investments may indicate broker-dealer status.
  • If a private equity fund executing a leveraged buyout strategy collects fees other than advisory fees that are linked to an acquisition or disposition – for example, if the manager directs a portfolio company to pay fees to the adviser or its affiliates, even if the payment is nominally for investment banking activity such as negotiating the transaction, soliciting purchasers, etc. – then the transaction-based compensation threshold may be triggered.  “The combination of success fees which cause the adviser to take on a salesman’s stake and the activities involved in effecting securities transactions appear, at least on their face, to cause such an adviser to fall within the meaning of the term ‘broker.’”

Mr. Blass also addressed three strands of push-back the SEC has received from private fund advisers seeking to avoid broker-dealer registration:

  • The advisers are not engaging in broker-dealer activity when the transaction-based payments offset or reduce the amount of the advisory fee.  Mr. Blass agrees, conceptually, that in this instance the transaction-based compensation is merely another way of paying the advisory fee.
  • Where the general partner of the fund is also the adviser to the fund or an affiliate of the adviser to the fund, then the general partner should be viewed as the same person as the fund such that the adviser is not engaging in securities transactions “for the account of others.”  This rationale is not plausible to Mr. Blass, who notes that if the general partner and the fund are the same person, then there is no need to pay the fee to any person other than the fund.
  • The SEC should not spend it’s time taking on registration of private fund advisers as broker-dealers without an underlying policy objective.  Mr. Blass sees the situation as dependent on the activities of the private fund advisers, though, rather than the SEC.  If private fund advisers are not prepared to register as broker-dealers, then they should avoid engaging in broker-dealer activity.

Mr. Blass concluded by noting that, in his view, it would not be difficult for private fund advisers to alter their practices in order to ensure that they do not fall within the broker-dealer definition.

Check frequently for updated information on the Dodd-Frank Act, the JOBS Act, and other important securities law matters.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Stinson Leonard Street - Dodd-Frank and the Jobs Act | Attorney Advertising

Written by:

Stinson Leonard Street - Dodd-Frank and the Jobs Act

Stinson Leonard Street - Dodd-Frank and the Jobs Act on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.