Much has already been said about the April 5 speech given by SEC Division of Trading and Markets Chief Counsel David Blass on broker-dealer registration issues as applied to private fund managers.
Here is our take on Mr. Blass’s comments:
Sales Personnel. Mr. Blass signaled that a private fund manager’s internal investor relations personnel could face broker-dealer registration scrutiny if their sole focus is selling fund shares or if they receive transaction-based compensation as a result of such sales. However, Mr. Blass offered a series of questions that firms can consider in weighing whether broker-dealer registration is required. We think there is room in these questions for most managers, working with counsel, to ensure that their internal investor relations personnel do not fall within the broker-dealer registration requirement. Notably, Mr. Blass stated that his remarks should not be taken to suggest “that all investment raising by a private fund adviser results in the adviser being a broker-dealer.” With that in mind, we recommend that private fund managers, together with counsel, consider the options suggested by these questions when evaluating whether broker-dealer registration is required for internal sales personnel.
Deal Fees. More challenging, however, are Mr. Blass’s comments on the issue of transaction-based deal fees. In our view, private fund managers that currently receive deal or similar transaction-based fees from portfolio companies that their fund invests in should take action in response to Mr. Blass’s speech. Either the manager should register as a broker-dealer or it should give careful consideration to the issues raised in the speech, consult with counsel, and prepare its rationale for remaining unregistered. Following Mr. Blass’s talk, we have seen questions that were raised as hypotheticals in the speech being carried into the field by SEC examiners and applied to actual facts. Private fund managers have been questioned about how they can receive deal fees as a result of their fund’s purchase of interests in a portfolio company without registration as a broker-dealer. The SEC staff’s focus on the issue may cause investors to start concentrating on it as well. Absent further SEC action or guidance on this topic in the short term, private fund managers that accept deal fees in whole or in part but that are not registered as broker-dealers should be prepared to give thoughtful answers to these inevitable questions.
Of course, as Mr. Blass indicated, deal fees that are used in their entirety to offset management fees do not raise the specter of broker-dealer status. So our call to action applies only to firms that receive deal fees that do not wholly offset advisory fees.
As always, if you have any questions regarding this alert or ACA’s advisory services, please contact your consultant or Damon Zappacosta at (212) 868-5940. For information on ACA’s broker-dealer registration services, please contact Dee Stafford at (310) 322-8840 or firstname.lastname@example.org.