SEC Charges PE Adviser for Unregistered Brokerage Activity

The U.S. Securities and Exchange Commission (SEC) on June 1, 2016 announced a settled enforcement action against a private equity fund manager (Adviser) for acting as a broker-dealer without registering. The case is significant because it calls into doubt certain compensation practices that became nearly universal among private equity firms following SEC staff guidance.

The issue of unregistered brokerage activities by private equity fund advisers has been raised in the context of examinations and other inquiries to unregistered entities. In many cases, private equity fund advisers have been able to respond to the SEC staff’s questions without enforcement action being taken. In light of this latest action, it remains to be seen whether there has been a shift in the SEC’s or its staff’s position, which could lead to wholesale revamping of private equity fund fee structures or result in the registration of fund advisers as broker-dealers. Private equity fund advisers may wish to review their fee structures and other activities in light of the SEC’s recent action.

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