The Securities and Exchange Commission has been poking around fees earned by private equity firms and found many to its distaste. One item the SEC has highlighted in the past was fees for acting as a broker dealer. I’ve been waiting to see if the SEC’s distaste would be enough to bring an enforcement action. The SEC has brought that case.
Blackstreet Capital Management paid itself transaction based compensation in connection with acquisition and disposition of portfolio companies. The fund documents permitted this fee.
Blackstreet purchased and sold securities on behalf of its private equity fund and earned a transaction based fee for those services. Those services included soliciting deals, identifying buyers or sellers, negotiating and structuring transactions, arranging financing, and executing the transactions. Those transactions would have largely been securities that Blackstreet was buying and selling for its private equity fund.
The problem is that those services look a lot like the services of a broker dealer. By collecting transaction based compensation, it seems to fall right into the definition of broker dealer.
“The rules are clear: before a firm provides brokerage services and receives compensation in return, it must be properly registered within the regulatory framework that protects investors and informs our markets,” said Andrew J. Ceresney, Director of the SEC Enforcement Division. “Blackstreet clearly acted as a broker without fulfilling its registration obligations.”
The charge is not for improperly charging fund investors. The fee was disclosed in the fund documents and presumably Blackstreet was charging an appropriate fee. The SEC charge is merely because Blackstreet was not registered as a broker dealer.
There are other issues disclosed in the order, so its not clear if the SEC would bring an enforcement action solely because of this issue. It is clear that the SEC is sending a signal.
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