SEC Continues Review of Private Fund Managers’, Possible Broker-Dealer Activities.

On June 1, 2016, the SEC issued an Administrative Order (SEC 34-77959, 40-4411) against BlackStreet Capital Management, LLC. At the highest level this was a disclosure case. I am however, going to focus on just one of the violations. The SEC found that:

In connection with the acquisition and disposition of portfolio companies or their assets, some of which involved the purchase or sale of securities, BCM provided brokerage services to and received transaction-based compensation from the portfolio companies. This activity caused BCM to be acting as a broker. BCM, however, has never been registered with the Commission as a broker.

Back in April 2013, David Blass then the Chief Counsel to the SEC Division of Trading and Markets, in a talk with an ABA committee caused a great stir in the private fund industry and bar, when he suggested that the sale of interests in private funds and the structuring of the sale or purchase of portfolio companies, for compensation related to the transaction without being registered as a broker-dealer might be viewed as a violation of the 34 Act Section 15(b).

My colleagues at the time and their counterparts at other firms, insisted that Mr. Blass had rewritten the law. I spent hours trying to explain that this had always been the law, but the SEC had never delved into private fund managers because they were not registered.

The case against BCM is very clear, in the limited partnership agreement BCM was expressly permitted to charge transaction or brokerage fees. BCM was not registered or affiliated with a broker-dealer. BCM performed the “investment banking” services in-house. The activities included soliciting deals, identifying buyers and sellers, negotiating and structuring transactions, arranging financing and executing the transactions. For these services BCM received at least $1,877,000. The fact that it was disclosed to the limited partners, did not obviate the need to register.

The moral to this story is that the SEC is closely examining the activities that fund managers are engaged in, probably for the first time, and are willing to bring actions.

(c) 2016  Sharon M. Davison


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