Practices By Private Fund Advisers Raise B-D Registration Issues

In its scrutiny of newly registered private fund advisers, the SEC Staff has observed two practices that might implicate broker-dealer registration requirements.

The first practice involves fund advisers that pay their personnel transaction-based compensation for selling interests in their funds or that have personnel whose primary purpose is selling interests in the funds. The second practice involves private fund advisers, their personnel, or their affiliates receiving transaction-based compensation for purported investment banking or other broker activities relating to one or more of the funds' portfolio companies.

The receipt of transaction-based compensation has long irritated the SEC, and it believes it is the quintessential aspect of being a broker.  The failure to properly register as a broker-dealer may have serious consequences, including, but not limited to, being sanctioned by the SEC, or having the securities transaction in question rescinded.  When