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The firm could now get a commission
But there was an important condition
Private sales to a buyer
Which were of great desire
Lacked an onerous filing submission
Having a broker-dealer means that private equity managers are permitted to accept transaction-based. “Layering broker-dealer regulations on private equity will be of no meaningful benefit to investors and would levy significant costs on private equity firms,” he said in an emailed statement.
Private equity firms sometimes arrange for the sale of all of part of companies in its portfolio. This makes sense – the managers are often experts in the industry and know key players with possible interest in a deal, facilitating capital infusions and benefiting their investors. This is not what securities brokers do. Brokers recommend securities to investors and are paid a commission on sales. This role is a valuable one – especially when recommendations are being made to retail investors - and there are strict testing requirements that must be satisfied to act as one. The testing in fact, coves a wide range of topics, including equities, bonds and options, and requires continuing education and training in these fields, as well as in new regulatory developments.
This distinction is marked – and important. Private fund managers who arrange and negotiate investments in their portfolio companies are not “brokering” securities – and certainly not in the same sense that stockbrokers “broker” securities sales, or real estate professionals “broker” real property sales. Furthermore, organizing and maintaining a registered broker-dealer poses numerous complications: personnel involved in the sales process (including non-marketing staff such as portfolio managers and risk managers) may need to be registered with the broker-dealer, thus triggering testing, fingerprinting and training obligations – usually in areas not relevant to their business. Finally, the firm is also subject to regulatory inspection even though it usually has little to no brokerage activity to inspect!
In 2013, David Blass, the SEC’s Chief Counsel for the Trading and Markets Division gave an insightful and thoughtful address on this issue, suggesting that with the right safeguards and parameters, broker-dealers and private funds could peacefully co-exist within the same corporate structure. The industry was buoyed by Mr. Blass’s thoughts, and rumors flew that a No-Action letter would be released outlining the circumstances of that co-existence. Alas, Mr. Blass left the SEC shortly after his address, and it appears, advancement of the issue left with him.
And so, we are left with the all- too-frequent creation of a fast-moving market – the grey area. Does the existence of private fund sales staff require the establishment of a broker-dealer? Do all professionals engaged in marketing need to pass multiple day long exams covering topics that are irrelevant to their business? Should regulatory financial filings be required of firms that do not hold customer funds and act in the advisory business only?
It is time to create a safe harbor that would obviate the need for a broker-dealer registration where the firm’s CORE business is plainly not brokering third-party securities. My modest proposal:
A private fund should not be considered a broker-dealer if:
It has a Commission Free Staff, i.e., no salespeople are paid commissions;
It Offsets any transaction fees against any investment management fees;
It is a Registered Entity, i.e., regulated by the SEC or CFTC; and,
The Entity involved in the transaction is affiliated with the firm, as in a portfolio company.
Under this framework, investment managers would have the flexibility to participate in deal-related activities benefitting their investors without being considered a broker. It also creates an incentive for a private equity firm to stay registered with the SEC at a time when Congress is considering eliminating the requirement. Such an approach would clarify the rules of the road in a way that protects investors and sets out fair and unambiguous guidelines for managers – something the CORE of our industry would surely welcome.
The firm could now get a commission
But there’d be an important condition
Give the fee to the fund
There’s no need to be bummed
We are starting a better tradition!