Andrew Ceresney: SEC Enforcement Expands Focus on Private Equity Broker-Dealer Activities


Maryland private equity fund advisory firm, Blackstreet Capital Management, LLC, and its owner, Murry N. Gunty, have agreed to pay more than $3.1 million to resolve allegations they violated the Securities Exchange and Investment Advisors Acts, the U.S. Securities and Exchange Commission (SEC) announced Wednesday. The enforcement action arose out of SEC allegations that Blackstreet engaged in brokerage activity and charged fees without registering as a broker-dealer, among other alleged violations.

The SEC Asset Management Unit has now brought eight enforcement actions on cases involving private equity advisers. Though advisers may rely on brokers when conducting activities that previously required broker-dealer registration, the SEC has not backed down with respect to private equity funds and continues to enforce regulations surrounding unregistered broker-dealer activity.

SEC Alleges Non-Registered Blackstreet In-House Broker-Dealer Activity

Though regulations allow Blackstreet to charge transaction and brokerage fees, the company has never registered as a broker-dealer. Instead of bringing in outside broker-dealers to perform portfolio companies acquisitions and dispositions involving securities purchases and sales, Blackstreet sought deals, identified buyers and sellers, and negotiated and executed transactions internally. In supplying these services itself, the company generated over $1.8 million in transaction-based compensation.

Andrew Ceresney: SEC Expanding Private Equity Focus Due to Growing Investor Harm

In recent years, the SEC has continued to emphasize private equity regulatory compliance and enforcement. Director of the Enforcement Division, Andrew Ceresney, stated in his May 12 keynote address to the 2016 Securities Enforcement Forum West, that the SEC will continue to enforce regulation of broker-dealer activity by funds.

“The Enforcement Division is expanding its focus on private equity because underlying victims frequently include retail investors,” Ceresney said. “In their 2016 Global Private Equity and Venture Capital Report, Prequin estimates that private equity advisers worldwide managed $4.2 trillion in June 2015 compared to just over $700 billion in 2000. It is important to understand that retail investors are significantly invested in private equity. Even experienced investors can be defrauded if they lack transparency into the various fees, expenses, and practices.”

Enforcement Actions Attack Transparency Deficiencies of Conflicts of Interest, Expenses and Fees

According to Ceresney, enforcement actions against private equity advisers currently fall into three general categories:

  • Undisclosed fees and expenses
  • Expense shifting and misallocation
  • Failure to disclose conflicts of interest

Ceresney described a number of arguments presented by private equity fund advisers that the SEC finds “unavailing.” Namely, the argument that advisers should not be charged for disclosure failures that occurred prior to the SEC’s requirement to register, the argument that regardless of disclosure of conflict of interest, the investors benefited from the adviser’s services, and the argument that the adviser received advice from counsel.

In response to these arguments, Ceresney explained that advisers are fiduciaries, regardless of registration, and subject to Advisers Act antifraud provisions. The argument that the adviser benefited the client “does not relieve an adviser of its duty to inform and obtain consent.” Ceresney also stated that advisers are ultimately responsible for their own conduct and cannot escape liability by attempting to blame counsel advice.

Industry Experts Urge Transparency and Supervised Environment of Regulatory Compliance

The industry is responding to the SEC’s focus on non-registered private equity activity by increasing transparency around conflicts of interest, expenses and fees. Industry experts are urging unregistered broker-dealers to function in a highly supervised environment of regulatory compliance. Likewise, investors are responding by raising their expectations regarding transparency around private equity adviser practices.

“The rules are clear,” said Ceresney. “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.”

Securities defense lawyer Rob Herskovits founded and leads Herskovits Law PLLC, a national securities law practice. He represents securities professionals, broker-dealers, and other facing FINRA or SEC enforcement actions or are ensnared in securities litigation.

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