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SEC’s Focus on Broker-Dealer Registration

SEC has recently made broker-dealer registration an area of focus for private fund managers. This is bad news for the private equity industry, as the burdens and costs of registration and on-going compliance with SEC requirements are substantial. The regulatory framework starts with Section 15(a) of the Exchange Act, which requires that persons engaged in broker or dealer activity must register with the SEC pursuant to Section 15(b) of the Exchange Act unless an applicable exemption is available.1 Section 3(a)(4)(A) of the Exchange Act defines a “broker” broadly as “any person engaged in the business of effecting transactions in securities for the account of others.”2 And a “dealer” is any person “engaged in the business of buying and selling securities for such person’s own account.”3 The SEC has also taken a very broad view of what activities constitute “effecting transactions” and “engaged in the business.”

A significant action regarding this issue was instituted earlier this year. On March 8, 2013, the SEC announced its settlement of two administrative proceedings, one against William M. Stephens and one against Donald W. Phillips and Ranieri Partners LLC.4 The SEC brought charges against Stephens for acting as an unregistered broker in violation of Section 15(a) of the Securities Exchange Act in marketing and receiving placement fees for the sale of interests in Ranieri Partners’ funds. Specifically, the SEC alleged that Stephens acted as more than a finder by: (1) sending private placement memoranda, subscription documents, and due diligence materials to potential fund investors; (2) urging at least one investor to consider adjusting its portfolio allocations to accommodate an investment with one of Ranieri Partners’ funds; (3) providing potential investors with his analysis of Rnaieri Partners’ funds’ strategy and performance track record; and (4) providing potential investors with confidential information relating to the identity of other investors and their capital commitments.5

SEC also imposed willful aiding and abetting liability on Ranieri Partners and Phillips, its senior manager, for their role in knowingly facilitating Stephens’ unregistered broker activities. Phillips was a senior managing partner of Ranieri Partners and was instrumental in retaining Stephens as an independent consultant to find potential investors for the Funds.6 Ranieri Partners agreed to pay Stephens 1% of all capital commitments they received from investors he introduced. According to Phillips, he specifically informed Stephens that Stephens’ activities on behalf of Ranieri Partners would be limited to simply contacting potential investors to arrange meetings for the principals of Ranieri Partners.7 Nevertheless, the SEC found that, in fact, Phillips did very little to limit Stephens’ activities and that Stephens actively solicited investors on behalf of the Funds.8

In addition to the imposition of cease-and-desist orders: (1) Stephens was barred from the securities industry and ordered to pay an amount of nearly $3 million in disgorgement and interest; (2) Ranieri Partners was assessed a penalty of $375,000; and (3) Phillips was assessed a fine of $75,000 and suspended from holding a supervisory position in the securities industry for nine months.9

Just a month later, the SEC gave more guidance. David Blass, the Chief Counsel to the SEC’s Division of Trading and Markets, gave a speech that addressed these concerns regarding the registration requirements.10 Blass emphasized the broad application of Section 3(a)(4)(A)’s definition of “broker” and that there are serious consequences for acting as an unregistered broker-dealer, even absent allegations of fraud or other misconduct.11He encouraged private fund advisers to assess (i) how they “solicit and retain investors”; (ii) whether “employees who solicit investors have other responsibilities”; (iii) how “personnel who solicit investors are compensated”; and (iv) whether the adviser “charges a transaction fee in connection with a securities transaction” when engaging in this analysis.12

In light of these developments, fund managers should re-examine their internal and external marketing and solicitation efforts to determine whether broker-dealer registration is required. Furthermore, they should be particularly wary of compensation agreements that may be construed as providing transaction-based compensation to persons not properly registered as broker-dealers.


  1. 15 U.S.C.A. § 78o (2013). 

  2. 15 U.S.C.A. § 78c.(a)(4) (2013). 

  3. 15 U.S.C.A. § 78c.(a)(5) (2013). 

  4. In the Matter of William M. Stephens, File No. 3-15233 (March 8, 2013) (the Stephens Order);In the Matter of Ranieri Partners LLC and Donald W. Phillips, File No. 3-15234 (March 11, 2013) (the Phillips Order), both available at http://www.sec.gov/news/press/2013/2013-36.htm

  5. See Stephens Order. 

  6. See Phillips Order. 

  7. Id. 

  8. See id. 

  9. See the Stephens Order and the Phillips Order. 

  10. See David W. Blass, A Few Observations in the Private Fund Space (April 5, 2013), available at: http://www.sec.gov/news/speech/2013/spch040513dwg.htm (the Blass Speech). 

  11. See id. 

  12. Id. 

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Bohyung Kim

Vol. 3 Associate Editor

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