On September 19, the SEC adopted new rules and amendments under Title VII of the Dodd-Frank Act establishing recordkeeping and reporting requirements for security-based swap dealers and major security-based swap participants, and amending those requirements for broker-dealers. The new rules aim to allow the SEC to better monitor compliance and reduce risk to the market. Release.
On June 1, 2016, the Securities and Exchange Commission (“SEC”) announced that a private equity fund advisory firm and its owner agreed to pay more than $3.1 million to settle charges that they engaged in brokerage activity, charged fees without registering as a broker-dealer and committed other securities law violations.
An SEC investigation found that Blackstreet Capital Management, LLC (“Blackstreet”) and its principal performed in-house brokerage services rather than using investment banks or broker-dealers to handle the acquisition and disposition of portfolio companies for a pair of advised private equity funds. Of particular interest is the SEC highlighted that “Blackstreet fully disclosed to its funds and their investors that it would provide brokerage services in exchange for a fee” and that the limited partnership agreements of the advised funds “expressly permitted” the adviser “to charge transaction or brokerage fees.” However, this did not suffice.
In the press release announcing the Order, Andrew J. Ceresney, Director of the SEC Enforcement Division, emphasized that the rules are clear that “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.”
Of note, the Order did not address whether or not Blackstreet offset transaction fees payable by the advised funds against its management fee. This is significant because in April 2013 the Chief Counsel of the SEC’s Division of Trading and Markets gave a speech in which he stated that “to the extent [a private equity fund] advisory fee is wholly reduced or offset by the amount of [a] transaction fee, one might view the fee as another way to pay the advisory fee, which, in my view, in itself would not appear to raise broker-dealer registration concerns.” Since the Order does not disclose whether or not there was a fee offset in the case presented, it is unclear whether the current SEC staff holds the view expressed by the Chief Counsel in 2013.
On April 4, 2016, the Financial Crimes Enforcement Network, a bureau of the Department of the Treasury (“FinCEN”), proposed amendments to the definitions of ‘‘broker or dealer in securities’’ and ‘‘broker-dealer’’ under the regulations implementing the Bank Secrecy Act (“BSA”). This rulemaking would amend those definitions explicitly to include “funding portals” that are involved in the offering or selling of “crowdfunded securities” pursuant to Section 4(a)(6) of the Securities Act of 1933. The consequence of those amendments would be that funding portals would be required to implement policies and procedures reasonably designed to achieve compliance with the BSA Act requirements currently applicable to brokers or dealers in securities. FinCEN stated that: “The proposal to specifically require funding portals to comply with the Bank Secrecy Act regulations is intended to help prevent money laundering, terrorist financing, and other financial crimes.” Written comments of this proposal must be submitted on or before June 3, 2016.
The Jumpstart Our Business Startups Act, enacted into law on April 5, 2012, established the foundation for a regulatory structure for startups and small businesses to raise funds by offering and selling securities through “crowdfunding” without having to register the securities with the Securities and Exchange Commission (“SEC”) or state securities regulators. In order to take advantage of this exemption for offerings of crowdfunded securities, an issuer must use the services of an intermediary that is either a broker registered with the SEC or a “funding portal” registered with the SEC.
On June 15, the SEC proposed several amendments to Rule 17a-5. The first set of amendments would: (i) require a broker-dealer acting as a custodian to undergo examination by a registered public accounting firm to ensure compliance with custody Rule 17a-5; (ii) facilitate the ability of the PCAOB to implement oversight of independent public accountants of broker-dealers pursuant to Section 982 of the Dodd-Frank Act; and (iii) eliminate redundant requirements for broker-dealers affiliated with, or dually-registered as, investment advisers. The second set of amendments would require a broker-dealer that clears transactions or carries customer accounts to allow the SEC and designated examining authorities (DEAs) to have access to the independent public accountant that audits such broker-dealer to discuss their audit findings and to review related audit documentation. The third set of amendments would require a broker-dealer to file a new Form Custody, providing the SEC and DEAs increased oversight over the broker-dealer’s custody practices. Comments must be submitted within 60 days of publication in the Federal Register. SEC Release. Proposed Amendments.
