United States: SEC Settles With Private Equity Fund Adviser Charged With Acting As An Unregistered Broker


In a case that may reflect a notable change in the SEC's views on broker-dealer registration issues in the private equity industry, a private equity fund adviser agreed to settle SEC charges that it engaged in broker activity and charged brokerage fees without registration, and committed other securities laws violations. On June 1, 2016, Blackstreet Capital Management, LLC ("Blackstreet") was censured, and Blackstreet and its principal owner and managing member Murry N. Gunty agreed to cease and desist from further violations and pay more than $3.1 million to settle the proceeding.

Following an inspection and investigation, the SEC found that Blackstreet performed brokerage services for and received brokerage fees from portfolio companies, instead of using investment banks or registered broker-dealers to provide such services, and that Blackstreet and Mr. Gunty engaged in conflicted transactions, improperly used fund assets and failed to adequately disclose certain fees and expenses that were charged to the funds and/or the portfolio companies. In addition, the SEC determined that Blackstreet failed to adopt and implement reasonably designed compliance policies and procedures to prevent violations of the Investment Advisers Act of 1940 ("Advisers Act") and its rules arising from the alleged improper conduct.

Broker-Dealer Registration

The Securities Exchange Act of 1934 (the "1934 Act") defines a broker as "any person engaged in the business of effecting transactions in securities for the account of others." In determining whether a person is a broker, the SEC typically focuses on whether the person receives transaction-based compensation and participates in important parts of a securities transaction, including solicitation, negotiation or execution. According to the SEC order, Blackstreet provided brokerage services and received transaction-based compensation in connection with the acquisition and disposition of portfolio companies, which caused Blackstreet to be acting as a broker. The services included soliciting deals, identifying buyers or sellers, negotiating and structuring transactions, arranging financing, and executing the transactions. The settlement included disgorgement of transaction fees of $1,877,000, related prejudgment interest and a civil monetary penalty of $500,000.

The Blackstreet case is the first enforcement action in which the SEC has taken the position that the receipt of portfolio company transaction fees requires a PE adviser to register as a broker-dealer. The case appears to be a departure from previous public comments by the SEC Staff. In 2013, David Blass, then Chief Counsel of the SEC's Division of Trading and Markets, suggested that newly registered PE advisers preparing for their first SEC exam should consider whether any of their activities, including the receipt of transaction fees from portfolio companies, required broker-dealer registration. Blass said that if the fund management fee is "wholly" reduced by the transaction fees, there are no broker-dealer registration concerns, presumably because in that event the PE adviser is not being compensated for the brokerage services.

In public remarks later in 2013, Blass appeared to retreat from his position somewhat, stating that the SEC Staff would apply a rule of reason to the analysis of broker-dealer registration in the private equity industry. He noted similarities between PE advisers and M&A brokers, which typically facilitate transactions between buyers and sellers of operating business, with the buyer actively involved in the business after the acquisition. He said the Staff was considering registration relief for those brokers, and that such relief might have favorable implications for PE advisers. He suggested that this topic could also be the subject of informal Staff guidance in the future.

On January 31, 2014, the SEC's Division of Trading and Markets in fact did issue a no-action letter stating that "M&A Brokers," defined as persons engaged in the business of effecting securities transactions solely in connection with the transfer of ownership and control of private companies, could, subject to certain conditions, engage in that activity without broker-dealer registration. The letter was a significant departure from the SEC's long-held view that persons receiving transaction-based compensation in connection with acquisition transactions in securities must register. PE advisers do not necessarily fit within the no-action letter's definition of an M&A Broker, and may not satisfy some of the conditions set forth in the letter. Nevertheless, at the time of the M&A Brokers letter, it was thought by some commentators that, in light of the prior remarks by Mr. Blass, the letter might be good news for PE advisers receiving transaction fees from portfolio companies.

During this period, SEC examiners continued to raise the registration issue in examinations of newly registered PE advisers. In that connection, an industry group took the position that PE advisers provide investment advisory services and expertise to their affiliated funds and portfolio companies and do not engage in traditional broker-dealer activity such as widespread solicitation of investors, that receipt of transaction fees alone does not transform an investment adviser into a broker-dealer, that management fee offsets benefit fund investors, that in contrast to brokers which act as intermediaries, PE advisers have a significant economic stake in portfolio companies, and that PE advisers act as owners on behalf of their funds and portfolio companies.

Late in 2014, an SEC staffer commented on the transaction fee issue. He said the perception of the Division of Trading and Markets was that the industry had "self-corrected" to some extent, with the 100% management fee offset in some cases, and with running the fees through affiliated broker-dealers in others. He said the Division was mindful that this was a historic practice in the industry. He thought the best way to address it was through forward-looking guidance via a Q&A or a no-action letter and not through enforcement actions (at least in the absence of other unlawful conduct like bad disclosure and improper expense allocation).

Although the Blackstreet enforcement action does, as noted, include Advisers Act violations, the SEC's press release clearly emphasizes the failure to register and includes the following statement by Andrew J. Ceresney, Director of the SEC Enforcement Division: "The rules are clear: 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. Blackstreet clearly acted as a broker without fulfilling its registration obligations."

An SEC administrative proceeding settlement does not have precedential value and of course depends on the facts of the case. However, the order suggests that the SEC now may not see any distinction between the activities of PE advisers and other persons engaged in the business of effecting securities transactions for others and therefore subject to registration. To that extent, prior Staff comments with implications to the contrary should be questioned. It now appears that the SEC may apply traditional broker-dealer analysis to the registration question for PE advisers, which is hard to square with the policy judgment presumably underlying the M&A Brokers no-action letter that brokerage activity in connection with change in control transactions of private companies does not require registration.

Both the SEC press release and order state that Blackstreet received compensation for the broker services provided to its portfolio companies. Notably, the Blackstreet case does not appear to involve failure to disclose such compensation to investors; the order observes that the fund agreements at issue "expressly permitted [Blackstreet] to charge transaction or brokerage fees." The Blackstreet order does not indicate that management fees for the Blackstreet funds were subject to any transaction fee offset. For this reason, the status of prior Staff comments that a 100% management fee offset obviates the need for broker-dealer registration is uncertain. At a minimum, care should be taken that a PE adviser not registered as a broker-dealer is not receiving other forms of compensation for brokerage services rendered to portfolio companies.

The SEC may have been emboldened in pursuing the broker-dealer registration issue with Blackstreet by the explicit reference to brokerage services in the Blackstreet fund agreements, as well as by the seemingly questionable conduct underlying the other securities law violations summarized below. However, in the wake of the Blackstreet action and the absence of any forward-looking guidance from the SEC, PE advisers should carefully review their activities to determine whether registration is required. The risks of failing to register when required include disgorgement of transaction fees, penalties, interest, and censure and cease and desist orders. In addition to these administrative remedies, the SEC can also resort to the courts and seek a permanent or temporary injunction as well as civil penalties. The 1934 Act also imposes liabilities on controlling persons and persons who aid and abet others who violate the 1934 Act. In theory, the SEC could ask the Department of Justice to institute criminal proceedings. As most states have their own statutes requiring broker-dealer registration, state enforcement actions could also result. Finally, a transaction in which an unregistered broker is involved could be subject to rescission in a private action under the 1934 Act or similar state laws.

Other Securities Law Violations

In addition to the unregistered broker-dealer claims, the SEC found that Blackstreet and Mr. Gunty engaged in other violations of securities laws, including:

  • Blackstreet charged at least $450,000 in "operating partner oversight fees" to portfolio companies without properly disclosing that it may receive such fees. It is worth noting that the persons performing operating partner services were current employees of Blackstreet and that the portfolio companies paid Blackstreet directly for their services.
  • Blackstreet used fund assets to pay for political contributions to a state campaign, charitable contributions and entertainment expenses (including a lease and event tickets), even though such expenditures were not authorized in the funds' governing documents. The SEC further noted that Blackstreet neither sought, nor obtained, appropriate consent for this use of fund assets.
  • Blackstreet acquired a departing employee's interest in certain portfolio companies even though the fund's governing documents required the interest to be repurchased by the portfolio companies for the benefit of the funds and its investors. In addition, Blackstreet failed to disclose its own financial interests or obtain appropriate consent to engage in the transaction.
  • Mr. Gunty indirectly (through an entity he controlled) acquired fund interests from certain defaulting and selling limited partners despite the fact that the fund's governing documents required the defaulting limited partners to forfeit their interests back to the funds. Following the acquisition, Mr. Gunty caused the fund's general partner (which he also controlled) to waive his obligation to make future capital calls associated with his newly acquired interest.1 Both the acquisitions and waivers were inconsistent with the terms of the fund's governing documents and the SEC found that Blackstreet's subsequent failure to disclose these waivers rendered the fund's governing documents materially misleading.
  • Blackstreet failed to adopt and implement policies and procedures reasonably designed to prevent violations of the Advisers Act and its rules arising from the improper use of fund assets, undisclosed receipt of fees and engaging in other transactions that involve conflicts of interest.

The SEC's press release is available here and a copy of the SEC's order is available here.


1. The SEC's order noted that notwithstanding the fact that Mr. Gunty did not participate in the gains resulting from these new investments, the failure to make future capital calls reduced the capital available for investment opportunities, thereby increasing the pro rata share of future capital calls borne by the remaining limited partners.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions