On June 1, 2016, the Securities and Exchange Commission (SEC) for the first time charged a private equity fund adviser for violating Section 15(a) of the Securities Exchange Act of 1934 (Exchange Act) by engaging in brokerage activities without registering as a broker.

Blackstreet Capital Management, LLC (Blackstreet), a registered private equity fund adviser, provides investment advisory and management services to two funds focused on underperforming portfolio companies. In exchange for these services, Blackstreet earns a management fee equal to 2% of the aggregate capital commitment, as well as 20-25% of all distributions in excess of the sums the funds invested. Blackstreet handled buying and selling of portfolio companies on the funds' behalf, which included:

Although the funds' governing documents allow Blackstreet to charge transaction and brokerage fees, Blackstreet never registered with the SEC as a broker nor affiliated itself with a registered broker, as required by Section 15(a) of the Exchange Act. For more information on the registration requirements for broker dealers, see Practice Notes, Determining Broker-Dealer Status and Broker-Dealer Registration: Overview.

The SEC's investigation, which stemmed from its examination of Blackstreet, found that Blackstreet willfully violated Section 15(a) of the Exchange Act by acting as a broker without fulfilling its registration obligations. The investigation also found that Blackstreet violated certain provisions of the Investment Advisers Act of 1940 by engaging in conflicted transactions and inadequately disclosing fees and expenses. In addition, the SEC found that Blackstreet's founder, Murry N. Gunty, caused Blackstreet's violations.

After the investigation ended, the SEC brought the enforcement action by issuing an order instituting administrative and cease-and-desist proceedings against Blackstreet and Gunty. Simultaneously, the SEC announced that it accepted the respondents' settlement offer. Without admitting or denying the SEC's findings, Blackstreet agreed to be censured, and Blackstreet and Gunty agreed to cease and desist from further violations. Blackstreet and Gunty also agreed to pay more than $3.1 million, which includes a fine, interest, and disgorgement. Part of the disgorged amount will be returned to the affected clients. For more information on the SEC's findings, see Press Release, SEC: Private Equity Fund Adviser Acted As Unregistered Broker (June 1, 2016).

The SEC's first-of-the-kind action against a private equity fund adviser is likely to draw more attention to the transaction fees managers collect from funds and portfolio companies.

Practical Law has resources to help lawyers handle the SEC's investigations and enforcement actions and settlement negotiations with securities regulators, including: