Placement Agents and the SEC Inquiry of Private Fund Broker Dealer Requirements

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Broker-dealer regulation in connection with the sale of private fund interests has become a focus of SEC inquiry. The David Blass speech on private funds and broker-dealer registration highlights the issue. If you have internal marketing people who are getting paid transaction based compensation for selling fund interests, there may be an issue. Even if you don’t pay a commission-like compensation to dedicated internal marketing people you may have a problem.

The big problem with having your internal marketing people re-cast as broker-dealers is that if they are not registered, your fund investors could have a rescission right. One way to deal with the broker-dealer issue is to use a third-party placement agent. Then, the fund manager would not need as much internal marketing manpower. The fund could rely on the placement agent’s broker-dealer registration.

But the SEC started a witch hunt against placement agents in 2009 when it threatened to ban the use of placement agents when dealing with government pension plans. That put fund managers on the defensive when dealing with placement agents. Individual states began instituting their own bans on placement agents. Many investors raised a red flag for compliance issues when a placement agent was involved in a fundraising.

Placement agents had to give some thought as to how they operated their businesses given that they are precluded from acting as an agent when dealing with the big dollars of pension plans.

Of course, many fund managers bulked up their internal marketing groups to deal with the lesser assistance they would get from placement agents. Now the SEC is going after those groups. Unfortunately, the SEC is being very inconsistent on how it wants private funds with savvy investors to operate now that they are under the stricter scrutiny of the SEC.

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