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Attention Private Fund Advisers: Are you Registered as a Broker-Dealer? Should You Be?

SEC official highlights common errors in private fund registration analysis, emphasizes critical questions to be asked

On April 5, 2013, the SEC published certain remarks of David W. Blass, Chief Counsel, Division of Trading and Markets, made before the Trading and Markets Subcommittee of the American Bar Association, titled “A Few Observations in the Private Fund Space.” Among other topics, a substantial portion of Blass’s remarks concerned the registration as broker-dealer or lack of registration as a broker-dealer where required - of private funds. Blass observed that the private funds sector “has become an increasingly large part of the financial marketplace in the last couple of decades…,” as recognized in the Dodd-Frank Act and related SEC Rules, which impose new registration and reporting requirements on private fund advisers.Blass confirmed that the staff is putting an increased examination focus on private fund advisers, both due to the new regulatory requirements and the SEC’s own observations of the private fund space. While a comprehensive discussion of broker-dealer registration is beyond the scope of this Alert, Blass’ remarks serve as a timely reminder for private fund advisers to review activities for possible registration requirements.


While many private fund advisers are appropriately expending substantial resources complying with the portions of the Investment Advisers Act of 1940 that are newly applicable to them, Blass rightly emphasized that the private fund adviser community cannot overlook a significant area of concern under the Securities Exchange Act of 1934 – activity that could cause a private fund adviser to be required to register as a broker-dealer.

Absent an available exemption or other relief, a person engaged in the business of effecting transactions in securities for the account of others must generally register under Section 15(a) of the Exchange Act as a broker. In general, the test for broker-dealer registration is broad and depends on various activities a person performs in one or more securities transactions. Blass identified generally some examples of activities, or factors, that might require private fund adviser personnel to register as a broker-dealer to include:

  • marketing securities (shares or interests in a private fund) to investors;
  • soliciting or negotiating securities transactions; or
  • handling customer funds and securities.

Blass further advised that the importance of these factors is heightened in circumstances where transaction-based compensation is made by the private fund adviser, noting that “The SEC and SEC staff have long viewed receipt of transaction-based compensation as a hallmark of being a broker.”


The so-called “issuer exemption,” found in Exchange Act Rule 3a4-1, provides a nonexclusive safe harbor under which associated persons of certain issuers can participate in the sale of an issuer’s securities in certain limited circumstances without being considered a broker. In observing that Rule 3a4-1 “generally is not used by private fund advisers,” Blass reiterated the criteria for the exemption, further emphasizing that a person must satisfy one of three conditions to claim the issuer exemption from broker-dealer registration:

  • the person limits the offering and selling of the issuer’s securities only to broker-dealers and other specified types of financial institutions;
  • the person performs substantial duties for the issuer other than in connection with transactions in securities, was not a broker-dealer or an associated person of a broker-dealer within the preceding 12 months, and does not participate in selling an offering of securities for any issuer more than once every 12 months; or
  • the person limits activities to delivering written communication by means that do not involve oral solicitation by the associated person of a potential purchaser.

Blass further cautioned that it could be difficult for private fund advisers to fall within these conditions, and that reliance upon this exemption will be scrutinized.


Blass also included some specific examples of questions all private fund advisers should be asking themselves about projected activities in making the determination whether registration as a broker-dealer is required. Blass advised that these questions are the same the SEC asks in determining whether registration should have been secured:

  • How does the adviser solicit and retain investors? What are the duties and responsibilities of personnel performing any such solicitation or marketing efforts? A dedicated sales force of employees working within a “marketing” department may strongly indicate that they are in the business of effecting transactions in the private fund, regardless of how the personnel are compensated.
  • Do employees who solicit investors have other responsibilities? If so, consider what those responsibilities are – are the primary functions of these employees to solicit investors?
  • How are personnel who solicit investors for a private fund compensated? Do those individuals receive bonuses or other types of compensation that is linked to successful investments? A critical element to determining whether one is required to register as a broker-dealer is the existence of transaction-based compensation.
  • Does your private fund charge a transaction fee in connection with a securities transaction? In addition to considering compensation of employees, advisers also need to consider the fees they charge and in what way, if any, they are linked to a security transaction.

The sanctions for failure to register as a broker-dealer where required can be severe, even in the absence of any fraudulent conduct. In light of the foregoing, we have again urged our private fund adviser clients and friends (and counsel) to undertake periodically a review of how they goes about obtaining new investors and retaining existing investors. The starting point for any such review should be a comprehensive analysis of the questions posted above – and answers.

© 2022 Neal, Gerber & Eisenberg LLP.National Law Review, Volume III, Number 102

About this Author

Michael Gray, Partner, Neal Gerber Eisenberg Law Firm

Michael B. Gray concentrates his practice in mergers and acquisitions, private equity, venture capital, hedge funds, fund formations, and intellectual property. He represents investors, companies, and executives in private equity and venture capital transactions; mergers, acquisitions and restructurings; executive compensation; general contract and intellectual property agreements and the structuring of partnerships, corporations and limited liability companies. He also has extensive experience advising investors in funds and advising funds on their formation and compliance needs (both on-...