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SEC Sends Warning to General Partners of Funds Receiving Finders’ and Other Fees

On June 1, 2016, the SEC sent a warning to general partners of private investment funds (including private equity funds, hedge funds, venture capital funds and leveraged buyout funds) by entering into a settlement agreement with a private equity fund advisory firm, Blackstreet Capital Management, and its principal, Murry Gunty. Blackstreet Capital Management and Murry Gunty were required to pay more than $3.1 million to settle charges that they engaged in brokerage activity and charged transaction-based brokerage fees without registering as a broker-dealer with the SEC.

In addition to certain other violations for which it was fined, the advisory firm 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 funds they advised. The advisory firm fully disclosed to the investors in the private equity funds that it would be receiving advisory fees that would not be shared with the funds, but did not register with the SEC for the receipt of such fees.

The receipt of transaction or success fees is common practice with many private investment funds.  While certain larger funds have formed in-house broker-dealers that are registered with the SEC, many firms have not.  However, all parties receiving transaction or success fees (or other types of fees that might be viewed as brokerage fees) should consult with their counsel as to whether the receipt of such fees is permissible and whether an in-house broker-dealer operation should be established.

© 2022 Neal, Gerber & Eisenberg LLP.National Law Review, Volume VI, Number 158
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About this Author

Scott J. Bakal, attorney, neal gerber law firm, Partner
Partner

Scott J. Bakal, co-chair of Neal Gerber Eisenberg's Taxation practice group, specializes in finding tax-sensitive solutions to complex financial situations, business transactions, and estate planning matters. Scott works primarily with entrepreneurial companies and high net worth individuals. Scott frequently represents commodities and securities traders, family offices, owners of business jets and companies and executives in employment...

312- 269-8022
Michael Gray, Partner, Neal Gerber Eisenberg Law Firm
Partner

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-...

312-269-8086
David Stone, corporate, securities, attorney, Neal Gerber, law firm
Partner

David S. Stone is Chair of the Neal Gerber Eisenberg Corporate & Securities Practice Group, Co-Chair of its Cross-Border Practice Group, and a member of its Corporate Governance Practice Group, where he represents clients in complex corporate and securities transactions and general corporate matters. He is also a member of the Neal Gerber Eisenberg Executive Committee.

David advises both buyers and sellers in connection with numerous negotiated public and private mergers, acquisitions, divestitures and dispositions. He also represents clients involved in public and private...

312-269-8411
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