June 2, 2016

The SEC Fines a Private Equity Firm for Broker-Dealer Fee Violations. Are KKR, Apollo, Blackstone, TPG, Carlyle and Lots of Others on Its Hit List?

We’ve been writing for some time about the peculiar failure of the SEC to target private equity firms for acting as unregistered broker-dealers. The agency has finally roused itself and has fined an itty bitty firm, Blackstreet Capital Management. Needless to say, it’s not clear whether the agency is simply putting the industry on notice that it needs to clean up its act and register if they continue to collect transaction fees from portfolio companies, or whether it is warming up for larger enforcement actions.

If the latter, it would be a very big deal, because this is considered to be a serious violation of securities laws and the punishment is therefore hefty: dollar for dollar for the amount of fees impermissibly charged. The SEC applied the classic dollar-for-dollar formula in the case of Blackstreet. If you read the order, the total amount to be disgorged of $2,339,000 is the sum of the transaction fees of $1,877,000 (p. 5), plus the impermissible operating partner fees of $450,000 (p. 5), plus the political contributions of $12,000 (p. 6).

We discussed in a 2014 post how widespread this misconduct is:

The Bloomberg story acknowledges that the billions in fees collected by the PE industry over decades appear to have been illegal, noting that an SEC official “…signaled in a speech last year that transaction fees the private-equity industry had been taking for decades may have been improper because the firms weren’t registered as broker-dealers….

The industry flack also claims that the billions paid in transaction fees were not for broker-dealer services (although the argument is so absurd it doesn’t seem to be made with much enthusiasm). Yes, Washington DC is a generally fact-free zone, but let’s look at the language from an actual transaction agreement:

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