The SEC recently announced that an equity advisory firm and its owner agreed to pay more than $3.1 million to resolve charges that they improperly engaged in brokerage activity, as well as charging fees without registering as a broker-dealer. In other words, the firm acted like a broker-dealer but never bothered to register as one.
The SEC’s investigation demonstrated that the firm performed brokerage services in-house, instead of using investment banks or broker-dealers to handle the acquisition and sale of portfolio companies for a pair of equity funds they advised. Interestingly, the firm disclosed to its customers that it would provide brokerage services and charge customers a fee for doing so.
The problem is that the firm provided those services itself even though it was not registered to do so. This action should serve as warning, particularly for firms who may be engaged in Reg. D offerings.
If part of the offering you find yourself engaged in the sale of securities, you better be registered as a broker-dealer to be doing so. Alternatively, you could have retained the services of a broker-dealer to sell interests in the fund. The law is clear; you need to do one of the two.
Another point of interest is that the SEC uncovered this improper conduct through an ordinary examination of the investment advisory firm. In other words, there was no customer complaining that it suffered any harm. So what lessons are to be learned?
For one, only broker-dealers can engage in brokerage services. Second, the SEC in its exam process is looking for such activity and going after it. Don’t make the same mistake; register as a broker-dealer or retain one to provide those services for you.