Private Equity Firms Affected by SEC Broker-Dealer Letter

February 26, 2014


The Securities and Exchange Commission’s Division of Trading and Markets (“SEC”) recently issued a no-action letter providing conditional relief to certain individuals from the broker-dealer registration requirements. Specifically, the no-action letter provides relief to “M&A Brokers” who advertise privately held companies for sale, participate in the sale negotiations, and provide transaction advice such as valuation and structuring, while receiving transaction-based compensation (“M&A Transactions”). The relief could cover arrangements wherein private equity fund sponsors pay consultants for referrals of acquisition targets and investments. The no-action letter is available here.

What are the Implications for Private Equity Firms?

A person who facilitates the sale of a business through the transfer of its securities may be required, under certain circumstances, to register as a broker-dealer under Section 15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”). Under this construct, the SEC has been, and will continue, exploring whether the activities of private equity firms would require broker-dealer registration.[1] Among other scenarios, the SEC has focused on the practice of private fund sponsors receiving transaction-based compensation for “purported investment banking or other broker activities relating to one or more of the fund’s portfolio companies.”[1]

To the extent the conditions of the no-action letter were satisfied, the letter could provide registration relief for certain activities engaged in by private equity firms. Most likely, the letter would provide comfort to private equity firms paying transaction-based compensation to unregistered persons, such as consultants, who serve as intermediaries or finders in relation to acquisition targets or investments for private equity funds. Whereas, a private equity sponsor itself may have difficulty satisfying all of the conditions in the letter.

Importantly, in granting relief to one class of broker-dealers—so called M&A Brokers—the letter may signal a willingness by the SEC to consider the policy implications behind requiring registration for certain types of acquisition and disposition activities undertaken by private equity firms.[3]

Who Qualifies as an M&A Broker Under the Relief?

For purposes of the no-action letter, M&A Brokers are individuals engaged in the business of effecting securities transactions solely in connection with the transfer of ownership and control of privately-held companies through the purchase, sale, exchange, issuance, repurchase, or redemption of securities or assets of the company. Such M&A Brokers must organize deals that transfer ownership and control to a buyer that will actively operate the company or the business conducted with the assets of the company. Importantly, the no-action letter does not limit the compensation that an M&A Broker may receive for its role in the M&A Transaction.

Per the letter, a “privately-held company” is one that does not have securities registered, or required to be registered, with the SEC under Section 12 of the Exchange Act, or does not file under Section 15(d) of the Exchange Act. Further, a privately-held company must be an operating company and not a “shell” company.

What are the Conditions of the Relief?

There are numerous conditions that must be met for an M&A Broker to be relieved of the broker-dealer registration requirements, including the following:

  • The M&A Broker may not have the ability to bind a party to an M&A Transaction.
  • The M&A Broker (and its affiliates) cannot provide financing for an M&A Transaction, although it may assist a purchaser in obtaining financing from unaffiliated third parties (subject to conditions).
  • The M&A Broker may not have custody, control, or possession or otherwise handle funds or securities in connection with an M&A Transaction for the account of others.
  • The M&A Transaction may not involve a public offering.
  • If the M&A Broker represents both the buyer and seller in the same transaction, that fact must be disclosed to both parties in writing and the M&A Broker must receive written consent from both parties.
  • The M&A Broker may organize transfers between groups only if the broker played no role in organizing or creating the groups.
  • The M&A Broker (and, in the case of an entity, each officer, director, or employee) has not been barred or suspended from association with a broker-dealer.

Importantly, the buyer of any company must control and actively operate the company or the business conducted with the assets of the business. Further, the M&A Transaction may not result in the transfer of interests to a passive buyer or group of passive buyers. To satisfy the “control” condition in the no-action letter, buyers must have the power, directly or indirectly, to direct management or policy decisions. Control is presumed if the buyer or group of buyers has ownership, or the power to direct the ownership, of 25% of a class of voting securities, or has the right to receive upon dissolution or has contributed 25% or more of the capital.

Contact Information

Private equity firms should closely review their activities to evaluate whether their investment and acquisition activities fall within the scope of the SEC Staff’s no-action letter. O’Melveny & Myers is able to advise private equity firms on the issues in the SEC Staff’s no-action letter. For questions or additional information, please contact Heather Traeger at (202) 383-5232 or

[1] In its 2014 Examination Priorities, available here, the SEC stated that it would continue to review private fund advisers for broker-dealer status concerns.
[2] “A Few Observations in the Private Fund Space,” Remarks by David W. Blass (April 5, 2013), available here.
[3] See also, Securities Law 360, “SEC Mulls Break for Private Equity To Skip Broker-Dealer Registration,” by Alan Katz (February 22, 2014) (suggesting the SEC may be considering relief for broker-dealer registration for certain activities undertaken by private equity firms).

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Heather Traeger, an O'Melveny partner licensed to practice law in the District of Columbia and Texas contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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