Two recently-issued SEC orders settling administrative and cease-and-desist proceedings (Orders) demonstrate the regulatory risks private fund managers face in using unregistered brokers to introduce prospective investors to their funds. One of those Orders was against a private equity fund manager and its former senior managing partner, and the other was against a third party consultant retained by the private equity fund manager to introduce potential investors to its funds. The private equity fund manager paid the consultant a percentage of the capital commitments of investors he introduced, resulting in millions of dollars in compensation for him. See generally “What Is the ‘Market’ for Fees and Other Key Terms in Agreements between Hedge Fund Managers and Placement Agents?
,” Hedge Fund Law Report, Vol. 3, No. 35 (Sep. 10, 2010). Importantly, this case demonstrates that the SEC is willing to pursue not just unregistered brokers who engage in impermissible marketing activities on behalf of investment funds, but also the fund managers themselves if they are found to assist an unregistered broker or ignore warning signs that the unregistered broker is engaging in misconduct. This article summarizes the alleged misconduct, causes of action and the remedies agreed upon in the settlement. In addition, this article provides four recommendations for fund managers wishing to mitigate the risks of using unregistered brokers in introducing prospective investors to their funds.