While private equity firms often operate like such broker-dealer firms as Morgan Stanley or Goldman Sachs, they are not uniformly subject to the same Securities and Exchange Commission regulations aimed at reining in excesses and requiring that the advice they provide is appropriate, according to a New York Times analysis today. Nor has the SEC clamped down on buyout firms for marketing private equity funds to endowments, pension funds and wealthy investors. These activities, too, are usually the purview of broker-dealers. “There appears to be growing confusion among private equity firms, the legal community and perhaps even among SEC staff as to conduct by private equity firms and their consultants and employees that subjects them to broker-dealer registration requirements,” said Marlon Q. Paz, a partner at the Locke Lord law firm and a former senior SEC official, who has advised his private equity clients to become broker-dealers. How the agency resolves this issue could have costly implications for private equity firms that have collected billions of dollars in fees without registering as broker-dealers. Clearer rules, too, would cast a spotlight on potential conflicts of interest inherent in private equity deal-making. And documents show that investors in many private equity firms’ funds may not be receiving a complete picture of the risks posed by the firms’ financial advice.
