## Facts

- Blackstreet Capital Management, LLC (BCM) was a registered investment adviser to private-equity funds; Murry N. Gunty was BCM’s founder and managing member.
- In connection with acquisitions and dispositions involving portfolio companies, BCM performed deal-related services (e.g., sourcing, negotiating, structuring, arranging financing, and executing transactions) and received transaction-based compensation totaling about $1.877 million, without registering as a broker-dealer.
- BCM charged portfolio companies “operating partner oversight” and similar fees for services by BCM personnel, which were not authorized by the relevant limited partnership agreement (LPA) and were not adequately disclosed to fund investors in advance.
- BCM and/or Gunty caused fund assets to be used for political contributions, charitable contributions, and entertainment expenses without LPA authority and without adequate disclosure or investor consent.
- BCM caused a portfolio company to sell an employee’s equity stake to BCM (or an affiliate) instead of allowing the company to exercise a contractual repurchase right upon the employee’s departure, without appropriate disclosure to limited partners.
- Gunty purchased fund limited-partnership interests from defaulting and selling limited partners on terms that departed from the LPA’s default/transfer provisions, including obtaining interests for one dollar and receiving a waiver of remaining capital-call obligations available only to him, without disclosure to other investors.
- The SEC found BCM lacked written policies and procedures reasonably designed to prevent adviser violations tied to fees, expenses, conflicts, and use of client assets.
- The matter was resolved through a settled SEC administrative cease-and-desist proceeding; respondents consented to the order without admitting or denying the findings (except jurisdiction).

## Issues

1. Whether BCM acted as an unregistered broker in violation of Exchange Act § 15(a)(1) by performing brokerage services and receiving transaction-based compensation in connection with portfolio-company transactions.
2. Whether BCM and Gunty violated Advisers Act §§ 206(2) and 206(4) and Rule 206(4)-8 by charging unauthorized or inadequately disclosed fees, misusing fund assets, and engaging in undisclosed conflicted transactions and self-dealing.
3. Whether BCM violated Advisers Act § 206(4) and Rule 206(4)-7 by failing to adopt and implement compliance policies and procedures reasonably designed to prevent violations.

## Decision

- The SEC found BCM willfully violated Exchange Act § 15(a)(1) by acting as an unregistered broker through transaction-based compensation tied to deal execution.
- The SEC found BCM and Gunty willfully violated Advisers Act §§ 206(2) and 206(4) and Rule 206(4)-8 through undisclosed/unauthorized fees, misuse of fund assets, and conflicted transactions involving portfolio-company equity and LP interests.
- The SEC found BCM violated Advisers Act § 206(4) and Rule 206(4)-7 by maintaining an inadequate compliance program.
- Sanctions included censure of BCM; cease-and-desist orders; disgorgement of about $2.339 million plus prejudgment interest of about $283,737 (including amounts designated for return to affected clients); and a $500,000 civil penalty.

## Legal Principles

- Receiving transaction-based compensation for services that effect securities transactions for others is a strong indicator of broker activity requiring registration under Exchange Act § 15(a)(1).
- As a fiduciary, an investment adviser must provide full and fair disclosure of material conflicts and compensation arrangements; undisclosed or unauthorized fees and conflicted self-dealing may violate Advisers Act §§ 206(2) and 206(4) and Rule 206(4)-8.
- Using client assets for non-investment purposes without clear authorization and adequate disclosure can constitute improper diversion of client assets and a conflict requiring disclosure and consent under the Advisers Act anti-fraud provisions.
- Registered advisers must adopt and implement written policies and procedures reasonably designed to prevent violations; compliance program failures can be charged as an independent violation under Rule 206(4)-7.

## Conclusion

The SEC sanctioned a private-equity adviser and its principal for unregistered broker activity and multiple fiduciary breaches arising from undisclosed compensation, improper use of fund assets, and self-interested transactions, and separately charged the adviser for inadequate compliance controls targeting fees, expenses, and conflicts.


In re Blackstreet Cap. Mgmt., LLC, Investment Advisers Act Release No. 4411 (S.E.C. June 1, 2016)