Adviser Found to Have Improperly Relied Upon Registration Exemptions

June 16, 2014

The SEC brought an administrative action against Penn Mezzanine Partners Management, L.P. and TL Ventures Inc., a related investment adviser, in connection with violations of the Advisers Act’s registration requirement by Penn Mezzanine.


Effective March 30, 2012, Penn Mezzanine and TL Advetures, each claimed to be exempt from the Advisers Act’s registration requirements. However, the SEC found that their relationship indicated that the two advisers were under common control, were not operationally independent of each other and thus should have been integrated as a single investment adviser for purposes of the applicable registration requirement and the applicability of any exemption. Had they been integrated, the SEC stated that Penn Mezzanine and TL Ventures would not have qualified for any exemption from registration and therefore should have been registered effective March 30, 2012.

From March 29, 2012, Penn Mezzanine claimed to be an investment adviser solely to private funds with less than $150 million in regulatory assets under management and thus to be exempt under Rule 203(m)-1 under the Advisers Act from registration as an investment adviser. It has reported to the SEC as an “exempt reporting adviser” under Section 204(a) of the Advisers Act and Rule 204-4 thereunder. In its exempt reporting adviser report on Form ADV dated March 31, 2014, Penn Mezzanine reported regulatory assets under management of approximately $51 million in private capital funds.

Penn Mezzanine claimed that it qualified for an exemption from registration with the SEC based on Rule 203(m)-1 under the Advisers Act because it acted solely as an adviser to private funds and had regulatory assets under management in the U.S. of less than $150 million. TL Ventures claimed that it qualified for an exemption from registration with the SEC based on Section 203(l) of the Advisers Act because it was an adviser solely to one or more venture capital funds.

On their exempt reporting adviser reports filed with the SEC, both Penn Mezzanine and TL Ventures report that they are under common control with each other. In addition, various employees and associated persons of TL Ventures held ownership stakes in TL Ventures and in the general partner and management company entities of Penn Mezzanine; among those, two managing directors of TL Ventures held in the aggregate a majority ownership interest in TL Ventures and indirectly held in the aggregate more than a 25%, but less than a majority, ownership interest in Penn Mezzanine. Penn Mezzanine and TL Ventures had several overlapping employees and associated persons, including individuals who provided investment advice on behalf of both Penn Mezzanine and TL Ventures. The SEC found that Penn Mezzanine and TL Ventures had significantly overlapping operations without any policies and procedures designed to keep the entities separate.

The SEC has stated that it will treat as a single adviser two or more affiliated advisers that are separate legal entities but are operationally integrated, which could result in a requirement for one or both advisers to register. When integrated with TL Ventures, Penn Mezzanine did not qualify for an exemption from registration with the SEC under Rule 203(m)-1 under the Advisers Act because the combined operations of Penn Mezzanine and TL Ventures exceeded $150 million in regulatory assets under management in the U.S. When integrated with Penn Mezzanine, TL Ventures did not qualify for an exemption from registration with the SEC under Section 203(l) of the Advisers Act because it was not an adviser solely to venture capital funds.  Accordingly, as of March 30, 2012, Penn Mezzanine and TL Ventures should have registered with the SEC as an investment adviser under the Advisers Act.

Click here to access the administrative action related to Penn Mezzanine. Click here to access the administrative action related to TL Ventures.


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Investment Advisers