SEC Charges Private Equity Firm With Violations in First Case Under 2010 Pay-to-Play Rules for Investment Advisers

By Charles R. Spies / Jun 30, 2014

On Friday, June 20th the Securities & Exchange Commission announced aggressive penalties in the first case involving its 2010 pay-to-play rules for investment advisers.

Among other things, the rules seek to prevent investment firms from making political contributions in an attempt to secure investment advisory contracts from pension funds. The rules achieve this by prohibiting investment advisers from providing advisory services for compensation for two years following a campaign contribution by the firm or certain employees to candidates or officials in positions to influence which advisers manage government client assets, including pension funds.

TL Ventures Inc., a private equity firm, was charged with violating the pay-to-play rules by continuing to receive compensation from two public pension funds after a TL Ventures associate made two campaign contributions in 2011. The associate contributed $2,500 to a mayoral candidate in Philadelphia and $2,000 to the Governor of Pennsylvania.

Each of the candidates had the ability to influence the selection of investment advisers for their respective public pension funds because they may appoint a designated number of members to their respective boards of directors.

Largely as a result of this single employee's political contributions totaling less than $5,000, TL Ventures agreed to settle the pay-to-pay charges by paying nearly $300,000. The settlement includes a fine of profits, plus interest, and a $35,000 penalty.

This may just be the beginning: "We will use all available enforcement tools to ensure that public pension funds are protected from any potential corrupting influences," said Andrew Ceresney, director of the SEC Enforcement Division. "As we have done with broker-dealers, we will hold investment advisers strictly liable for pay-to-play violations."

It is important to be mindful that this is an area where the SEC can easily identify potential violations and increase its enforcement figures. Considering this, and the SEC aggressively prosecuting these violations, it is all the more necessary for hedge funds, private equity funds, and other investment advisers to develop, adopt, and follow pay-to-play compliance policies.

For further information regarding the topics discussed in this Political Law Update, or to discuss instituting a compliance plan, please contact your Clark Hill political law attorney.