Pay-to-play violations have the potential to affect a firm's reputation and typically in a "two-year timeout from providing compensatory advisory services directly to a government client."
Contributions of any kind, which include campaign contributions to those seeking elected office, have the potential to be construed as intending to influence the flow of government business to the adviser, even if the adviser's personnel, and not the adviser entity, is the source of a contribution. It is important to understand that even minor donations of relatively small amounts can trigger serious violations and penalties.
What Is Pay-to-Play? - Understanding the Law Is Critical to Avoiding Enforcement
The Pay-to-Play Rule, outlined under Rule 206(4)-5 of the Investment Advisers Act prohibits campaign and other contributions by certain investment advisers or their personnel to government officials with influence over the selection of investment advisers to manage government client assets.
The Pay-to-Play Rule also prohibits certain investment advisers from billing a government client or associated organization for advisory services within the two years following a prohibited contribution.
Cease-and-Desist Proceedings for Pay-to-Play Infractions
According to a July 10, 2018, SEC ruling, three associates of a leading private equity firm (the "PE Firm"), made nominal campaign contributions to candidates for elected office in California and Rhode Island between September 2014 and April 2016. The contributions ranged from $500 and upwards to $1,400.
It was determined the candidates were running for offices having influence over selecting investment advisers for public pension plans in those states.
More specifically, violations of Section 206(4) and 206(4)-5 of the Advisers Act occurred when the associates of the PE Firm were hired to provide advisory services to the California State Teachers' Retirement System and the Employees' Retirement System of Rhode Island within two years of the above-mentioned contributions.
Although donations were returned to their donors, the SEC found and charged the PE Firm with similar Pay-to-Play violations in its dealings with the Water and Power Employees' Retirement Plan of the City of Los Angeles, the Los Angeles City Employees' Retirement System, and the Los Angeles Fire and Police Pension System.
Without directly admitting or denying wrongdoing, the PE Firm has agreed to pay $100,000 in penalties and accept the SEC's cease-and-desist order.
Today's Political Climate and Pay-to-Play Regulations
When it comes to the Pay-to-Play rule, a seemingly minor donation can result in a dramatic impact to a registered investment adviser. Violations of this sort are an occurrence that any adviser should take active steps to avoid at all costs.
The importance of understanding the Pay-to-Play Rule is clearly highlighted in the case discussed above: If a firm has dealings with government investors, pension funds, or other government entities, it is imperative that the advisory firm has strong policies and procedures in place that are effectively implemented to avoid violations.
In our country's current politically-charged climate, thorough knowledge of the rules governing campaign contributions and pay-to-play guidelines is crucial.
Jacko Law Group ("JLG") provides legal consulting and strategy development services to help our clients establish effective written policies, procedures, and internal controls with a practical, systematic approach toward compliance, as well as ongoing legal support for any new issues that arise.
Robert D. Conca is a Partner at Jacko Law Group, PC. His practice includes representation of investment advisers, broker-dealers, private funds, and non-financial industry companies, and their personnel, in a variety of ...
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