Securities Law & Corporate Counsel Blog

The SEC's pay-to-play rule is more relevant than ever before in today's politically charged climate. As the management of government client assets is widespread in the realm of private equity, whether a private equity adviser is seeking its first public investor dollars or has a long history with government investors, firms cannot afford to ignore potential pay-to-play violations and subsequent penalties.

Simply put, the pay-to-play rule disallows campaign contributions or donations public officials or affiliated entities that have influence over choosing investment advisers that manage public monies. The rule sweeps broadly, covering even indirect payments to third parties that solicit government entities for advisory business. This rule is quite restrictive, and the level of contributions proscribed by the pay-to-play rule can seem almost comically low, especially when compared to the resultant penalties.

For example, just over a year ago, the SEC announced ten enforcement actions relating to violations of the pay-to-play rule - something that was foreshadowed in the SEC's 2017 Examination Priorities, which listed pay to play and public pension advisers, announced just a few days earlier.

The amounts of the political contributions that triggered enforcement actions were as low as $500 - far smaller than the associated fines which ranged from $35,000 to $100,000. 

From a technical view, the problem wasn't necessarily that campaign contributions were made - the violations of the pay-to-play rule arose when the advisers accepted fees after the contribution was made and an associated "2-year timeout" was triggered.

Suffice to say, the SEC has sent a clear signal that it has no tolerance for violations of the pay-to-play rule, no matter how small. Without clear, robust pay-to-play policies in place that are designed to prevent contributions that violate pay-to-play rules, private equity advisers that seek investment from public clients can find themselves in trouble quickly.

Enforcement Fines Hurt; a 2 Year Timeout Can Hurt More

Though certainly a $100,000 enforcement fine is impactful, a "2-year timeout" from working with a government client may hurt worse. As one can see based on the 10 enforcement action mentioned above, it can be tricky to handle these situations once the donation has been made.

To further complicate matters, even when a contribution has been clawed back, an enforcement action can still proceed. 

For most private equity advisers, the best method of dealing with these issues may be to implement a pay to play policy requiring pre-clearance of all political contributions, no matter how small, or even to disallow political contributions altogether. Your policy should be tailored to the particulars of your firm so that pay-to-play issues can be managed appropriately.

This issue, now more than ever, is one firms should keep a close eye on. With the political fervor gripping the country, and the likelihood that someone at your firm will want to make a contribution, reviewing and revising policies and procedures now should make avoiding pay-to-play issues easier in the future.

We expect public pension advisers to remain high on the list of the SEC's examination program, so now is the time to review pay-to-play issues at your firm.

With an Experienced Advisor to Private Funds on Our Team, We'd Love to Help

Robert Conca's experience as CCO and internal counsel to private equity companies puts him in a unique position to understand the complex regulatory paths that the private equity CCO and their firms must walk.

If you have questions on the complexities of handling political contributions, and other matters of concern specific to your private equity firm, click here to learn what Jacko Law Group, PC can do for you.

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