Women's Bar Association of the State of New York Newsletter
Suzanne M. Dugan
Winter 2015 Issue
The SEC recently settled its first enforcement action under Rule 206(4)-5, its “pay-to-play” rule, in Matter of TL Ventures, Inc. (www.sec.gov/litigation/admin/2014/ia-3859.pdf). Investment advisers with government clients should take note of this important action, as the SEC stated in the press release accompanying its Order that it will hold investment advisers strictly liable for pay-to-play violations. Moreover, individuals with responsibility for public pension plans and government-run savings plans must also be attentive to the implications of the Rule and the recent enforcement action.
The Rule, adopted in 2010, prohibits investment advisers from providing compensatory advisory services for a period of two years following a political contribution by the adviser or certain of its covered associates to a public official or candidate who is or would be in a position to influence the selection or retention of advisers to manage public pension funds or other government client assets. The Rule covers anything of value made for the purpose of influencing a political election in excess of de minimus thresholds ($350 or $150, depending on election) regardless of whether there is any evidence of intent to influence a public official.
In June, TL Ventures Inc. agreed to disgorge advisory fees and pay civil monetary penalties for its violations in a total amount of nearly $300,000. TL Ventures obtained investments in 1999 and 2000 from two public pension systems run by boards with members appointed by elected officials. The political contributions triggering the Rule were made in 2011 (when the investments were in wind down mode) by an associate of TL Ventures. TL Ventures continued to provide investment advisory services and received compensation for those services for the two years after the contributions, thus violating the Rule.
The SEC has responded to past pay-to-play scandals with a strong rule to deter and remedy future violations. Investment advisers must have effective internal controls in place to ensure strict compliance with the Rule in order to avoid violating the Rule and facing enforcement actions. Public pension funds must also be sure that they fully understand this rule and its implications in order to secure the maximum protection for their beneficiaries.