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“Pay-to-Play” for Investment Advisers: The SEC’s First Prosecution

Peter D. Fetzer
Jason M. Hille
Foley & Lardner LLP - Milwaukee Office

Terry D. Nelson
Foley & Lardner LLP - Madison Office

September 2, 2014

Previously published on August 29, 2014

On June 20, 2014, the Securities and Exchange Commission (“SEC”) brought and settled its first case under the “pay-to-play” rules for investment advisers. The SEC charged TL Ventures Inc. with violating the “pay-to-play” rules by continuing to receive advisory fees from the pension plans of the city of Philadelphia and state of Pennsylvania after a covered associate made campaign contributions to a candidate for mayor of Philadelphia and the governor of Pennsylvania. TL Ventures Inc. agreed to settle the charges by paying nearly $300,000 in disgorgement, prejudgment interest and civil money penalties. TL Ventures Inc. received illicit advisory fees from two public pension funds: (i) Pennsylvania’s state retirement system and (ii) Philadelphia’s pension plan, both, within two years of making the disqualifying contributions. The continuing relationship violated “pay-to-play” rules because the mayor of Philadelphia appoints three of the nine members of the Philadelphia Board of Pensions and Retirement. Similarly, the governor of Pennsylvania appoints six of the eleven-member board of Pennsylvania’s state retirement system. Thus, both the mayor and governor, who received campaign contributions from a covered associate of TL Ventures Inc., could influence the hiring of investment advisers for each pension plan.

On July 1, 2010, the SEC adopted Rule 206(4)-5 (the “Rule”), promulgated under Section 206(4) of the Investment Advisers Act of 1940. The Rule addresses “pay-to-play” violations involving campaign contributions made by advisers or their covered associates to government officials who have the ability to influence the selection of registered investment advisers who in turn manage government assets. The Rule does not require a showing of quid pro quo or actual intent to influence elected officials or candidates and prohibits an investment adviser from (i) providing advisory services for compensation to a government client for two years after the adviser or covered associate makes a contribution to certain elected officials or candidates who would have influence over an entity that hires the investment adviser; (ii) providing direct or indirect payments to any third party that solicits government entities for advisory services unless the third party itself is a registered broker-dealer or investment adviser subject to “pay-to-play” restrictions; and (iii) soliciting or coordinating contributions to political parties where the adviser is providing or seeking to provide advisory services to government entities controlled by the individual to whom the adviser directed the contribution.

As stated above, the Rule covers contributions made by either the investment adviser or any covered associate. Under the Rule, covered associates are deemed to be officers and employees of the adviser who have a direct economic stake in the adviser’s relationship with the government client. Covered associates are defined to include, among others: (i) any general partner, managing member or executive officer; (ii) any employee who solicits a government entity for the investment adviser; and (iii) any political action committee controlled by the investment adviser or by any of its covered associates. Furthermore, executive officers include: (i) the president; (ii) any vice president in charge of a principal business unit, division or function; (iii) any other officer of the investment adviser who performs a policy-making function; or (iv) any other person who performs similar policy-making functions for the investment adviser.


The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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