SEC Fined 10 Firms for Violating Pay-to-Play Rule

In June 2010, the SEC adopted the Rule 206(4)-5 of the Investment Advisers Act of 1940, which addressed “pay-to-play” practices surrounding political contributions.  Pay to play is a term used in the financial industry that generally refers to investment advisers making campaign contributions to government officials with the intent to influence the award of contracts.  Rule 206(4)-5 is designed to protect investors by preventing arrangements that could result in advisers being chosen based on campaign contributions rather than on merit.

The SEC had concerns that such practices could result in fraudulent conduct and diminished investor confidence.  To help protect investors and safeguard the integrity of the industry, the rule applies to SEC-registered investment advisers and certain advisers exempt from registration with the SEC who provide investment advisory services, or are seeking to provide investment advisory services, to government entities.

On January 17, 2017, the SEC issued orders instituting administrative and cease and desist proceedings against 10 investment advisory firms stating they had violated the pay-to-play rule after receiving compensation from public pension funds within two years of campaign contributions being made to elected officials or political candidates by the firms’ associates.

According to LeeAnn Ghazil Gaunt, Chief of the SEC Enforcement Division’s Public Finance Abuse Unit, “The two-year timeout is intended to discourage pay-to-play practices in the investment of public money, including public pension funds. Advisory firms must be mindful of the restrictions that can arise from campaign contributions made by their associates.”

The advisory firms consented to the SEC’s orders finding they violated Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-5. The firms were censured and fined as follows:

  • Adams Capital Management – $45,000
  • Aisling Capital – $70,456
  • Alta Communications – $35,000
  • Commonwealth Venture Management Corporation – $75,000
  • Cypress Advisors – $35,000
  • FFL Partners – $75,000
  • Lime Rock Management – $75,000
  • NGN Capital – $100,000
  • Pershing Square Capital Management – $75,000
  • The Banc Funds Company – $75,000

In light of these cases, Chief Compliance Officers (“CCOs”) should review their firm’s policies, procedures and internal controls pertaining to political contributions to help ensure they are in line with all requirements under Rule 206(4)-5.  In addition, as part of the firm’s testing protocols, the CCO should perform periodic reviews of public records of political contributions at www.fec.gov/disclosure.shtm to determine if any unapproved contributions had been made by Covered Associates (as such term is defined in Rule 206(4)-5) within the last two years.

The CCLS team can assist firms with creating and implementing appropriate policies, procedures and controls to help prevent pay-to-play violations from happening at their firm.  For more information, please contact us at info@corecls.com or (619) 278-0020.