The SEC has brought its first case under the pay-to-play rule for registered investment advisers. It’s just as horrible as I thought it would be.
The Securities and Exchange Commission enacted Rule 206(4)-5 to address pay-to-play abuses involving campaign contributions made by registered investment advisers and their key employees. The concern was contributions to government officials who are in a position to influence the selection of advisers to manage government client assets, including public pension assets. The SEC perceived that there is a culture of making contributions in exchange for investment.
TL Ventures sponsored private equity funds. The Pennsylvania State Employees’ Retirement System is an investor in two funds. The City of Philadelphia Board of Pensions and Retirement is an investor in one fund. The commitments were made in 1999 and 2000. As a limited partner in the fund, neither government pension fund had the right to withdraw its contribution or to make a bigger contribution.
In 2011, a covered associate of TL Ventures made a $2500 campaign contribution to the Mayor of Philadelphia. The Mayor appoints three of the nine members of the City of Philadelphia Board of Pensions and Retirement. Therefore the Mayor has indirect influence over the investment decisions and contributions are subject to Rule 206(4)-5.
In 2011, a covered associate of TL Ventures made a $2000 contribution to the Governor of Pennsylvania. The Governor appoints six of the eleven members of the board of the Pennsylvania State Employees’ Retirement System. Therefore the Governor has indirect influence over the investment decisions and contributions are subject to Rule 206(4)-5.
In this case, the dollar amounts are not huge. In the current race for Governor, Ed Rendell and Bob Casey have together spent $31.5 million. The violation in this case was $2500. I assume the Covered Associate lived in Pennsylvania. Therefore the cap under Rule 206(4)-5 was $350.
The contributions were made more than 10 years after the investment decision was made. There is no statement of malice or bad intent by TL Ventures. But Rule 206(4)-5 does not require a showing of quid pro quo or actual intent to influence an elected official or candidate. You make a contribution; you violate the rule.
The SEC action also includes a charge of failing to register with the SEC. TL Ventures tried to structure its business to avoid registration. TL Ventures managed venture capital funds and therefore was able to be an exempt reporting adviser. Its affiliate, Penn Mezzanine, had less than $150 million under management and therefore would be subject to state registration, not SEC registration. The SEC has stated that it will treat two or more affiliated advisers that are separate legal entities but are operationally integrated as a single adviser. The SEC found that the operations of the two were integrated. Therefore, the firm should have registered with the SEC.
The firm ended up paying a disgorgement of $256,697. I assume that translates to the two years worth of fees that TL Ventures collected from the government pension funds.
The amounts are relatively small. The firm was not currently soliciting the government pension funds for business. There is no finding of malice or egregious behavior.
Good luck going to sleep tonight.
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