It’s been about a year since the Securities and Exchange Commission granted its first exemptive order Rule 206(4)-5 when an adviser accidentally violated the pay-to-play rule. The SEC has now issued its second relief order. Ares Real Estate Management Holdings filed for exemptive relief after a senior partner wrote a $1,100 check to Colorado Governor John Hickenlooper’s campaign.
The Colorado governor appoints members to the Board of Trustees for Colorado’s pension system. That system was investor in one of Ares’ older funds.
Ares had compliance policies and procedures that require pre-approval of all political contributions. The employee thought the limitation didn’t apply in this situation because the adviser was not seeking new investments from the Colorado public pension fund.
The Colorado system had not made a new investment in an Ares fund since 2007. That’s six years before the contribution was made and three years before Hickenlooper was elected governor.
Since it’s a closed-end private fund, the investor has no right to redeem and is locked in for the fund’s duration.
After finding the problem, Ares put the fees into escrow pending an outcome of the exemptive order. Ares also walled that employee off from the Colorado investment to avoid tainting the relationship.
A big pile of cash was at stake for Ares. Over $1 million in fees could be generated over the two year ban.
It is great that the SEC granted the relief. But the case is an example of the problem with the Rule 206(4)-5. It is too broad. The contribution amounts were relatively small and had no connection to the investment.
Money in politics is a problem. It’s noble that the SEC has taken a stance. However, it’s contrary to the current law that political contributions are considered free speech. the SEC is taking a big club to the problem.
Sources:
- Application for Exemptive Order
- Exemptive Order
- Second exemptive relief from painful pay-to-play penalty appears near in IA Watch
- Some Relief for a Fund Manager Under the Political Contributions Rule