The SEC recently charged an investment adviser for violating Rule 206(4)-5 under the Advisers Act, known as the “Pay-to-Play Rule” (Rule).1 In settling the charges, the adviser agreed to pay a $60,000 penalty and was censured by the SEC. The charges highlight the SEC’s ongoing focus on enforcing the Rule2 and serve as a timely reminder – as political fundraising intensifies during this election year – for advisers to review and continue implementing their policies and procedures that are designed to prevent violations of the Rule.
Pay-to-Play Rule. The Rule prohibits an adviser from receiving compensation for providing investment advisory services to a government entity – directly or through a pooled investment vehicle – for two years following a contribution3 made by the adviser or a covered associate4 to an official in or candidate for an elective office of the government entity,5 if the office can influence the selection of investment advisers (e.g., to manage assets of public pension funds or other public entities). The Rule does not require a showing of quid pro quo or actual intent to influence an elected official or candidate.
Summary of Facts. Between 2007 and 2013, a state investment board (board) invested $300 million in funds managed by the adviser. In 2022, a covered associate of the adviser made a $4,000 campaign contribution to a candidate for election to the board. The contribution triggered the Rule’s two-year “time out” on providing investment advisory services for compensation to the board. However, during the two years after the contribution, the adviser provided investment advisory services for compensation to the funds and, therefore, received advisory fees and carried interest attributable to the board’s investments in the funds. The SEC found that the adviser violated the Rule even though the board invested in the funds years before the contribution and there was no showing that the contribution was intended to influence the board’s investment decisions.
S&K Considerations and Takeaways. Although the SEC adopted the Rule to prevent quid pro quo arrangements,6 the settlement demonstrates that the SEC continues to enforce the Rule even when there is no showing of quid pro quo or actual intent to influence an elected official or candidate. Given the risk of enforcement action for mere technical violations of the Rule and the likelihood of increased political contributions during this election year, advisers may wish to have a fresh look at their compliance programs and remind employees about the Rule and related compliance obligations. Advisers also may wish to consider whether their policies and procedures remain appropriately tailored to their business operations7 and consider enhancements to their monitoring procedures (e.g., using new technologies to search the most up-to-date public databases).8
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If you have any questions regarding the foregoing, please contact your Investment Management Group attorney at Seward & Kissel LLP.
