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Memorandum

Memorandum: Ten Advisers Settle Charges of Pay to Play Violations

February 15, 2017

The SEC announced that ten investment advisory firms (the "Advisory Firms")1 have agreed to settle charges that they violated Rule 206(4)-5 (the "Pay-to-Play Rule") of the Investment Advisers Act of 1940.

Among other things, the Pay-to-Play Rule imposes what is commonly referred to as the two-year timeout. The two-year timeout prohibits investment advisers from providing investment advisory services for compensation to a government entity (or to a covered investment pool in which a government entity invests) for two years after the adviser or its covered associates make a campaign contribution above certain de minimis amounts to elected officials or candidates who can influence the selection of investment advisers for the government entity.
2  

In these ten cases, the SEC concluded that the Advisory Firm violated that two-year timeout as follows:

  • While one or more public pension plans3 were invested in pooled investment vehicles4 managed by an Advisory Firm, covered associates of the Advisory Firm made one or more contributions to an official5 in excess of the de minimis amounts prescribed in the Pay-to-Play Rule.6 These contributions included amounts as low as $400.
     
  • The official was found to have the ability to influence the selection of investment advisers for the plan. Specifically, the official was a member of the board, or had the power to appoint one or more members of the board, of the plan.  The board has influence over investments by the plan and the selection of investment advisers and pooled investment vehicles for the plan.
     
  • During the two years after the contributions, the Advisory Firm continued to provide investment advisory services for compensation to the pooled investment vehicle.

The Advisory Firms were censured and agreed to pay civil money penalties ranging from $35,000 to $100,000 in settling these charges.

In light of these settlements, registered investment advisers and exempt reporting advisers may wish to review the adequacy of their policies and procedures with respect to the Pay-to-Play Rule and the effectiveness of their implementation.

______________________________________________________ 

  

  

1   The Advisory Firms included registered investment advisers and exempt reporting advisers.

2   See 17 CFR 275.206(4)-5(f) for the definition of terms such as covered investment pool, covered associates, officials and government entity.

3   The public pension plans included the New York City Employee's Retirement System, the Massachusetts Pension Reserves Investment Management Board and the Pennsylvania State Employee's Retirement System.

4   The pooled investment vehicles included hedge funds, venture capital funds and private equity funds.

5   The officials included a candidate for Mayor of New York City, the Manhattan Borough President and a candidate for the Governor of Massachusetts.

6   In several cases, the covered associate sought and received the return of their contribution.

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If you have any questions regarding the matters covered in this memo, please contact any of the partners and counsel listed below or your primary attorney in Seward & Kissel's Investment Management Group.

 

 

John J. Cleary

cleary@sewkis.com 

(212) 574-1255

Maureen R. Hurley

hurley@sewkis.com 

(212) 574-1384

Paul M. Miller

millerp@sewkis.com 

(202) 661-7155

Joseph M. Morrissey

morrissey@sewkis.com 

(212) 574-1245

David R. Mulle

mulle@sewkis.com 

(212) 574-1452

Steven B. Nadel

nadel@sewkis.com 

(212) 574-1231

Anthony C.J. Nuland

nuland@sewkis.com 

(202) 661-7140

Marlon Q. Paz
paz@sewkis.com

(202) 661-7178

Patricia A. Poglinco

poglinco@sewkis.com 

(212) 574-1247

Christopher C. Riccardi

riccardi@sewkis.com 

(212) 574-1535

Jack Rigney

rigney@sewkis.com 

(212) 574-1254

John E. Tavss

tavss@sewkis.com 

(212) 574-1261

Robert B. Van Grover

vangrover@sewkis.com 

(212) 574-1205

Robert L. Chender

chender@sewkis.com

(212) 574-1415

Ivy Wafford Duke

duke@sewkis.com 

(202) 661-7179

Keri E. Riemer

riemer@sewkis.com 

(212) 574-1598

David Tang

tang@sewkis.com 

(212) 574-1260

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About Seward & Kissel LLP

Seward & Kissel LLP, founded in 1890, is a leading U.S. law firm with an international reputation for excellence. We have offices in New York City and Washington, D.C.

Our practice primarily focuses on corporate, litigation and restructuring/bankruptcy work for clients seeking legal expertise in the financial services, corporate finance and capital markets areas.  The Firm is particularly well known for its representation of major commercial banks, investment banking firms, investment advisers and related investment funds (including mutual funds and hedge funds), master servicers, servicers, investors, distressed trade brokers, liquidity providers, hedge fund administrators,  broker-dealers, institutional investors and transportation companies (particularly in the shipping area). 

Notices

 

This memo  may be considered attorney marketing and/or advertising. Prior results do not guarantee a similar outcome.  The information contained in this memo is for informational purposes only and is not intended and should not be considered to be legal advice on any subject matter.  As such, recipients of this memo, whether clients or otherwise, should not act or refrain from acting on the basis of any information included in this memo without seeking appropriate legal or other professional advice.  This information is presented without any warranty or representation as to its accuracy or completeness, or whether it reflects the most current legal developments.