SEC Settles First “Pay-to-Play” Enforcement Action

2 July 2014
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Key Takeaways:

  • On June 20, 2014, the Securities and Exchange Commission settled its first enforcement action under its “pay-to-play” rule, Rule 206(4)-5 under the Investment Advisers Act of 1940.
  • The enforcement action is important because it confirms that the SEC will hold investment advisers strictly liable for pay-to-play violations, even in the absence of any allegations of quid pro quo or intent to influence the elected official or candidate. In this case, the political contributions occurred more than a decade after the state agencies invested in the private fund. The case emphasizes the importance of adopting and implementing effective “pay-to-play” policies.
  • The enforcement action also included allegations that the firm, a venture capital fund manager, along with an affiliated firm, should have been registered under the Advisers Act because they should have been “integrated” for purposes of this determination. This aspect of the case demonstrates the importance for affiliated unregistered investment advisers to confirm that they are sufficiently separate from their affiliates in analyzing registration issues.