Adviser Settles SEC "Pay-to-Play" Charges
An investment adviser settled SEC charges for violating the Advisers Act "pay-to-play" rule. SEC Commissioner Hester M. Peirce dissented from the Commission's Order.
The SEC charged that a covered associate of the investment adviser made a campaign contribution to a candidate for elected office in Minnesota; the candidate's office had influence over selecting investment advisers for a state investment board. The SEC found that, within two years after this contribution, the adviser provided investment advisory services for compensation to the state investment board.
The SEC determined that, by providing these investment advisory services for compensation within two years after the contribution, the adviser violated Section 206(4) of the Advisers Act ("Prohibited transactions by investment advisers") and Rule 206(4)-5 ("Political contributions by certain investment advisers").
To settle the charges, the adviser agreed to (i) cease and desist from committing or causing any violations and any future violations of the pay-to-play rule, (ii) a censure and (iii) to pay a civil money penalty in the amount of $60,000.
In her dissent, SEC Commissioner Hester M. Peirce argued that the Order does not allege any link between the donation and the investments. She noted that the state investment board invested in closed-end funds advised by the adviser several years prior to the contribution. She said, the adviser's "violation stems not from any attempt to obtain additional investments from the state investment board, but from the fact that it continued to provide advisory services for compensation in connection with the board’s longstanding closed-end fund investments."
Ms. Peirce argued that, while the rule has exemptions, the SEC rarely grants them, making an investment adviser's easiest course of action to "give up [its] right to contribute to certain political campaigns." She warned that the pay-to-play rules impede political participation. She asserted that "[n]ot being able to solicit for campaign contributions people with whom you have worked for years is a serious disadvantage to political candidates coming from the investment advisory industry." Ms. Peirce said that, while politicians should not select advisers to manage public funds based on who has made the highest campaign contributions, "there has to be a better way to get at public corruption."