The SEC fined an investment adviser and two exempt reporting advisers for violating the pay-to-play rule (206(4)-5) that prohibits accepting adviser compensation during the two-year period following a political contribution to an official that could influence the awarding of investment mandates. In all three cases, one or more public plans had significant investments in funds managed by the respondents before the disqualifying campaign contributions. The campaigns included those for governor, state attorney general, state treasurer, and Superintendent of Public Instruction.
OUR TAKE: The pay-to-play rule is a strict liability rule. It doesn’t matter if contributions were returned, investments preceded the contributions, the government entity invested in a fund, or there was no intent to influence a mandate. Also, exempt reporting advisers should note that they are also subject to the pay-to-play rule. The only real remedy once a firm discovers that a disqualifying contribution was made is to forego fees on the investment for two years. To avoid the compliance monitoring headaches, we recommend that firms prohibit their employees from making political contributions.