The first enforcement case brought under the SEC's pay-to-play rules has increased awareness of the extent of the regulations, and their impact on managers and investors.
The case against TL Ventures Inc., “makes it clear that (the SEC is) charting out the broadest possible course of enforcement” for pay-to-play rules, said Stefan Passantino, a partner in the Washington law firm McKenna Long & Aldridge LLP. “It's a really big deal because of the standards they set for themselves to bring this case.”
And more cases are likely.
“We are always looking and assessing, and will bring cases when we can,” said LeeAnn Gaunt, the Boston-based chief of the SEC enforcement division's municipal securities and public pensions unit.
The new rules give the SEC more latitude than some money managers might realize. The agency does not have to prove intent to influence, actual influence of an investment decision, or even an opportunity to influence, Ms. Gaunt said.
On June 20, the Securities and Exchange Commission charged TL Ventures, a Wayne, Pa., private equity firm, with violating the rules that prohibit investment advisers from getting paid for advising public pension funds and other government accounts within two years of making political contributions to people who could influence contracting decisions.
The firm agreed to settle without admitting or denying the charges and to return $256,697 in advisory fees to the $27 billion Pennsylvania State Employees' Retirement System, Harrisburg, and the $4.5 billion Philadelphia Board of Pensions and Retirement, after it was discovered that a TL Ventures affiliate, Penn Mezzanine Partners Management LP, made $4,500 in campaign contributions to candidates for governor and mayor in 2011. The two pension funds had invested $85 million in two TL Ventures funds as early as 1999. The firm, which reported $178 million in venture capital assets under management this year, will also pay $38,197 in penalties and interest.
Even though the client relationship was established well before the contributions were made, it was the connection that mattered.
The pay-to-play rules, which were approved in 2010 and went into effect in 2011, dictate that a firm providing advisory services directly to a government client or through a pooled investment vehicle must forgo compensation for two years, but the rules also prohibit the firm from severing the relationship, which in the case of private equity and other private funds, raises practical and financial concerns for the other investors involved in a particular fund.
There could also be ramifications for the pension fund staff if fee structures and investors' compensation are affected, said Suzanne Dugan, who leads the ethics and fiduciary counseling practice at Cohen Milstein Sellers & Toll PLLC in Washington. “How are they going to sort it out?”