Investment Advisers are prohibited from providing investment advice for compensation to a government entity within two years after a campaign contribution.

When dealing with public pension fund clients, investment advisers (and solicitors for investment advisers) must be aware of the relevant regulations that can arise from political contributions.  On June 20, 2014, the U.S. Securities and Exchange Commission (the "SEC") charged a private equity advisory firm with violating the SEC's "pay-to-play" rules under SEC Rule 206(4)-5 (the "Rule").  The SEC alleged that the advisory firm, by continuing to receive advisory fees from the city and state pension fund clients following campaign contributions made by an associate of the advisory firm in 2011, failed to comply with the two-year time restriction contained in the Rule.  As part of a settlement with the SEC, the advisory firm agreed to disgorge $256,697 in earned advisory fees and to pay a civil penalty of $35,000.

The Rule prohibits any investment adviser registered with the SEC, any investment adviser required to be registered with the SEC, any foreign private adviser, or exempt reporting adviser from providing investment advice for compensation to a government entity within two (2) years after a campaign contribution to an official of a government entity made by the investment adviser or any covered associate of the investment adviser.  It is critical that an adviser keep track of the relevant political contributions by its employees (or "covered associates") to confirm compliance with the Rule.  The Rule does not require a showing of actual intent to influence an elected official or candidate.

According the SEC's orders, the SEC also charged the advisory firm and its affiliate with improperly acting as unregistered investment advisers.   Namely, the SEC alleged that both advisers were not "operationally independent" of each other and should have been integrated as a single investment adviser for the purposes of registration requirements.   Advisers with multiple adviser affiliates must review their operations and personnel to confirm that they are properly registered.

If you have additional questions, please reach out to your Sadis & Goldberg contact for further clarification of this rule.

Cheryl Spratt