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Dodd-Frank

Pay-to-Play Enforcement Sweep Snares Private Equity and Venture Capital

by   |   January 20, 2017

On January 17, 2017, the SEC announced nine settled enforcement actions for violations of the pay-to-pay rule against private equity, venture capital and hedge fund sponsors. The firms involved agreed to pay monetary penalties from $35,000 to $75,000.  In addition, the firms involved did not admit or deny the allegations.

The pay-to-play rule is designed to address pay-to-play abuses involving campaign contributions made by certain investment advisers or their covered associates to government officials who are in a position to influence the selection of investment advisers to manage government client assets, including public pension fund assets. Among other things, Rule 206(4)-5 prohibits certain investment advisers from providing investment advisory services for compensation to a government client (or to an investment vehicle in which a government entity invests) for two years after the adviser or certain of its executives or employees (known as covered associates) makes a campaign contribution to certain elected officials or candidates who can influence the selection of certain investment advisers.

While the amounts involved may seem small, the de minimis exception to Rule 206(4)-5 only permits covered associates to make aggregate contributions of up to $350, per election, to an elected official or candidate for whom the covered associate is entitled to vote, and up to $150, per election, to an elected official or candidate for whom the covered associate is not entitled to vote.

Some details of the enforcement actions are set forth below.

Adams Capital — a covered associate of this private equity sponsor made two $500 campaign contributions to two elected officials in Pennsylvania.

Aisling Capital — a covered associate of this venture capital sponsor made campaign contributions totaling $1,500 to a candidate for elected office and an elected official in New York.

Commonwealth Venture Management — two covered associates of this venture capital sponsor made campaign contributions totaling $1,000 to a candidate for elected office in Massachusetts.

Alta Communications — a covered associate of this private equity sponsor made a $500 campaign contribution to an elected official in Massachusetts.  After the contribution was made, the covered associate sought and received the return of the contribution.

NGN Capital — a covered associate of this venture capital sponsor made campaign contributions totaling $1,925 to two candidates for elected office in New York.

Lime Rock Management — a covered associate of this private equity sponsor made a $1,000 campaign contribution to an elected official in Ohio.

FFL Partners — a covered associate of this private equity sponsor made a $1,000 campaign contribution to a candidate for elected office in the state of Wisconsin.

The Banc Funds — a covered associate of this private equity fund made a $1,000 campaign contribution to a candidate for Governor of Illinois.

Pershing Square Capital Management — a covered associate of this hedge fund sponsor made a $500 campaign contribution to a candidate for elected office in Massachusetts.