RIA Pay-To-Play Violation Involving a Campaign Contribution
SEC Releases
Introduction
On April 15, 2024, the SEC announced an RIA violated the Pay-To-Play Rule by continuing to receive compensation from a government entity within two years after a campaign contribution to an elected official who had influence over the selection of Investment Advisers for advisory services for the government entity.
The RIA involved is a Private Fund Manager that serves as Investment Adviser to two (2) Hedge Funds with now $376 Million in AUM, but previously as of the enforcement action, had $644 million in regulatory AUM.
Executive Summary
- In April 2022, a Covered Associate made a $4,000 campaign contribution to a candidate for elected office in Minnesota.
- The government official was on the board of the State Investment Board (“SBI”) in Minnesota and had influence over selecting RIAs for SBI.
- The SBI had already invested in Funds advised by RIA prior to political contribution.
- Between 2007 and 2013, The Minnesota State Board of Investment committed to invest and subsequently invested, approx. $300 Million in Funds advised by the RIA.
- The SEC notes that the Funds were Closed-End Funds and investors were generally prohibited from withdrawing their money for the life of the Funds.
- However, within two (2) years after the contribution, the Adviser continued to provided Investment Advisory Services for compensation to SBI.
- The Advisers Act Rule 206(4)-5(a)(1) prohibits any Investment Adviser registered with the Commission, Investment Adviser required to be registered with the Commission, Foreign Private Adviser, or Exempt Reporting Adviser from providing Investment Advisory Services for compensation to a government entity within two years after a contribution to an official of a government entity made by the Investment Adviser or any Covered Associate of the Investment Adviser.
- Advisers Act Rule 206(4)-5 does not require a showing of quid pro quo or actual intent to influence an elected official or candidate.
Vigilant’s Conclusion
It was discovered by the SEC that this RIA willfully violated Section 206(4) and Rule 206(4)-5 thereunder of the Investment Advisers Act of 1940.
As a result of the findings by the SEC, the RIA consented to a cease and desist order and to a censure and agreed to pay a civil money penalty of $60,000.
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