In December, the Securities and Exchange Commission (“SEC”) fined an investment adviser $100,000 for violating the SEC’s pay-to-play rule. The SEC’s rule effectively prohibits investment adviser executives and other “covered associates” of an investment adviser from making political contributions in excess of de minimis amounts ($350 per election if the contributor is eligible to vote for the candidate; $150 if not) to officials of a government entity with which the investment adviser does or may seek to do business. In this case, two of an investment adviser’s covered associates made political contributions to Ohio gubernatorial candidates and a candidate for Ohio Treasurer well in excess of the SEC rule’s de minimis thresholds: $46,908 in total, spread between several candidates and across several years.
This is not the first big fine the SEC has issued for a pay-to-play rule. Indeed, the SEC’s enforcement of the SEC rule has increased significantly since the first case in 2014. Nor does this case involve the largest fine; last summer, for example, a different firm was fined $500,000.
The lesson here for investment advisers relates to the nature of the governmental entities involved. One was a state pension fund, which most investment advisers will recognize is likely to be covered by the SEC’s pay-to-play rule.
But the other was a public university. Many forget that public universities, though academic in nature and often largely independent from other government agencies, may invest public assets. And governing officials at the university may be subject to appointment by an elected official; in this recent case, the Governor of Ohio appoints the members of the university’s board of trustees. This fine serves as a reminder that it is important for investment advisers to carefully evaluate all potential investors for government entity status, and not only investors of public pension fund assets.