RIA Compliance Blog
Last month three registered investment advisers settled with the Securities and Exchange Commission over charges they violated the pay-to-play rule, Investment Advisers Act Rule 206(4)-5. The Orders Instituting Proceedings were entered against EnCap Investments, L.P., Oaktree Capital Management, L.P., and Sofinnova Ventures, Inc. All three advisers submitted offers of settlement in connection with the Orders.
The Pay-to-Play Rule prohibits registered investment advisers and exempt reporting advisers from offering investment advisory services for compensation to a government entity for a period of at least two years after the investment adviser or a covered associate of the investment adviser makes a political contribution to an official of the government entity. An investment adviser violates the Pay-to-Play Rule regardless of whether the investment adviser intended to influence the government entity official.
The Orders allege that the following acts by each of the advisers constituted violations of the Pay-to-Play Rule:
- The Order against EnCap, an exempt reporting adviser, alleges that beginning in about September 2013 and ending in May 2014, two of EnCap’s covered associates made contributions to a candidate for Governor of Texas and a candidate for Texas Attorney General. In October 2012, an EnCap covered associate made a campaign contribution to the State Treasurer of Indiana. Finally, in September 2015, an EnCap covered associate provided a campaign contribution to the Governor of Wisconsin. Subsequently, EnCap provided investment advisory services for compensation to a number of retirement funds managed by the office of the Governor of Texas and the office of the Treasurer of Indiana. These services occurred within two years after the contributions were made, resulting in EnCap’s violating the Pay-to-Play Rule.
- The Order against Oaktree Capital alleges that in September 2014, two covered associates of Oaktree Capital made campaign contributions to a candidate for California State Superintendent of Public Instruction and to the Treasurer of Rhode Island, who was running for Governor of Rhode Island. In April 2016, an Oaktree Capital covered associate made a campaign contribution to a candidate for Mayor of Los Angeles. Within two years after these contributions were made, Oaktree Capital provided investment advisory services for compensation to various retirement funds managed by the office of California State Superintendent of Public Instruction, the offices of Treasurer and Governor of Rhode Island, and the office of Mayor of Los Angeles, resulting in Oaktree Capital’s violating the Pay-to-Play Rule.
- The Order against Sofinnova alleges that in April 2014, a Sofinnova covered associate made a contributed to the campaign of a person running for Governor of Illinois. For eight-months after the contribution, Sofinnova provided investment advice for compensation to a retirement fund managed by the office of Governor of Illinois, resulting in Sofinnova’s violation of the Pay-to-Play Rule.
Each of the advisers agreed to cease-and-desist from further violations of the Pay-to-Play Rule. EnCap agreed to pay a civil money penalty of $500,000, Oaktree Capital agreed to pay a civil money penalty of $100,000, and Sofinnova agreed to pay a civil money penalty of $120,000.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including compliance with federal and state laws and rules. Please visit our website for more information.