A Philadelphia-area private equity firm has become the first ever to be charged by the SEC for violating a pay-to-play rule set up in 2010 designed to prevent conflicts of interest when pension funds hire investment firms.
The firm, TL Ventures Inc, was charged with violating the rule after an employee at the firm made political contributions to Pennsylvania’s governor and Philadelphia’s mayor while the firm was doing work for the Philadelphia Board of Pensions and the Pennsylvania State Employees’ Retirement System.
The employee, an investment advisor, made a $2,500 campaign contribution to a candidate for Mayor of Philadelphia and a $2,000 contribution to a candidate for Governor of Pennsylvania.
The SEC says that presented a conflict of interest because the Mayor and Governor appoint a total of nine members to the two pension boards for which TL Ventures was providing investment services for at the time of the donations.
Those boards are tasked with hiring investment firms to do advisory work for the pension funds.
Bracewell & Giuliani explains the specifics of the rule:
Rule 206 (4)-5, which was adopted in 2010, prohibits investment advisers from providing compensatory advisory services to a government client for a period of two years following a campaign contribution from the firm, or from defined investment advisers, to any government officials, or political candidates in a position to influence the selection or retention of advisers to manage public pension funds or other government client assets. Some de minimus contributions are permitted, topping out at $350 if the contributor is eligible to vote for the candidate, and the contribution is from the person’s personal funds.
TL Ventures has agreed to give up the $257,000 worth of fees it earned from the state, as well as pay a $35,000 fine.
Republicans are now suing the SEC in an attempt to block the rule, saying that preventing investment advisors from making political donations is, in effect, a restriction on free speech. From Reuters:
Republican politicians sued the U.S. Securities and Exchange Commission, seeking to throw out a rule that limits political donations by investment advisers.
The Republican state committees from New York and Tennessee said the federal securities regulator had flouted due procedure when adopting its Political Contribution Rule, which they said also violated the constitutional right to freedom of speech.
“The (rule) directly harms Plaintiffs, as potential donors have informed each Plaintiff that they will not make political contributions because of the SEC’s rule,” said the complaint before a federal court in the District of Columbia, which was filed late on Thursday.
The SEC in 2010 approved the rule, which prohibits investment advisers from making campaign contributions in the hope of being awarded lucrative contracts to manage public pension funds, a practice known as “pay to play”.
The plaintiffs want the court to decide that the rule violates the law and to stop the SEC from enforcing the rule with respect to federal campaign contributions.
Specifically, Republicans are arguing that the SEC violated the Administrative Procedures Act when drafting the law. The Act requires specific procedures to be followed when drafting rules.
The Administrative Procedures Rules has been used successfully to strike down previous SEC rules.