For the first time since it issued its pay-to-play rule in 2010, the SEC has charged a private equity firm with violating Rule 206(4)-5. The company charged agreed to disgorge nearly $260,000 in fees earned and to pay a $35,000 penalty as a result of two impermissible contributions made by the same “covered associate.” This initial enforcement action likely signals enhanced regulatory enforcement in this area.
Rule 206(4)-5 prohibits firms from receiving compensation for investment advisory services for government entities if the firm or any “covered associate” makes contributions above a de minimus amount ($350 if the person is eligible to vote for the candidate, $150 if he is not) to a government official who can directly or indirectly influence the hiring of an investment adviser by a governmental entity. Indirect influence includes appointing board members who make investment decisions. The ban applies for two years from the date the contributions are made. Under the rule, covered associates generally include general partners, managing members, executive officers (e.g., president, vice president in charge of a principal business unit or function, and those who perform policy-making functions), any employees who solicit government business, and their supervisors.