Yes we can?

The challenge:  

With a presidential election looming, it’s political season here in the US. Type “political donations and private equity funds” into Google and you will see a slew of stories involving political candidates receiving donations from GPs. But how are these funds able to make political donations when the Dodd-Frank “pay-to-play” rule created new restrictions specifically designed to prevent potential conflict-of-interest situations for political candidates?

Ron Geffner’s response:

It’s a common question I hear. Fund managers routinely inquire on what is and is not legal when it comes to political donations.

Under the pay-to-play rules, if an investment adviser, whether registered or unregistered, and certain representatives of the firm – make a political contribution above a de minimums amount ($350/$150 depending upon the circumstances) to a political candidate covered under the law, the investment adviser may be prohibited from providing advisory services to public pension funds. The rule is intended to prevent conflicts of interest between investment advisers and persons managing or overseeing public employees’ retirement assets.  Political candidates are considered “covered” if they have the authority to directly or indirectly influence a state or local investment contract. The prohibition will be in effect for two years from the date of the donation.

In July 2014, the SEC charged a private equity firm for violating the “pay-to-play” rule in connection with a campaign contribution to the governor of Pennsylvania and the mayor of Philadelphia. The SEC charges came after the private equity fund received advisory fees from the city and state pension funds. That private equity firm ended up settling the charges with the SEC and paid nearly $300,000 in fines.

At the time of the SEC announcement, the director of the SEC Enforcement Division promised he would use “all available enforcement tools” to ensure that public pensions funds are protected.

We strongly recommend that advisers renew existing policies and the procedures in connection with political donations and take the steps necessary to educate their staff to avoid an unintended consequence.

Given the timing of the 2016 presidential elections and the support sought by local government, advisers and their representatives should monitor donations and educate their staff to prevent an easily avoidable problem. Further, past 2008, advisers should take into consideration that regulators have been more active in prosecution, been conducting more examinations and been more thorough in their examination process. Further, based upon my experience subsequent to my position in the SEC’s enforcement division in the New York office, when the staff discovers a violation in an adviser’s compliance program, there is an increased likelihood that the staff will request additional documents and invest additional time examining that adviser.

So before you open the wallet in this political season, keep in mind that the latest 2012 version of the pay-to-play rules gives the SEC a stronger bite over your firm.