In November of 2013, the SEC issued its first order granting exemptive relief to an investment adviser under the pay-to-play rules. The pay-to-play rule generally prohibits investment advisers from receiving compensation from a government entity within two years after the adviser (or a covered associate) makes a political contribution to such government entity. The pay-to-play rule also allows the SEC to exempt an investment adviser from the two-year prohibition based upon a number of factors.
In May of 2011, a senior investment professional of the adviser requesting relief made a $2,500 contribution to a federal congressional campaign of an official who was able to appoint a majority of trustees on the boards of the investment adviser’s pension fund clients. The investment professional did not pre-clear this contribution, as was required under the adviser’s policies and procedures, because he mistakenly believed contributions to federal campaigns were permissible and not subject to pre-clearance. When the adviser’s compliance department later discovered the contribution through random testing of publicly available contribution databases, the adviser and the investment professional arranged for the return of the investment professional’s contribution.
In the meantime, the adviser notified its clients of the contribution and established an escrow account for all compensation received from clients for the two-year period beginning as of the date the contribution was made, pending exemptive relief from the SEC.
The SEC granted the adviser’s application for an exemption based on representations made by the adviser, including that the investment professional’s contact with clients was limited, the government official’s influence on each client was limited, it was is in the best interest of the clients to permit the advisory relationship to continue, the adviser adopted appropriate policies and procedures prior to the contribution and was appropriately monitoring contributions, the adviser and investment professional obtained the return of the contribution and the investment professional did not intend to influence the clients in making the contribution.
This relief provides insight into the types of factors the SEC may consider in making determinations for future applications of relief.