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Private Equity and Pay to Play

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The SEC's pay-to-play rule is more relevant than ever before in today's politically charged climate. As the management of government client assets is widespread in the realm of private equity, whether a private equity adviser is seeking its first public investor dollars or has a long history with government investors, firms cannot afford to ignore potential pay-to-play violations and subsequent penalties. Simply put, the pay-to-play rule disallows campaign contributions or donations public officials or affiliated entities that have influence over choosing investment advisers that manage public monies. The rule sweeps broadly, covering even indirect payments to third parties that solicit government entities for advisory business. This rule is quite restrictive, and the level of contributions proscribed by the pay-to-play rule can seem almost comically low, especially when compared to the resultant penalties. For example, just over a year ago, the SEC announced ten enforcement actions relating to violations of the pay-to-play rule - something that was foreshadowed in the SEC's 2017 Examination Priorities, which listed pay to play and public pension advisers, announced just a few days earlier. The amounts of the political contributions that triggered enforcement actions were as low as $500 - far smaller than the associated fines which ranged from $35,000 to $100,000. From a technical view, the problem wasn't necessarily that campaign contributions were made - the violations of the pay-to-play rule arose when the advisers accepted fees after the contribution was made and an associated "2-year timeout" was triggered. Suffice to say, the SEC has sent a clear signal that it has no tolerance for violations of the pay-to-play rule, no matter how small. Without clear, robust pay-to-play policies in place that are designed to prevent contributions that violate pay-to-play rules, private equity advisers that seek investment from public clients can find themselves in trouble quickly.

Enforcement Fines Hurt; a 2 Year Timeout Can Hurt More

Though certainly a $100,000 enforcement fine is impactful, a "2-year timeout" from working with a government client may hurt worse. As one can see based on the 10 enforcement action mentioned above, it can be tricky to handle these situations once the donation has been made. To further complicate matters, even when a contribution has been clawed back, an enforcement action can still proceed. For most private equity advisers, the best method of dealing with these issues may be to implement a pay to play policy requiring pre-clearance of all political contributions, no matter how small, or even to disallow political contributions altogether. Your policy should be tailored to the particulars of your firm so that pay-to-play issues can be managed appropriately. This issue, now more than ever, is one firms should keep a close eye on. With the political fervor gripping the country, and the likelihood that someone at your firm will want to make a contribution, reviewing and revising policies and procedures now should make avoiding pay-to-play issues easier in the future. We expect public pension advisers to remain high on the list of the SEC's examination program, so now is the time to review pay-to-play issues at your firm.

Our Team Would Love to Help

If you have questions on the complexities of handling political contributions, and other matters of concern specific to your private equity firm, click here to learn what Jacko Law Group, PC can do for you.

About the author

Jacko Law Group provides tailored legal services and effective strategies for success, delivering exemplary solutions to complex legal and regulatory challenges to ensure that both business efforts and compliance obligations are satisfied.

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Dharmi is an excellent securities lawyer who understands the law as it pertains to these cases. She is extremely proactive and represents her clients well. I highly recommend Jacko and Dharmi.
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Michelle and the team at Jacko Law Group have helped guide through a variety of critical circumstances as we ventured through the uncharted and unfamiliar territory of becoming and successfully operating as an RIA. I have particularly appreciated Michelle's personal involvement and genuine caring about us and our organization. She has been responsive and her counsel has been consistently on-point and helpful. She artfully guided us through our initial filing process and first SEC exam process - which went very well. Very grateful to Michelle and her team.
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Michelle and her team were excellent to work with, front to back. They helped me to understand the challenges ahead and were always proactive in their consultation through every step of my transition. JLG truly know the wealth management industry very well and did a great job of understanding the challenges unique to my business. Without them, I can confidently say I would not have felt as comfortable through the transition as I did. Fortunately, that's not something that stops there - Michelle and her team have kept in touch to ensure that I'm on top of certain administrative issues, trends, and simply showing me that they care about my business and success. I look forward to continuing to work with them for many years to come.
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My mentor once told me that a good attorney is worth their weight in gold — and that couldn't be more true of Michelle and Amanda. Their expertise, professionalism, and responsiveness were top notch every step of the way. It's rare to find legal partners who are not only sharp and thorough, but also genuinely invested in your success. I’m grateful for their guidance and highly recommend them to anyone seeking trusted legal counsel.
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It is my great Privilege to share my Review of what Atty Dharmi Mehta of Jacko Law Group did for me and by extension for my family. From the first time complimentary conversation we had having spoken to several other Lawyers ,l knew she was the right person for the Job .Because of her background as a former RR ,she was professional,kind, Empathetic,listened and was focused on fighting for me. From a potential of been terminated with cause ,l was able to walk away with a clean U5 with a validation that l did nothing wrong except what was in the best Interest of my clients. I hope nobody ever has to go through what l have Experienced, but if you do ,you want Dharmi Mehta beside you .Rest assured your service Deserve 10 stars but this forum only allows 5. Me and my family are forever grateful and will make sure that any RR who needs an advocate will know about you . Everistus Etafo
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