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.
