More On Legal & Compliancefrom The Advisor's Professional Library
- Suitability and Fiduciary Duty Recommending suitable investments is more than just a regulatory obligation. Many investors bring cases claiming lack of suitability, so RIAs must continuously put the onus on clients to notify the advisor of changes in their financial situation.
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
In its first case against an advisor for pay-to-play violations, the Securities and Exchange Commission on Friday charged a Philadelphia-area private equity firm with violating the agency’s rules for advisors. The SEC said the firm continued to receive advisory fees from the city and state pension funds following campaign contributions made by an associate in 2011 to the governor of Pennsylvania and a candidate for mayor of Philadelphia.
The firm, TL Ventures Inc., agreed to settle the charges by paying nearly $300,000.
Pay-to-play rules adopted in 2010 prohibit investment advisors from providing compensatory advisory services — either directly to a government client or through a pooled investment vehicle — for two years after making a campaign contribuion to politicians or officials who could potentially influence the selection of advisors to manage government client assets, including pensions.
An SEC spokesman told ThinkAdvisor that while there have been "other pay-to-play cases," this is the first one brought under the rule for advisors, which went into effect in 2011.
An SEC investigation found that TL Ventures violated those rules by continuing to receive compensation from two public pension funds — Pennsylvania’s state retirement system and Philadelphia’s pension plan — within two years after an associate made a $2,500 campaign contribution to a Philadelphia mayoral candidate and a $2,000 campaign contribution to the governor of Pennsylvania.
The mayoral position appoints three of the nine members of the Philadelphia Board of Pensions and Retirement. Therefore, the SEC says that a mayor can influence the hiring of investment advisors for the public pension fund.
The 11-member board of Pennsylvania’s state retirement system includes six gubernatorial appointees. “Therefore, a governor can influence the hiring of investment advisors for the public pension fund,” the agency states.
After the contributions, TL Ventures improperly continued to receive compensation from the pension funds for those advisory services.
“We will use all available enforcement tools to ensure that public pension funds are protected from any potential corrupting influences,” said Andrew Ceresney, director of the SEC Enforcement Division, in a statement. “As we have done with broker-dealers, we will hold investment advisors strictly liable for pay-to-play violations.”
LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit, added in the statement that public pension funds “are increasingly investing in alternative investment vehicles such as hedge funds and private equity funds. When dealing with public pension fund clients, advisors to those kinds of investment vehicles should be mindful of the restrictions that can arise from political contributions.”
The SEC’s orders instituting settled administrative proceedings also charged TL Ventures and an affiliated advisor Penn Mezzanine Partners Management L.P. with improperly acting as unregistered investment advisors.
According to the orders, TL Ventures and Penn Mezzanine separately claimed to be exempt from SEC registration in March 2012, however their operations were closely integrated and significantly overlapped. “Because they were not operationally independent of each other, TL Ventures and Penn Mezzanine should have been integrated as a single investment advisor for purposes of registration requirements or determining the applicability of any exemption.”
Check out Most Advisors Don’t Know Their Own Fees on ThinkAdvisor.