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SEC Takes Aim at Political Contributions by Investment Advisers
On Jan. 17, 2017, 10 investment advisory firms were sanctioned by the Securities and Exchange Commission (SEC) for violations of the so-called “pay-to-play” prohibition of the Investment Advisers Act Rule 206(4)-5 (http://bit.ly/2mGR461) (the Rule). The firms accepted fees from public pension funds within two years of the firms' associates making campaign contributions to individuals with potential influence over the funds (SEC Release 2007-15). The firms agreed to censure, cease and desist, and fines up to $100,000 despite the lack of connection between the contributions and any action by a public official.
These settlements follow the expansion late last year of the Financial Industry Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board's (MSRB) authority to also sanction “pay-to-play” under a strict liability rule. The new rules and amped-up enforcement (the only other case under the Rule was in 2014) reflect regulators' focus on the interaction between money managers and public officials. While it remains unclear both when the regulators will invoke their authority to enforce the nearly limitless strict liability provision of the rules and how they will determine the appropriate remedy, the recent settlements and the SEC's handling of exemptive relief petitions may provide some clues.
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