With the record-breaking campaign expenditures of the 2014 midterm elections behind us, and the 2016 campaign cycle already heating up, this is an ideal moment for investment advisers (including advisers to venture capital funds and certain private equity and hedge funds) to ensure that they have mechanisms in place to verify compliance with the U.S. Securities and Exchange Commission’s pay-to-play rule. The SEC has ramped up enforcement of the rule: the first case charged under the rule settled last year, and the director of the SEC’s Division of Enforcement has declared it to be a current priority.

The rule, which is intended to prevent investment advisers from using campaign contributions to exert improper influence over existing and prospective investments by public sector clients (e.g., pension funds), carries potentially significant consequences for even small-dollar violations made without any intent to influence a current or potential investor. For example, in the first charges brought under the rule, an adviser faced the loss of over $250,000 in fees earned over two years from two clients — a state pension fund and a city pension fund — and a $35,000 fine, all because of less than $5,000 in campaign contributions made by a co-founder of the fund to candidates for state and municipal office.

Originally published in Law360 – April 6, 2015.