On April 15, 2024, the SEC announced the settlement of administrative proceedings brought against a registered investment adviser for alleged violations of Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-5 thereunder, known as the “pay-to-play” rule, concerning a political campaign contribution. The “pay-to-play” rule prohibits registered investment advisers from providing investment advisory services for compensation to a government entity within two years after the adviser or its covered associate makes a contribution to an official of the government entity, including a candidate for office.

According to the order, a covered associate of the adviser made a campaign contribution to a candidate for elected office, which office had influence over selecting investment advisers for a state investment board. The state investment board had previously invested in private equity funds advised by the adviser and, during the two years after the contribution, the adviser continued to provide advisory services for compensation to these funds, in which the state investment board remained invested. 

The SEC found that the adviser willfully violated Section 206(4) of the Advisers Act and Rule 206(4)-5 thereunder. Without admitting or denying the allegations, the adviser agreed to cease and desist from future violations, to be censured and to pay a civil monetary penalty of $60,000.

Commissioner Hester Peirce issued a statement of dissent regarding the settlement in which she criticized the rule’s role in inhibiting legitimate political participation by employees of investment advisers, including by discouraging them from making campaign contributions or by preventing them from soliciting donations in the investment advisory industry should they choose to run for office. While acknowledging that the concerns about public corruption underlying the rule are important, Commissioner Peirce noted her view that there are better ways of addressing such concerns without penalizing advisers and their employees for merely expressing their political preferences.

The SEC’s order is available here. Commissioner Peirce’s statement of dissent is available here.

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