The Commission brought its first pay-to-play action involving political campaign contributions under the Investment Advisers Act. The proceeding is predicated on the integration of two firms which claimed to be exempt from registration under filings made with the agency. In the Matter of TL Ventures Inc., Adm. Proc. File No. 3-1594 (June 2, 2014); In the Matter of Penn Mezzanine Partners Management, L.P., Adm. Proc. File No. 3-15939.

The Respondents: TL Ventures Inc. is an unregistered investment adviser. Previously it was exempt from registration under a provision which has been repealed. At the time of this proceeding the firm claimed to be exempt under Section 203(1) because it is an adviser solely to one or more venture capital funds. TL Ventures reports to the Commission as an exempt reporting adviser. It has under management about $178 million in venture capital funds.

Penn Mezzanine is also an unregistered investment adviser. Like TL Ventures, the exemption it previously relied on was repealed. Now it claims to be exempt under Rule 203(m)-1 of the Advisers Act because it is an adviser solely to private funds with less than $150 million in regulatory assets under management.

The violations: Each firm is charged with violating Section 203(a) of the Advisers Act regarding registration. TL Ventures is also charged with violating Rule 206(4)-5 under the Advisers Act, the pay-to-play rule enacted in the wake of Dodd-Frank, in a claim which is predicated on the Section 203(a) violation.

The pay-to-play rule prohibits investment advisers from furnishing advisory services for compensation to a government client, or an investment vehicle in which a government entity invests, for two years after the adviser or certain of its executives or employees make a campaign contribution to certain elected officials or candidate. The provision is a strict liability rule that applies only to registered investment advisers or those who are required to be registered.

The pay-to-play rule on its face does not apply to TL Ventures since it is unregistered and need not be under the claimed exemption – unless it must register. Here the Order alleges that the firm is required to register and not entitled to the exemption claimed. Where two or more affiliated advisers that are separate legal entities are operationally integrated the Commission stated in Advisers Act Release 3222 at 125 (June 22, 2011) that they must be treated as a single adviser.

Registration required: TL Ventures and Penn Mezzanine should be integrated under Release 3222, in which event neither is entitled to its claimed exemption – they must register. In their reports filed with the Commission each firm stated that they operate under common control. Employees of TL Ventures hold ownership interest in that firm and in Penn Mezzanine. The firms also have shared employees and associates. Certain facilities are shared at times. Indeed, the two firms have significantly overlapping operations but no policies or procedures which are designed to keep the entities separate. Functionally the firms are one. Registration is thus required.

Pay-to-play: Since TL Ventures was required to be registered the pay-to-play rule applies to the firm. That rule was violated. Since 1999 the Pennsylvania State Employees’ Retirement System has been committed to invest, and did invest public pension money in two funds managed by the firm. Since 2000 the Philadelphia Retirement Board committed to invest, and did invest public pension money in two funds managed by TL Ventures. The funds in which the investments were made are in wind-down mode.

In 2011 a person at TL Ventures covered by the rule–generally those who have a direct stake in the enterprise–made a $2,500 campaign contribution to the candidate for Mayor of Philadelphia, Pennsylvania. Later that year the same person made a $2,000 campaign contribution to the Governor of Pennsylvania. Each candidate has the ability to influence the selection of investment advisers for their respective public pension funds. Each has the ability to appoint a designated number of members to the board of directors of their respective board. Since the funds in which each entity paid adviser fees to TL Ventures within the two year period of the donations, there is a violation of the pay-to-play rule.

The Order as to TL Ventures Inc. alleged violations of Advisers Act Sections 203(a), 206(4) and 208(d). The Order as to Penn Mezzanine alleges violations of Advisers Act Sections 203(a) and 208(d).

Settlement: Each firm resolved the proceeding. The Commission considered the remedial acts of each, including the adoption of appropriate policies and procedures.

TL Ventures consented to the entry of a cease and desist order based on the Sections cited in the Order in which it is named as a Respondent and to a censure The firm also agreed to pay disgorgement of $256,697, prejudgment interest and a $35,000 penalty.

Penn Mezzanine also consented to the entry of a cease and desist order based on the Sections cited in the Order in which it is named as a Respondent and to a censure.

 

 

Topics:  Dodd-Frank, Enforcement, Enforcement Actions, Investment Adviser, Investment Advisers Act of 1940, Non-Judicial Settlement Agreements, Pay or Play, Registration, SEC

Published In: General Business Updates, Elections & Politics Updates, Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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