SEC Settles with Exempt Reporting Adviser over Pay-to-Play Violations

by Goodwin
Contact

The SEC settled public administrative proceedings against TL Ventures Inc., a venture capital fund adviser (the “Adviser”), over violations of Rule 206(4)-5 (the “Rule”) under the Investment Advisers Act of 1940 (the “Advisers Act”) resulting from its failure to observe the two-year timeout on receiving compensation with respect to certain public plans invested in the Adviser’s funds.  The timeout was triggered when a principal owner of the Adviser (the “Principal”) made campaign contributions to a Philadelphia mayoral candidate and to the Governor of Pennsylvania.  This article provides selected highlights of the SEC’s findings set forth in the settlement order (which the Adviser has neither admitted nor denied). 

Background

The Adviser manages venture capital funds that invest in early-stage technology companies.  The Adviser relies on the exemption from registration under the Advisers Act available to an adviser whose only clients are “venture capital funds” as defined under Rule 203-l(1) under the Advisers Act.  The Adviser raised its last fund in 2008.  In  2000, the City of Philadelphia Board of Pensions and Retirement (the “Philadelphia Retirement Board”) invested in one of the Adviser’s funds.  In 1999 and 2000, the Pennsylvania State Employees’ Retirement System (“SERS”) invested in two of the Adviser’s funds.  The Adviser received advisory fees attributable to the respective investments by the Philadelphia Retirement Board and SERS in the Adviser’s funds.

Campaign Contributions

In April 2011, the Principal made a $2,500 campaign contribution to the campaign of a candidate for Mayor of Philadelphia.  In November 2011, the Principal made a $2,000 campaign contribution to the Governor of Pennsylvania.

The Pay-to-Play Rule

In relevant part, Rule 206(4)-5 prohibits an “exempt reporting adviser” like the Adviser from receiving advisory fees attributable to the investment of a government entity in a private fund managed by the Adviser within two years after a contribution by certain personnel of the Adviser to an incumbent, candidate or successful candidate for elective office of a government entity if the office is directly or indirectly responsible for, or can influence the outcome of, the hiring of an investment adviser by a government entity or has authority to appoint any person who is directly or indirectly responsible for, or can influence the outcome of, the hiring of an investment adviser by a government entity.  A “government entity” is any state or political subdivision of a state, including, among other things, a pool of assets sponsored or established by the state or political subdivision or any agency, authority or instrumentality thereof, including, but not limited to a “defined benefit plan” as defined in the Internal Revenue Code, or a state general fund.

The SEC found that each of the Mayor of Philadelphia and the Governor of Pennsylvania had the ability to influence the selection of investment advisers for their respective retirement funds.  The Mayor of Philadelphia has authority to appoint the City’s Director of Finance, Managing Director and City Solicitor, each of whom serves on the nine member Philadelphia Retirement Board, which has influence over the retirement fund’s investments including the selection of investment advisers and pooled investment vehicles.  The Governor of Pennsylvania has authority to appoint six members of the eleven member SERS board, which has influence over investments by the SERS pension fund including the selection of investment advisers and pooled investment vehicles.

Violation

The SEC found that the Adviser willfully violated Rule 206-4(5).  The SEC noted that, according to case law, “a willful violation of the securities laws means merely that that ‘the person charged with the duty knows what he is doing.’”  There is no requirement that there be an awareness of violating a rule or statute.  In addition, Rule 206(4)-5 does not require a showing of a quid pro quo arrangement or actual intent to influence an elected official or candidate.

Sanctions

Among other sanctions, the Adviser must pay disgorgement of $256,697 and prejudgment interest of $3,197.  Under this settlement order, the Adviser is also subject to a civil money penalty of $35,000 that appears to be attributable at least in part to a separate violation of the Advisers Act’s registration requirements that was also part of the settlement, as discussed here.

In the Matter of TL Ventures Inc., SEC Release No. IA-3859 (June 20, 2014).

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

 

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.

© Goodwin | Attorney Advertising

Written by:

Goodwin
Contact
more
less

Goodwin on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!