Private Fund Adviser Receives Exemptive Relief from Two-Year Compensation Ban under Pay-to-Play Rule Triggered by Contribution to State Official’s Campaign for Federal Office

by Goodwin

An SEC-registered adviser (the “Adviser”) was granted exemptive relief pursuant to Rule 206(4)-5 (the “Rule”) under the Investment Advisers Act of 1940 (the “Advisers Act”)  from the Rule’s two-year prohibition on receiving compensation with respect to the investments made by three Ohio state pension plans in one of the Adviser’s private funds.  The prohibition was triggered when a managing member of the Adviser (the “Contributor”) contributed to the federal Senate campaign of the Ohio State Treasurer (the “Official”) who by virtue of his office had the power with respect to each of the pension plans in question (the “Clients”) to appoint a member to the board that oversees the plan’s investments.  This article summarizes the Adviser’s amended and restated application for exemptive relief (the “Application”) on which the SEC granted the proposed relief.  (The Rule is described in the July 9, 2010 Goodwin Procter Alert; the Financial Services Alert discussed subsequent amendments to the Rule and an SEC staff Q&A.)

Adviser’s Political Contributions Policy

The Adviser implemented its political contributions policy (the “Policy”) in August 2009 shortly after the Rule was proposed and approximately a year before it was adopted.  The Policy required all employees, and any members of an employee’s immediate family living with, or financially dependent on, the employee, to pre-clear all contributions to state and local office incumbents and candidates, a requirement that is more restrictive than the Rule.   At adoption, the Adviser provided the Policy to each employee, and subsequently circulated the Policy in the Code of Ethics that each employee is required to review, and confirm compliance with, on an annual basis.  In 2011, the Adviser began requiring all new employees qualifying as “covered associates” of the Adviser under the Rule to complete a Political Contribution Questionnaire regarding all political contributions of any size at any level since March 14, 2011.  Following the Rule’s implementation, the Adviser conducted compliance training including a discussion of the Policy that reiterated the need to pre-clear contributions to state or local officials running for federal office.  As part of its compliance testing program, the Adviser conducted random reviews of campaign contribution databases looking for employee names.   One of these reviews discovered the contribution by the Contributor that triggered the Rule’s compensation ban (the “Contribution”).

The Contributor and the Contribution

The Contributor is one of the Adviser’s 11 managing members and has been a manager of one of the Adviser’s investment strategies for eight years.  He and his spouse each made a $2,500 contribution to the Official’s U.S. Senate campaign on May 22, 2011.  The Contributor, who had historically made permissible campaign contributions to candidates for federal office who share certain political views with the Official, was under the mistaken impression that contributions to federal candidates who held state or local office would not trigger the prohibition on compensation under the Rule and were not prohibited by the Policy.  The Adviser identified the Contribution as a violation of the Rule on November 2, 2011.

Steps Taken Following Discovery

The Adviser took the following steps after discovering the Contribution:

Return of Contribution.  Within 24 hours of the Adviser’s discovery of the Contribution, the Adviser and the Contributor secured the Official’s agreement to return the Contribution.

Notice to Client and Escrow of Advisory Fees.  The Adviser promptly notified each Client of the Contribution and the application of the Rule’s two-year prohibition on compensation with respect to the Client’s Fund investment.  The Adviser informed each Client that the fees charged to the Client’s capital account in the Fund since May 22, 2011, the date on which the Contribution was made, were being placed in escrow and that, absent exemptive relief, those fees would be refunded and no additional fees would be charged to the Client for the duration of the two-year period.  The Adviser established an escrow account for the Clients and deposited an amount equal to the sum of all fees paid to the Adviser and its affiliates, directly or indirectly, with respect to the Clients for the two-year period beginning May 22, 2011.

Limits on Contact Between Contributor and Clients.  The Adviser took steps to limit the Contributor’s contact with any representative of a Client for the duration of the two-year period beginning May 22, 2011, including informing the Contributor that he could have no contact with any representative of a Client other than making substantive presentations to the Client’s representatives and consultants about the investment strategy the Contributor manages.

Pre-Clearance of All Contributions Going Forward.  The Adviser revised the Policy to require pre-clearance of all campaign contributions.

Mandatory Considerations in Granting Relief

The Rule mandates that the SEC consider specified factors in determining whether to grant relief from the two-year prohibition on compensation (but does not limit the SEC’s ability to consider other factors).  Each factor specified in the Rule is listed below followed by the Adviser’s arguments addressing that factor:

Whether the exemption is necessary and appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Advisers Act;

The Adviser asserted that the Clients’ respective investment decisions regarding the Fund were free of any improper influence from the Contribution as evidenced by the fact that (i) the relationships with the Clients pre-dated the Contribution, and that only one Client invested subsequent to the Contribution, (ii) the Official may only appoint a single board member out of 11 in the case of two Clients and out of 9 in the case of the third, and at the time of the Contribution, had not made any board appointments.  The Adviser argued that in the absence of evidence that either the Contributor or the Adviser intended to, or actually did, interfere with any Client’s merit-based process for the selection or retention of advisory services, the interests of the Clients are best served by allowing the Adviser and its Clients to continue their relationship.

Whether the investment adviser, (A) before the contribution resulting in the prohibition was made, adopted and implemented policies and procedures reasonably designed to prevent violations of the Rule;

The Adviser noted that it had implemented the Policy, which exceeds the Rule’s requirements, shortly after the Rule was proposed and substantially before it was adopted.  The Adviser also pointed to the Policy’s compliance monitoring component.

(B) prior to or at the time the contribution which resulted in such prohibition was made, had no actual knowledge of the contribution; and

The Adviser acknowledged that “actual knowledge of the Contribution at the time of its making could be imputed to the Adviser, given that the Contributor was a Managing Member and the Executive Managing Member was aware of the Contributor’s interest in the Official, although not specifically of the fact of the Contribution.”  The Adviser noted, however, that (1) no employee of the Adviser other than the Contributor knew of the Contribution prior to its discovery by the Adviser in November 2011 and (2) the Contributor believed he was acting in compliance with the Policy and simply misunderstood its application to state officials running for federal office.   The Adviser also noted that the Rule had only been in force for nine weeks at the time of the Contribution.

(C) after learning of the contribution, (1) has taken all available steps to cause the contributor involved in making the contribution which resulted in such prohibition to obtain a return of the contribution, and (2) taken such other remedial or preventive measures as may be appropriate under the circumstances

The Adviser cited the actions listed above under “Steps Taken Following Discovery.”

Whether, at the time of the contribution, the contributor was a covered associate or otherwise an employee of the investment adviser, or was seeking such employment;

The Adviser (i) identified the Contributor as a “covered associate” of the Adviser, (ii) cited the various measures taken to limit contact between the Contributor and the Clients after discovery of the Contribution, and (iii) represented that the Contributor has had (a) no contact with any representative of a Client outside of the permitted  presentations on the investment strategy the Contributor manages, and (b) no contact with any member of a Client’s board.

The timing and amount of the contribution which resulted in the prohibition; and

The Adviser reiterated that its relationships with the Clients pre-date the Contribution, that only one Client invested subsequent to the Contribution, and that amount of the Contribution was consistent with the giving history of the Contributor and his wife.

The nature of the election (e.g., Federal, State or local); and the contributor’s apparent intent or motive in making the contribution that resulted in the prohibition, as evidenced by the facts and circumstances surrounding such contribution.

The Adviser argued that the nature of the election and other facts and circumstances indicate that the Contributor’s apparent intent in making the Contribution was not to influence the selection or retention of the Adviser.  The Adviser pointed to the Contributor’s long history of making permissible contributions to federal candidates that share the political views of the Official and asserted that the amount of the Contribution, profile of the candidate, and characteristics of the campaign fell squarely within the pattern of the Contributor’s other substantial political donations (as discussed elsewhere in the Application in greater detail).  The Adviser noted that while the Contributor could not vote in the Ohio Senate election, the Contributor had a legitimate interest in the outcome of the campaign given that his wife grew up in Ohio where she owns a house and has extended family.

The Adviser characterized the Contributor’s violation of the Policy and the Rule as resulting from a mistaken belief that all contributions to federal campaigns were permissible and exempt from pre-clearance under the Policy.   As evidence of the lack of any improper motive, the Adviser cited the fact that the Contributor never spoke with the Official or anyone else about the authority of the Official over the Client’s investment decisions, and never mentioned the Clients, their relationship to the Adviser, or any other existing or prospective investors to the Official.  The Adviser also cited the limited contact between the Contributor and Official, the fact that the Contributor had few discussions with others about his meeting with the Official, and the fact that the Contributor never told any prospective or existing investor (including the Clients) or any relationship manager at the Adviser about the Contribution.


The Contribution was made on May 22, 2011 triggering the two-year compensation ban.  The initial application was filed on October 16, 2012.  The amended and restated application was filed on July 5, 2013.  The SEC issued the notice of the application for the order on October 17, 2013.  The SEC issued the final order granting relief on November 13, 2013.

In the Matter of Davidson Kempner Capital Management, SEC Rel. No. IA-3715 (Nov. 13, 2013).

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 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.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

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.


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 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:

- 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.