What do Oaktree Capital Management, EnCap Investments and Sofinnova Ventures have in common (apart from being big name GPs)? The answer: they have all found themselves on the wrong side of the Investment Advisers Act Rule 206(4)-5.
Under the rule, employees of investment firms who make donations to political campaigns are then barred from providing advisory services to any government entity for two years. For private equity firms who manage public pension money (which is most of them) this is a very real issue. Not just the individual donor is affected – the firm as a whole is.
Elected officials on the state level, such as governors and legislators, often take a role in pension funds, and the SEC wants to crack down on “pay to play” practices; the rule is designed to prevent firms helping elected officials into power and then benefiting financially from their influence.
In some executives’ eyes, the rule needs recalibration. Doug Cornelius, a compliance officer at a private equity real estate firm in Boston, blogged late last year about the disconnect between the amount of the campaign contribution and the settlement for the violation itself.
“These all look [like] technical violations with no evidence that there were weaknesses in policies or an intent to influence. The rule is just too broad, with dollar limits that are too low,” he wrote.
The Securities and Exchange Commission continues to be vigilant in its enforcement of Rule 206(4)-5, judging by some recent cases. In the past month, Oaktree, EnCap and Sofinnova all settled with the SEC after the agency found some of those firms’ employees made contributions to political candidates in state and local elections. The biggest penalty was levied against EnCap, which will settle for $500,000 for its workers who contributed $90,200 in Texas, Indiana and Wisconsin elections within the past decade.
Politics right now is impassioned and divisive, and the mid-term elections are coming up. Eighty-two percent of all state legislative seats will be up for election, according to Ballotpedia. It is therefore time to remind your staff not to make campaign contributions to politicians, whatever the strength of their convictions.
One chief financial officer pfm spoke with says his firm will be doing just that: “Ongoing education, especially just reminding people more often, is a great point in the upcoming election. Voting isn’t part of people’s day-to-day jobs, so it’s easy to forget about compliance.”
In the case of Oaktree, which managed more than $110 billion in assets at the time of the SEC disclosure in early July, the firm settled for $100,000 on employees’ contributions totaling $2,900 to officials running for office in California and Rhode Island. The California State Teachers’ Retirement System has been a substantial client of Oaktree’s.
“It’s almost everybody’s biggest fear,” says the CFO. “You’ve got a big staff, and then somebody accidentally makes a contribution not even thinking about it and, boom, it sort of automatically discounts the firm as a whole.”
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