WASHINGTON — The Securities and Exchange Commission has charged a Philadelphia-area private equity firm with violating pay-to-play rules by receiving advisory fees from the city and state pension funds following campaign contributions an associate made to state and local officials. It is the first case brought by the SEC under its pay-to-play rules for investment advisers.
Pay-to-play rules adopted in 2010 prohibit investment advisers from receiving compensation for advisory services for two years following a campaign contribution the firm or certain associates make to political candidates or officials in a position to influence the selection or retention of advisers to manage public pension funds or other governmental assets.
An SEC investigation found that TL Ventures violated pay-to-play rules by continuing to receive compensation from two public pension funds - Pennsylvania's state retirement system and Philadelphia's pension plan - within two years after an associate made a $2,500 campaign contribution to a Philadelphia mayoral candidate and a $2,000 campaign contribution to the governor of Pennsylvania.
"We will use all available enforcement tools to ensure that public pension funds are protected from any potential corrupting influences," said Andrew Ceresney, director of the SEC enforcement division. "As we have done with broker-dealers, we will hold investment advisers strictly liable for pay-to-play violations."
LeeAnn Ghazil Gaunt, chief of the SEC enforcement division's municipal securities and public pensions unit, added, "Public pension funds are increasingly investing in alternative investment vehicles such as hedge funds and private equity funds. When dealing with public pension fund clients, advisers to those kinds of investment vehicles should be mindful of the restrictions that can arise from political contributions."
Pay-to-play rules are designed to prevent firms from generating business by influencing public officials with financial gifts. The Investment Advisers Act of 1940 does not require that a firm intend to influence the politician to award them business in order for a violation to have occurred. It also does not require any evidence that the contribution led the official who received it to help award business to the firm.
The mayor of Philadelphia is responsible for appointing three of the nine members of the Philadelphia Board of Pensions and Retirement, while the governor appoints six of the 11 board members overseeing the state retirement system. The SEC concluded that both the mayor and the governor could influence the hiring of investment advisers.
An associate of TL Ventures made contributions to both in 2011, but continued to receive fees from the management of TL Ventures IV and TL Ventures V, two funds in which the city and state retirement plans had invested.
The firm settled the charges with the SEC while neither admitting nor denying the commission's findings. It agreed to pay a penalty of $35,000, as well as prejudgment interest of $3,197, and to disgorge $256,697 of ill-gotten gains. The firm agreed to cease and desist from future violations of the law.
The SEC also charged TL Ventures and an affiliated adviser, Penn Mezzanine Partners Management L.P., with improperly acting as unregistered investment advisers.
According to the commission's order settling the administrative proceedings, the two firms separately claimed in March 2012 to be exempt from SEC registration under the advisers act. TL Ventures claimed to be exempt because it was serving as adviser only to one or more venture capital funds, while Penn Mezzanine said it advised only private funds and managed fewer than $150 million. TL Ventures reported that it managed about $178 million as of March 31 of this year.
But their operations were closely integrated and significantly overlapped, the SEC found. Because they were not operationally independent of each other, TL Ventures and Penn Mezzanine should have been treated as a single investment adviser for purposes of registration requirements or determining the applicability of exemptions from registration, the SEC said.
Treated as one entity, the two firms would not have qualified for an exemption from registration and were therefore operating while not properly registered, the commission concluded.
Attorneys for TL Ventures and Penn Mezzanine did not respond to requests for comment.
