On August 6, Vice President Kamala Harris selected Minnesota Governor Tim Walz as her running mate in the 2024 Presidential election. With the selection of Governor Walz, contributions to the Harris-Walz campaign made by partners, employees, and political action committees subject to the SEC’s “Pay-to-Play” rule from August 6, 2024 forward likely trigger specific compliance considerations.
In addition to the new wrinkle of Governor Walz on the democratic presidential ticket, there are 11 gubernatorial races on ballots in 2024 and numerous other contentious state and local elections with pay-to-play implications for private equity fund managers e.g. North Carolina and New Hampshire gubernatorial races.
Key Takeaways
Chief Reminding Officer and “Pre-clear, pre-clear, pre-clear” It is vital to remind employees if they are planning on making a contribution to a candidate for political office or a contribution to a political action committee, regardless of amount, they should pre-clear that contribution with compliance. The most common mistakes made are a result of employees either self-interpreting or forgetting a firm’s requirements. CCOs should become Chief Reminding Officers to hammer home a firm’s requirements for political contributions during the run up to election day.
SEC Rule 206(4)-5 (the “Pay-to-Play” Rule)
The Pay-to-Play rule prohibits registered investment advisers from providing investment advisory services for compensation to certain state and local “government entities” for two years after the adviser or a covered associate of the adviser contributes to or solicits campaign contributions for a person seeking state or local government office, whether or not that person presently occupies the office.
“Covered associates” under Rule 206(4)-5 include:
- Any general partner, managing member or executive officer, or other individual with a similar status or function
- Any employee who solicits a government entity for the investment adviser and any person who supervises, directly or indirectly, such employee
- Any political action committee controlled by the investment adviser or by any covered associate
Government entities include any state or political subdivision of a state and encompass anything from a large state pension plan (e.g. Minnesota State Board of Investments) to a university endowment (the University of Minnesota endowment fund).
SEC Enforcement Actions related to Pay-to-Play Rule
The SEC’s Office of Examinations and Office of Enforcement have shown increased scrutiny during previous election cycles of political contributions by employees of investment advisers. The most recent enforcement example involving Wayzata Investment Partners happens to be a contribution to a government official in Minnesota who had influence over the selection of investments by the Minnesota State Board of Investments and the selection of investment advisers and pooled investment vehicles. In many cases small donation resulted in large fines:
- Wayzata Investment Partners – $4,000 donation resulted in $60,000 fine
- Canaan Management, LLC – $1,000 contribution led to a $95,000 fine
- Highland Capital Partners LLC – $1,000 contribution led to $95,000 fine
- StarVest Management, Inc – $1,000 and $400 contributions resulted in a $70,000 fine
- OakTree – Separate $1,000 and $1,400 contributions led to a $100,000 fine
- Ancora – Multiple contributions to candidates in Ohio led to $100,000 fine
- BlackRock – $2,700 contribution resulted in BlackRock having to seek special exemptive relief to avoid losing fees on $37 million of fees
How Trillium Can Help
Testing and Surveillance: A key component of Trillium’s ongoing compliance support and compliance health check work is reviewing your firm’s practices in key risk areas against policies and procedures. Checking employee disclosures and campaign contributions against publicly available campaign finance disclosure website is a key component of any standard testing and surveillance program.
Integrated Compliance Technology: Trillium’s ongoing compliance support includes ComplySci’s compliance management platform which is used for periodic employee and new hire onboarding disclosures, certifications and questionnaires. These employee disclosures help minimize the risk of missed compliance obligations.
Training: Ongoing support clients receive annual compliance training tailored to key areas of the firm’s compliance program and Code of Ethics with a special focus on current and upcoming areas of risk.