On August 19, 2024, Obra Capital Management, LLC (“Obra Capital”), a Texas-based registered investment adviser settled charges it violated the Rule 206(4)-5 of the Advisers Act (the SEC’s “Pay-to-Play” rule) and agreed to a $95,000 fine stemming from a contribution made by an employee prior to joining Obra Capital.
Key Takeaways: New hire onboarding compliance questionnaires and certifications are key compliance tasks. The individual was subject to the two-year “look back” provision in the Pay-to-Play rule. The SEC’s Order does not mention whether Obra Capital knew or asked about previous contributions when the employee was hired but it would be odd if Obra Capital ignored such a blatant violation of a pretty clear rule.
Summary
Obra Capital managed a covered investment pool (the “Fund”) in which the Michigan Department of Treasury, on behalf of the Michigan Public Employees’ Retirement Fund, committed to invest, and subsequently invested, approximately $100 million in 2017.
In December 2019, an individual made a $7,150 contribution to a government official in Michigan. In July 2020, Obra Capital hired this individual into a position in which the individual was a “covered associate” under the Pay-to-Play rule. After being hired, the individual sought and obtained a return of the contribution.
The government official to whom the contribution was made had the ability to influence hiring of investment advisers for the Michigan Public Employees’ Retirement Fund. Specifically, the office of the government official appointed the five members of the Michigan Investment Board, including the Michigan State Treasurer, who had influence over selecting investments by the Michigan Public Employees’ Retirement Fund.
After hiring the individual, Obra Capital continued to provide investment advisory services for compensation to the Fund and the Michigan Public Employees’ Retirement Fund as an investor.
Violations
The SEC argued Obra Capital willfully violated Section 206(4) of the Advisers Act and Rule 206(4)-5, which makes it unlawful for any investment adviser registered to provide investment advisory services for compensation to a government entity within two years after a contribution to an official of the government entity is made by the investment adviser or any covered associate of the investment adviser (including a person who becomes a covered associate within two years after the contribution is made).
For their transgressions Obra Capital was fined $95,000, censured and ordered to cease and desist from committing or causing any violations and any future violations of Section 206(4) of the Advisers Act and Rule 206(4)-5.
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.