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Editor’s Letter: Watch for pay-to-play in midterm elections

  • SEC adopted political contribution rules in 2010
  • EnCap settled with SEC earlier this year
  • Pay-to-play scandals erupted in New York in 2009

Recently, I had cause to recall the paranoid days of 2009 when the markets froze and a massive private equity scandal erupted into public view.

Andrew Cuomo, then attorney general of New York, unveiled a wide-ranging investigation involving New York State Common Retirement Fund, ex-state Comptroller Alan Hevesi, a politically connected fundraiser named Hank Morris and a bunch of PE firms.

The crux of the issue was that numerous private equity firms paid Morris in exchange for commitments from the state retirement fund. Cuomo settled with numerous firms at the time to end investigations against them; Hevesi and Morris went to jail. Gradually, similar schemes in New Mexico and California unraveled.

In the wake of the scandal, the SEC adopted a federal rule restricting political contributions by investment managers to state officials in position to control or influence pension money.

Those rules will come into play in the next few weeks as the midterm elections approach — a vote that will probably garner a lot more attention and participation than normal.

VCJ reporter Kaitlyn Landgraf Bartley wrote recently that employees at venture firms (and I’ll add private equity firms) who make political contributions can easily and inadvertently violate the SEC rule.

The rule was adopted in 2010. It bars investment advisers from providing services to a government client two years after the adviser or certain executives make a contribution to elected officials or candidates who may play a role in managing or influencing allocation of public pension funds.

“These practices, known as pay to play, distort the process by which advisers are selected,” the rule states. “They can harm pension plans that may subsequently receive inferior advisory services and pay higher fees. Ultimately, these violations of trust can harm the millions of retirees that rely on the plan or the taxpayers of the state and municipal governments that must honor those obligations.”

SEC is serious about enforcing these rules. The agency settled with several firms over the past few years over what appear to be minor contributions made by employees. EnCap Investments settled with SEC earlier this year for allegedly violating the pay-to-play roles. The firm did not admit or deny wrongdoing. Under the settlement, EnCap agreed to pay a $500.000 civil penalty.

EnCap voluntarily established a policy banning all political contributions by its employees, Buyouts previously reported.

The EnCap settlement arose from situations in 2012 and 2013, when an employee or employees of the firm contributed to a candidate for the governor of Texas, a candidate for Texas attorney general, the state treasurer of Indiana and the governor of Wisconsin. Pension funds in those states had committed to EnCap funds so the firm worked for the public systems even after the contributions were made.

“Given the number of cases that have come out this year with respect to pay-to-play, as an industry people are viewing the requirements more strictly than they were previously,” Jamie Lynn Walter, a partner at Kirkland & Ellis, told VCJ.