Return to search

SEC probes EnCap for potential pay-to-play violation

  • SEC probes firm on potential pay-to-play violation
  • Investigation not likely to hamper fundraising
  • Agency focused on pay-to-play conflicts

By Chris Witkowsky and Sam Sutton

The SEC is investigating EnCap Investments for a possible violation of federal pay-to-play rules in connection with one or more campaign donations made by at least one employee at the firm, according to a limited partner and two investment advisers.

The status of the investigation is unclear, as is whether the probe will lead to charges.

The significance of the investigation also is not known, although sources described the alleged violation as minor. One of the sources said they didn’t expect the investigation to hamper EnCap’s fundraising efforts. EnCap, based in Houston, is in market with Fund XI, targeting $6.5 billion. The firm counts major U.S. public pensions, including state pensions in California, Florida, Oregon and Texas, as backers.

Casey Nikoloric, a spokeswoman for EnCap, and Judith Burns, a spokeswoman for the SEC, declined to comment.

Federal “pay-to-play” rules bar investment advisers for two years from getting paid for managing public money if key executives at the firms make campaign donations to candidates with influence over how that money is spent. Executives at firms covered by the pay-to-play rule can contribute as much as $350 to campaigns of candidates for whom they are entitled to vote, and $150 to those for whom they are not entitled to vote.

The investigation comes amid heightened SEC scrutiny of potential campaign-donation conflicts. Earlier this month, the agency announced settlements with 10 managers for violations of federal pay-to-play rules. Those cases involved political contributions between $400 and $10,000 in size, with penalties ranging from $35,000 to $100,000. None of the firms admitted or denied wrongdoing in their settlements.

Details of the potential violation by EnCap were not available. However, Buyouts uncovered a small contribution from an EnCap partner to Gov. Scott Walker of Wisconsin, whose responsibilities include appointing board members to State of Wisconsin Investment Board.

To be clear, Buyouts does not know whether this campaign contribution is connected to the investigation. On June 6, 2012, M. Sean Smith of EnCap contributed $300 to Friends of Scott Walker, Walker’s campaign committee. On his contribution form, Smith noted he was a Texas resident and “Banker” at EnCap, according to state campaign finance records.

Two months later, State of Wisconsin Investment Board said it had committed $50 million to EnCap Flatrock Midstream Fund II. The retirement system later re-upped $50 million to EnCap Midstream Fund III in 2014. In 2015, the board committed $50 million to EnCap Energy Capital Fund X. Wisconsin is also a limited partner in several vehicles EnCap raised prior to Smith’s contribution.

While the investment board isn’t directly responsible for approving individual investments, it is tasked with hiring and firing the state retirement system’s executive director. The executive director must sign off on each commitment to new private equity funds.

It’s unclear whether EnCap charged Wisconsin management fees in the two years following Smith’s contribution to the Walker campaign. Walker’s campaign-finance records, which detail expenses including returned contributions, do not indicate Smith’s contribution was ever rescinded or returned.

“SWIB expects and requires all of our private equity managers to be in compliance with the pay-to-play rule under the Advisers Act, and SWIB’s contracts require compliance as well,” State of Wisconsin Investment Board spokeswoman Vicki Hearing said in a statement. Hearing did not confirm or deny whether the contribution constituted a violation.

“The two-year timeout is intended to discourage pay-to-play practices in the investment of public money, including public pension funds,” said LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Public Finance Abuse Unit, in a statement. “Advisory firms must be mindful of the restrictions that can arise from campaign contributions made by their associates.”

Reach Chris Witkowsky at and Sam Sutton at

Action Item: Check out the SEC pay-to-play rule here:

Photo: The U.S. Securities and Exchange Commission logo adorns an office door at the SEC headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst