The SEC settled public administrative proceedings against TL Ventures Inc., a venture capital fund adviser (the “Adviser”), over violations of Rule 206(4)-5 (the “Rule”) under the Investment Advisers Act of 1940 (the “Advisers Act”) resulting from its failure to observe the two-year timeout on receiving compensation with respect to certain public plans invested in the Adviser’s funds. The timeout was triggered when a principal owner of the Adviser (the “Principal”) made campaign contributions to a Philadelphia mayoral candidate and to the Governor of Pennsylvania. This article provides selected highlights of the SEC’s findings set forth in the settlement order (which the Adviser has neither admitted nor denied).
The Adviser manages venture capital funds that invest in early-stage technology companies. The Adviser relies on the exemption from registration under the Advisers Act available to an adviser whose only clients are “venture capital funds” as defined under Rule 203-l(1) under the Advisers Act. The Adviser raised its last fund in 2008. In 2000, the City of Philadelphia Board of Pensions and Retirement (the “Philadelphia Retirement Board”) invested in one of the Adviser’s funds. In 1999 and 2000, the Pennsylvania State Employees’ Retirement System (“SERS”) invested in two of the Adviser’s funds. The Adviser received advisory fees attributable to the respective investments by the Philadelphia Retirement Board and SERS in the Adviser’s funds.
In April 2011, the Principal made a $2,500 campaign contribution to the campaign of a candidate for Mayor of Philadelphia. In November 2011, the Principal made a $2,000 campaign contribution to the Governor of Pennsylvania.
The Pay-to-Play Rule
In relevant part, Rule 206(4)-5 prohibits an “exempt reporting adviser” like the Adviser from receiving advisory fees attributable to the investment of a government entity in a private fund managed by the Adviser within two years after a contribution by certain personnel of the Adviser to an incumbent, candidate or successful candidate for elective office of a government entity if the office is directly or indirectly responsible for, or can influence the outcome of, the hiring of an investment adviser by a government entity or has authority to appoint any person who is directly or indirectly responsible for, or can influence the outcome of, the hiring of an investment adviser by a government entity. A “government entity” is any state or political subdivision of a state, including, among other things, a pool of assets sponsored or established by the state or political subdivision or any agency, authority or instrumentality thereof, including, but not limited to a “defined benefit plan” as defined in the Internal Revenue Code, or a state general fund.
The SEC found that each of the Mayor of Philadelphia and the Governor of Pennsylvania had the ability to influence the selection of investment advisers for their respective retirement funds. The Mayor of Philadelphia has authority to appoint the City’s Director of Finance, Managing Director and City Solicitor, each of whom serves on the nine member Philadelphia Retirement Board, which has influence over the retirement fund’s investments including the selection of investment advisers and pooled investment vehicles. The Governor of Pennsylvania has authority to appoint six members of the eleven member SERS board, which has influence over investments by the SERS pension fund including the selection of investment advisers and pooled investment vehicles.
The SEC found that the Adviser willfully violated Rule 206-4(5). The SEC noted that, according to case law, “a willful violation of the securities laws means merely that that ‘the person charged with the duty knows what he is doing.’” There is no requirement that there be an awareness of violating a rule or statute. In addition, Rule 206(4)-5 does not require a showing of a quid pro quo arrangement or actual intent to influence an elected official or candidate.
Among other sanctions, the Adviser must pay disgorgement of $256,697 and prejudgment interest of $3,197. Under this settlement order, the Adviser is also subject to a civil money penalty of $35,000 that appears to be attributable at least in part to a separate violation of the Advisers Act’s registration requirements that was also part of the settlement, as discussed here.