Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

Rule 206(4)-5(a)(1) under the Investment Advisers Act prohibits a registered investment adviser from providing 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.  This is the so called “pay-to-play” rule.  Rule 206(4)-5(e) provides that the SEC may exempt an investment adviser from the prohibition under Rule 206(4)-5(a)(1) upon consideration of several factors.

An adviser to a hedge fund applied for an exemption on October 16, 2012 as a result of a campaign contribution to a public official, and an amended and restated application was filed on July 5, 2013.  The contribution to which the application for exemption related occurred in May 2011.

The adviser stated the violation was inadvertent and represented it had taken extensive steps to implement additional compliance procedures.  The violation was discovered by the adviser through routine compliance testing.

An escrow account was established.   All fees paid from the clients’ capital accounts in the hedge fund for the two-year period beginning on May 22, 2011 were paid into the escrow account while the application was pending.

On November 13, 2013, an exemption from Rule 206(4)-5(a)(1) under the Advisers Act was granted.

Check frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.