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The SEC charged two firms with failing to register as investment advisers because their operations were integrated (SEC orders are here and here) and charged one of the entities with violating pay-to-play rules.

Failure to Register and Integration

The integrated entities did not qualify for an exemption from registration with the Commission under Rule 203(m)-1 under the Investment Advisers Act because the combined operations exceeded $150 million in regulatory assets under management in the U.S.  The entities did not admit or deny the findings, except for jurisdictional matters.

Alleged facts the SEC looked at in determining integration included:

  • On their exempt reporting adviser reports filed with the Commission, both entities reported that they are under common control with each other. In addition, various employees and associated persons of one entity held ownership stakes in that entity  and in the general partner and management company of the other entity.
  • The entities had several overlapping employees and associated persons, including individuals who provided investment advice on behalf of both entities.
  • The entities had significantly overlapping operations without any policies and procedures designed to keep the entities separate. Marketing materials for one entity made reference to both entities as being a “partnership.”  In addition, Managing Directors of one entity solicited potential investors for the other.  Moreover, neither adviser had adequate information security policies and procedures in place to protect investment advisory information from disclosure to the other. Also, employees and associated persons of one entity routinely used email addresses associated with the other entity to conduct business and communicate with outside parties.

In arriving at its conclusion, the order noted the SEC has stated that it will treat as a single adviser two or more affiliated advisers that are separate legal entities but are operationally integrated, which could result in a requirement for one or both advisers to register. Based upon the facts and circumstances, the SEC found the entities were operationally integrated and, therefore, were not eligible to rely on the claimed exemptions from registration. The SEC pointed to guidance in Advisers to Venture Capital Funds, Private Fund Advisers With Less Than $150 Million in Assets Under Management, and Foreign Private Advisers, Investment Advisers Act Release No. 3222 at 125, as support for its conclusion..

Pay-to-Play Violations

The SEC investigation found that one of the private equity firms violated pay-to-play rules by continuing to receive compensation from two public pension funds within two years after an associate made a $2,500 campaign contribution to a mayoral candidate and a $2,000 campaign contribution to a governor.  The mayoral and governor positions could influence the hiring of investment advisers for the public pension funds for which the private equity firm managed money.  After the contributions, the private equity firm  improperly continued to receive compensation from the pension funds for those advisory services.


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