SEC Rule 206(4)-5 for investment advisers and fund managers limits the ability of a firm’s employees to make political contributions. It’s a nasty rule. Violation of the rule does not require any bad intent. The breadth of affected political candidates is long, diverse, and hard to discover.
Anthony Yoseloff worked at Davidson Kempner Capital Management which ran a private investment fund. Three of the investors in the fund were Ohio public pension plans. Under the SEC Rule, Yoseloff would be limited in making political contributions to politicians who could directly or indirectly influence the decision to invest in the private investment fund.
Yoseloff gave a $2500 donation to the federal senate campaign of Joshua Mandel. Yoseloff though federal elections were exempt from the political contributions limit. He was wrong. Mandel was the Ohio Treasurer and had the power to appoint trustees to the Ohio pension plans. Yoseloff had violated the rule and the firm was at risk of losing two years worth of management fees from Ohio pension plans.
The firm applied for exemption from the SEC, hoping the innocent mistake would not cost them thousands of dollars. (tens of thousands? hundreds of thousands?)
The rule does provide for exemptive relief. This case may be the first such relief.
Here’s what the SEC said mattered in the ruling granting the relief:
- The Ohio pension plans established the investment relationship on a arms’ length basis prior to the date of the contribution
- Only one investment was made after the contribution
- The firm had pay-to-play policies and procedures compliant with the rule’s requirements and implemented compliance testing
- After discovering the contribution, the firm requested it’s return from the candidate
- The firm set up an escrow account to hold the fees.
- The contribution was consistent with Mr. Yoseloff’s past contributions.
- Mr. Yoseloff mistakenly thought the contribution policy was not applicable to federal candidates.
Thankfully, the SEC is showing some relief from this oppressive rule that distorts political campaigns. Mr. Yoseloff could have given the $2500 to Sherrod Brown, the other candidate in the election, and there would have been no problem. In the 2012 republican presidential primaries, of the 10 candidates only Rick Perry was limited by the SEC rule.
On the other hand, there was a long history of pay-to-play in the municipal finance industry that was snuffed out by the MSRB rules. (This SEC rule was based on those.) We have several instances of politicians and investment advisers/fund managers doing bad things to steer investments. I understand the need.
Clearly the firm is trying to run tests on political contributions. It found the contribution because the federal database allows you to search by “employer name.” The Ohio state database does not. If the contribution was made to the treasurer’s state campaign, the firm may never have discovered it. Most of the state election finance databases that I’ve reviewed do not allow you to search by employer. This effectively limits the ability to monitor contributions. Yet another problem with the rule.