Even though spring has only just begun, politicians are already starting to gear up for the November elections. Not only will the election for the US Senate be held this year, but also a myriad of state and local elections will take place. With this backdrop, it’s the perfect time to revisit the Securities and Exchange Commission’s (“SEC’s”) Rule 206(4)-5 (the “Rule”) of the Investment Advisers Act of 1940 (the “Advisers Act”), more commonly referred to as the “pay-to-play” rule. “Pay-to-play” generally refers to various arrangements whereby an investment adviser may seek to influence the award of advisory business by making or soliciting political contributions to government officials who have the ability to award such business. While this rule has been in effect since 2011, this article will serve as a reminder of the key components of the Rule and discuss updates promulgated by the SEC since the Rule’s adoption.

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The ripple effects of the 2008/2009 financial crisis still echoes throughout most US industries today. Fraudulent acts of certain “bad actors” – both individuals and firms in the financial industries during this time – are also still being discovered today. Take for example the now-defunct international law firm Dewey & LeBoeuf, who according to a March 6, 2014 press release issued by the Securities and Exchange Commission (“SEC”), has been charged with creating a $150 million fraudulent private bond offering. According to the release, this offering misled investors on the financial health of the law firm, which was struggling as a result of the recession, “steep costs from a merger”, and surmounting fear of severed credit lines from bank lenders.

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As an Arizona-based private equity fund and its manager discovered at the end of February 2014, paying one’s expenses with client’s assets is both problematic and liable to receive prosecution by the Securities and Exchange Commission (“SEC”). Clean Energy Capital, LLC (“CEC”) and its private equity fund manager Scott Brittenham were issued charges by the SEC on February 25, which detailed how $3 million of the fund’s expenses were paid “improperly” with assets from 19 funds that invest in private ethanol production plants.

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A new initiative with the Office of Compliance Inspections and Examinations (“OCIE”) at the Securities and Exchange Commission (“SEC”) is aimed at registered investment advisers who have never undergone examination by the SEC. According to a February 20, 2014 press release, this demographic of advisers primarily includes those who have been registered with the SEC for “three or more years” and who have not been examined since their initial registration. The so-called Never-Before Examined Initiative (the “Initiative”) seeks to conduct examinations on “a significant percentage” of these advisers, with the goal of providing both examination experience and education in the process.

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