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SEC Pay to Play Rule Approved: VC Implications PDF Print E-mail

John Taylor

Written by John Taylor   

Nearly a year after proposing its rule aimed at pay to play practices at public pension funds, the Securities and Exchange Commission (SEC) issued a final rule last week.  Most of the new prohibitions, penalties and disclosure requirements will go into effect the first quarter of 2011.  The new rules apply equally to all “investment advisers,” whether registered with the SEC or not.  The SEC’s official statement can be viewed here.  There are two provisions in this ruling that impact venture capital firms:

Total Placement Agent Ban Avoided

As many NVCA member firms have been or soon will be in the market to raise a new fund, the Association thought it was critical to share concerns when the SEC originally put forth last summer an outright ban on the use of placement agents for firms seeking state and local pension money.  We engaged in the rule making process during the comment period by sending a letter to the SEC which advocated against a complete ban of third-party placement agents for venture capital.  Fortunately, this concern was addressed in the final rule.  The negative effects of a total ban should be largely avoided with the SEC’s decision to allow the use of placement agents who are registered with the SEC or FINRA.  The new rule, which will take effect in approximately 14 months months will continue to allow venture capital firms to use registered placement agents in the U.S.  There continues to be uncertainty regarding U.S. venture firms’ ability to use placement agents in Europe and the NVCA is engaged in these discussions with the EU.

Political Contributions to State Officials / Candidates

Another provision in the ruling restricts political contributions to state and local officials and candidates by pension fund advisers and the penalties are drastic.  There is a mandatory two-year time out for any adviser who makes a contribution, directly or indirectly, to any official or candidate who could influence the choice of public pension fund investments. This restriction applies to members of venture capital firms. 

This ruling is consistent with guidance the NVCA has been providing members.  It is now even more important to have a firm-wide policy against political contributions to these officials / candidates.  This restriction does NOT include political contributions to candidates running for federal office (U.S. House of Representatives, U.S. Senate, U.S. President) nor does it include contributions to the NVCA PAC, which only gives to federal candidates. 

As with other such “prophylactic” rules, the SEC tried to anticipate efforts to circumvent.  The rule defines all the key terms very broadly, e.g., “contribution,” “official,” “solicit” as to who, what and how.  There is a six-month look-back period for new hires.  Bundling of contributions and solicitation of political money for influential officials in prohibited also.  Finally, the provision bars advisers from arranging contributions through family members or affiliates.

De minimus contributions (up to $350 or $150 based on whether adviser can vote for the candidate) are permitted, and there is provision for curing certain inadvertent violations; however, these exceptions are far from generous and fitting within them will require care and oversight.  Naturally, all this comes with new recordkeeping and disclosure requirements, at least for SEC-registered advisers. 

The full rule release is available here.   

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