The Securities and Exchange Commission this week fined private equity firm TL Ventures nearly $300,000 to resolve charges that it violated “pay-to-play” rules, governing political contributions. The case marks the first enforcement action under the pay-to-play rules for investment advisers, since their enactment four years ago.

The settlement requires TL Ventures to pay $256,697 in disgorgement, $3,197 in prejudgment interest, and a $35,000 penalty. Without admitting or denying the findings in consenting to the SEC's order, TL Ventures agreed to be censured and to cease and desist from committing or causing any violations and any future violations of the provisions referenced in the order. 

“As we have done with broker-dealers, we will hold investment advisers strictly liable for pay-to-play violations,” Andrew Ceresney, director of the SEC Enforcement Division, said in a prepared stated.

Pay-to-play rules adopted in 2010 prohibit investment advisers from providing compensatory advisory services—either directly to a government client or through a pooled investment vehicle—for two years following a campaign contribution by the firm or certain associates to political candidates or officials in a position to influence the selection or retention of advisers to manage public pension funds or other government client assets.

According to the SEC, TL Ventures violated pay-to-play rules by continuing to receive compensation from two public pension funds—Pennsylvania's state retirement system and Philadelphia's pension plan—within two years after an unnamed associate gave a total of $4,500 in campaign contributions to a Philadelphia mayoral candidate and to the governor of Pennsylvania.

The mayoral position appoints three of the nine members of the Philadelphia Board of Pensions and Retirement. Thus, a mayor can influence the hiring of investment advisers for the public pension fund. 

In addition, the 11-member board of Pennsylvania's state retirement system includes six gubernatorial appointees. Therefore, a governor can influence the hiring of investment advisers for the public pension fund.

In addition to TL Ventures, the SEC also charged an affiliated adviser, Penn Mezzanine Partners Management, with improperly acting as an unregistered investment adviser.  According to the orders, TL Ventures and Penn Mezzanine separately claimed to be exempt from SEC registration, even though their operations were closely integrated and significantly overlapped. 

“Because they were not operationally independent of each other,” the SEC stated, “TL Ventures and Penn Mezzanine should have been integrated as a single investment adviser for purposes of registration requirements or determining the applicability of any exemption.”