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No Good Deed Goes Unpunished: The SEC’s Recent $100K Penalty For Inadvertent and Self-Reported Pay-to-Play Violations Is A Not So Subtle Reminder of the Need for Compliance Vigilance

By Benjamin Keane and Michael Pfeifer
January 28, 2019
  • Compliance
  • General
  • SEC
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While many spent the final days of 2018 taking a much-needed break, the Securities and Exchange Commission (SEC) was busy trumpeting its dedication to holding the regulated community accountable for violations of the federal pay-to-play laws. Just a week before Christmas, the SEC announced the assessment of a $100,000 penalty as part of an administrative settlement it reached with Ancora Advisors LLC, a Cleveland-based investment advisory firm. Ancora neither admitted nor denied the allegations detailed in the associated SEC order announcing the settlement, but the description provided by the Commission alleged violations of Rule 206(4)-5, which limits covered associates of investment advisers from making certain contributions to state and local officials with influence over the award of public contracts for the provision of investment advisory services. 

The SEC’s levied penalty in this settlement is a stark reminder that investment advisory firms must be diligent in the implementation of robust internal compliance policies that pre-screen impermissible contributions before they are made. As Ancora found out, merely having a compliance system in place that allows for post-hoc remediation of inadvertent violations is insufficient from an SEC perspective – even if identified problems are self-reported in a timely fashion.

In this particular instance, the SEC asserted that a covered associate of Ancora Advisors made over $45,000 in campaign contributions to Ohio politicians from 2013 to 2017, including former Governor John Kasich and former State Treasurer Josh Mandel. The Commission’s order also alleges that a second company official contributed $2,500 to an unidentified gubernatorial campaign in the summer of 2017. Given that Ohio’s Governor appoints members to the Ohio Board of Regents (the board overseeing the Ohio state university system), and the Governor and State Treasurer appoint members to the Board of the Ohio Public Employee Retirement System – both purported Ancora clients – the firm found itself subject to the restrictions set forth in Rule 206(4)-5. Namely, by making contributions of over $350 to covered Ohio officials, Ancora could no longer legally receive compensation for providing investment advisory services to the two public funds within the officials’ spheres of influence.

Like the vast majority of registered investment advisors, it does not appear that Ancora was blind to its potential pay-to-play risk. Quite the opposite in fact – it appears that Ancora had a fairly robust internal compliance program that led to the initial discovery of the potential violating contributions during a routine audit of political activity. Upon discovery of the problematic donations, the firm alerted the SEC and ensured that the contributions in question were returned. 

Such remedial measures and cooperation, although reasonable and appropriate, did not convince the SEC to walk away from enforcement. To the contrary, the Commission pursued its pound of monetary flesh and signaled to all advisors that merely having an internal compliance program and self-reporting any identified problems is not enough to find safe harbor. To avoid getting caught up in the pay-to-play trap, firms must employ compliance policies and procedures that prevent problematic donations before they occur. 

While only a one-off enforcement action by the SEC, the Ancora matter provides an important reminder to all in the regulated community concerning the inherent risks associated with political engagement by firm executives. Even through Ancora successfully uncovered the alleged violations through its internal regulatory compliance program and brought the matter to the SEC’s attention, the company was still slapped with a six-figure penalty and is now forced to deal with the associated public relations blowback. In 2019, it thus remains crucial for registered investment advisers and other entities subject to federal pay-to-play provisions to ensure their internal compliance programs are designed to both pre-screen political activity by key employees and educate such individuals about the potential financial and reputational consequences of certain electoral engagement.  

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Benjamin Keane

About Benjamin Keane

Ben Keane is a Partner in the Washington, DC and Atlanta, GA offices of Dentons and co-head of the firm’s Political Law, Ethics and Disclosure Team. Mr. Keane focuses his practice on the representation of elected officials, political candidates, PACs, SuperPACs, political parties, corporations, non-profit organizations and other entities with regard to federal, state and local election law, campaign finance, lobbying, pay-to-play, and ethics matters. He regularly counsels businesses, trade associations and other non-profits on the establishment and maintenance of successful political law compliance frameworks. Additionally, Mr. Keane assists clients across the country with political law investigation and audit matters involving federal, state and local government authorities, and frequently counsels presidential nominees, appointees and other federal officials on confirmation and ethics matters.

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Michael Pfeifer

About Michael Pfeifer

Michael Pfeifer is member of Dentons' Political Law, Ethics and Disclosure team. The focus of his practice is providing lobbying, campaign finance, and government ethics compliance counsel and representation to trade associations, political action committees (PACs), corporations and other business entities, non-profit organizations and elected officials at the federal, state and local levels.

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