SEC commissioner pans regulator’s latest pay-to-play order

One of the SEC’s commissioners is speaking out against its recent decision to penalize an investment advisory firm for violating a “pay to play” rule against campaign contributions.

SEC Commissioner Hester Peirce voiced her dissent following a recent settlement involving Obra Capital Management, in which the firm was found to have violated the SEC’s rule.

“Today’s settlement with Obra Capital Management, LLC is yet another reminder that when it comes to participation in the political process … anyone who might be looking for a job at an investment adviser always should expect the Commission’s inquisition,” Peirce said in a statement.

The case centers around a political contribution made by an employee before joining the firm, and the subsequent actions that triggered regulatory scrutiny.

The issue began in December 2019 when the individual, who Peirce referred to by the pseudonym “Bob,” contributed $7,150 to a Michigan government official. According to the SEC’s order, the official held influence over appointments to the Michigan Investment Board, which indirectly affected the Michigan Public Employees’ Retirement Fund.

At the time of the contribution, the Michigan pension fund had already been invested in a private, closed-end fund managed by Obra Capital for two years.

“The Michigan pension fund ‘was not able to increase or withdraw its investment from the [closed-end] Fund,’” Peirce noted.

In July 2020, Obra Capital hired Bob to a role where he solicited government entities, which led to the firm’s violation.

The SEC’s pay-to-play rule includes a two-year lookback provision, meaning that political contributions made within two years of becoming a covered associate are still subject to the rule, regardless of the associate’s status at the time of the donation.

“Bob’s participation in soliciting government entities triggered the two-year lookback provision,” Peirce said, adding that this interpretation meant Obra Capital breached the rule by continuing to receive fees from the Michigan pension fund.

She criticized the broad application of the rule, noting how it was invoked even though the solicitation had no direct connection to the Michigan official or any related entities.

“[The order] does not state that he solicited any Michigan government entities,” she said, pointing out that the order only said Bob “solicited government entities.”

Peirce also questioned the order’s focus on “mere solicitation of investments.” Even if it didn’t result in an actual investment decision, the act of solicitation, coupled with the fact that the fund was receiving fees from longstanding investments, was enough to trigger the rule, she noted.

“It does not matter that the investment decision pre-dated the contribution; receiving fees counts [as a breach] even though the relevant investment decision was made years earlier,” Peirce said.

Raising concerns about the implications for investment, she questioned the SEC’s authority to enforce the pay-to-play rule as currently interpreted, arguing that it goes beyond the agency’s mandate to prevent fraud or misconduct.

“When we adopt and enforce rules that effectively chill a person’s right to engage in political activity, we must be scrupulous in our articulation of a close nexus between the disfavored conduct and the fraudulent conduct prevented,” she said.