The SEC’s pay-to-play rule makes it unlawful for any registered investment adviser and others identified in 17 C.F.R , § 275.206(4)-5(a)(2) to provide or agree to provide, directly or indirectly, payment to any person to solicit a government entity for investment advisory services on behalf of such investment adviser, unless such person is a regulated person or an officer, partner, member, or employee of the investment adviser.
Paul A. Corey & Assocs., Inc. vs. Great-West Life & Annuity Ins. Co., No. 2:18-cv-366 (S.D. Ohio, 11/26/18).
In 1984, Great-West’s predecessor in interest (“IPC”) entered into an Agreement with Corey for consulting services in exchange for a percentage of the gross compensation IPC received from the County Commissioners Association of Ohio (“CCAO”). At the time, Corey assisted IPC in getting the CCAO as a client, although the Agreement did not mention this event. A 1998 amendment changed Corey’s compensation to a flat fee paid monthly and stated the Agreement would remain in effect until the CCAO’s relationship with IPC ended. Great-West assumed IPC’s obligations in 2002 and paid Corey the flat fee every month until June 2017. Then, Great-West stopped the payments, claiming they were illegal under the SEC’s pay-to-play rule (17 C.F.R. § 275.206(4)-5), which prohibits investment advisers from paying any person, directly or indirectly, to solicit a government entity for advisory services, unless that person is a regulated person or a principal or employee of the adviser.
Corey sued in state court, alleging breach of contract and other claims. Great-West removed the case to this Court and moved for judgment on the pleadings. The Court finds the Agreement does not implicate the pay-to-play rule and denies Great-West’s motion. The plain language of the Agreement, the Court notes, states that Corey will provide consulting services to IPC in public/government relations, marketing, and other areas and that IPC will pay Corey for its counsel. While Corey’s compensation was initially tied to fees received by IPC from the CCAO, the Court continues, the Agreement requires IPC to pay Corey for its consulting services, not for soliciting the CCAO.
The addendum changing Corey’s compensation to a flat fee did not change the basis for its compensation. Rather, the Court states, the flat fee was consideration for Corey’s ongoing consulting services, not for the ongoing solicitation of the CCAO. The Court finds nothing in the plain language of the Agreement or any amendment that conditions payment on Corey’s ongoing solicitation of the CCAO. The Court also points to commentary from the SEC Staff stating that even if an agreement involved a third party soliciting a government entity before the pay-to-play rule’s compliance date, continued “trailing payments” under such an agreement would not be prohibited where the third party does not solicit the government entity after the compliance date. Thus, the Court concludes, Corey’s claims are not barred on grounds that enforcement of the Agreement is prohibited by the pay-to-play rule.
(C. Lazarini: Great-West was likely moved to take its position after the SEC, in January 2017, announced that 10 investment advisory firms had agreed to pay penalties to settle charges that they had violated the pay-to-play rule by receiving compensation from public pension funds within two years after the firms’ associates had made campaign contributions to candidates who could influence the investment adviser selection process. The two-year timeout is another provision of 17 C.F.R. § 275.206(4)-5. See https://www.sec.gov/news/pressrelease/2017-15.html.)
(SOLA Ref. No. 2019-03-06)
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