The recent case involving Wayzata Investment Partners and the SEC highlights the potential consequences of pay-to-play violations in the investment advisory industry. It also highlights the effects of slow-moving policy change in a fast-paced industry.
Wayzata Investment Partners was fined $60,000 for violating pay-to-play rules after an associate made a $4,000 contribution to a politician with influence over money manager selection for the state.
SEC Commissioner Hester Peirce criticized the fine, describing it as overreaching by the SEC. She did not deny that the violation occurred but explained that there was no evidence linking the donation to obtaining additional investments from the state investment board. One might go further to suggest that a 60k fine for a 4k contribution (and the value of that to the campaign) seems misaligned.
Peirce emphasized that there was no link between the donation and the selection of Wayzata as a manager, as the state investment board had already invested in Wayzata's funds prior to the contribution.
Industry experts question the influence of a $4,000 political donation on any decision-making. Here is where a real disconnect exists between regs and reality: can such a small amount create a material conflict of interest? It might be time to revisit the rule's threshold.
The SEC's rules prohibit certain investment advisers from providing services for compensation to government clients for a specified period after making campaign contributions to officials who can influence the selection of investment advisers.
But perhaps, as industry experts have suggested, it might be time to adjust the threshold for violations. While a $4,000 donation might trigger a technical violation, larger contributions might be more likely to raise concerns about conflicts of interest.
In the short term, the case is a heavy-handed reminder to advisers; however archaic the thresholds may be.
