Compliance June 23, 2014

Firm Settles with SEC for Pay-to-Play Violations

TL Ventures Inc. has settled with the Securities and Exchange Commission (SEC) in a case involving pay-to-play rules for investment advisers.
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The SEC had alleged that the Philadelphia-area private equity firm had violated pay-to-play rules by continuing to receive advisory fees from city and state pension funds following campaign contributions made by an associate in 2011 to the governor of Pennsylvania and a candidate for mayor of Philadelphia. The firm agreed to settle the charges, paying nearly $300,000.

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.

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An SEC investigation found that 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 associate made a $2,500 campaign contribution to a Philadelphia mayoral candidate and a $2,000 campaign contribution to the governor of Pennsylvania.

The mayoral position appoints three of the nine members of the Philadelphia Board of Pensions and Retirement, says the SEC, and a mayor can therefore influence the hiring of investment advisers for the public pension fund. The 11-member board of Pennsylvania’s state retirement system includes six gubernatorial appointees. Therefore, says the SEC, a governor can influence the hiring of investment advisers for the public pension fund. After the contributions, TL Ventures improperly continued to receive compensation from the pension funds for those advisory services.

“We will use all available enforcement tools to ensure that public pension funds are protected from any potential corrupting influences,” says Andrew Ceresney, director of the SEC Enforcement Division, based in Washington, D.C. “As we have done with broker/dealers, we will hold investment advisers strictly liable for pay-to-play violations.”

LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit, adds, “Public pension funds are increasingly investing in alternative investment vehicles such as hedge funds and private equity funds. When dealing with public pension fund clients, advisers to those kinds of investment vehicles should be mindful of the restrictions that can arise from political contributions.”

The SEC’s orders instituting settled administrative proceedings also charged TL Ventures and an affiliated adviser, Penn Mezzanine Partners Management L.P., with improperly acting as unregistered investment advisers. According to the orders, TL Ventures and Penn Mezzanine separately claimed to be exempt from SEC registration in March 2012. However their operations were closely integrated and significantly overlapped. Because they were not operationally independent of each other, 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, according to the SEC.

The SEC’s order finds that TL Ventures violated Sections 203(a), 206(4) and 208(d) of the Investment Advisers Act of 1940 as well as Rule 206(4)-5. TL Ventures is ordered to pay disgorgement of $256,697, prejudgment interest of $3,197 and penalty of $35,000.

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. TL Ventures neither admitted nor denied the findings in consenting to the SEC’s order.

In Practice June 22, 2014

Will Retiring Retirement Plan Participants Turn to You?

As an adviser to workplace retirement plans, you’ve helped participants save money for retirement, but when they’re ready to retire, will they turn to you?
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To keep retiring clients, you need to provide services other than investment management, noted M. Kristi Cook, an attorney with her own practice in Horsham, Pennsylvania, speaking at the National Tax-Deferred Savings Association 403(b) Summit in Washington, D.C. “What do you say when your clients ask how much they need to retire? Do you help your clients determine if they have sufficient assets for retirement? Where are they getting information about Social Security, defined benefit pension options and costs, defined contribution withdrawal strategies and beneficiary planning?” Cook queried. “This is when they need a lot of help.”

To prepare to provide the services retirees are seeking, advisers should listen to their questions and seek information from surveys and social discussions about the services clients want. Then it’s important to acquire the knowledge necessary to provide those services, find any necessary partners to assist in providing those services, and get the best tools to help.

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Broker/dealers are good resources for financial advisers, according to Cook. They can design what advisers need and have compliance departments. In addition, advisers can learn what they need to know from continuing education courses, peers and industry conferences.

As for tools, financial advisers can find software to help them provide these services to retiring participants, but every piece of software will give a different answer to clients’ questions, Cook noted. Some modeling software offers “standards” for retirement income need—80% of pre-retirement income, 4% draw down rate, a strategy for having different “buckets” of assets to dip into at different times—“but I’m not sure any of these are right,” she said. Edward Dressel, president of Trust Builders, Inc. in Dallas, Oregon, added that the simple models do not work well for those who have a defined benefit retirement plan benefit.

Cook told Summit attendees she was speaking as a consumer who has just gone through the process of trying to get information for her husband about whether he has enough assets to retire or when will be the best time for him to retire.

Models provide generic information, ballpark numbers, and clients want help that is specialized to their situations. Any software advisers use must be customizable, according to Cook. She warned that clients will not go to an attorney for tax and legacy planning issues because they think that’s what they pay an adviser for. Advisers need to let clients know up front what they can and will do and what they can’t or won’t do.

But, clients will want to know how to maximize Social Security, Cook said, and advisers should make sure the software they use has all the rules accounted for so they are not giving the wrong advice. “You cannot get enough Social Security strategy information, and you cannot be an expert on it on your own.”

There are about 17,000 different scenarios for Social Security strategies for a couple with both spouses about the same age, Dressel noted. “Read the Social Security books,” he suggested. He also mentioned that Imagisoft, Still River Retirement Planning and WealthTrace are three software solutions advisers may use that include government pension information.

Interestingly, both Dressel and Cook said they had used the benefits calculator on the Social Security Administration’s website and it gave them incorrect numbers. Both said they called Social Security to inform the agency of this and were told there was nothing the agency could do about it.

Dressel added that the software needs to integrate Social Security with other assets. His own firm’s TRAKS software integrates defined benefit plan information, estimated Social Security benefits and spousal information, and offers different scenarios for income replacement at different retirement ages. It can also integrate other assets. He said a good software tool will allow an adviser to manipulate the numbers easily, and some will show how long money will last at different rates of return and with different withdrawal rates.

“I fear if advisers only do overly simplistic scenarios, they will lose clients,” Dressel said. Advisers need software that can get into clients’ complicated situations, “this will offset you from others.”

Cook added that when including defined benefit plan information, advisers should know what the plan document says the benefits are. “Clients expect you to know it, because they don’t,” she said, suggesting advisers become familiar with information about pension plan payments and survivor benefits in the event of early retirement or normal retirement, cash out provisions and cost-of-living adjustments (COLAs).

“Sell timing strategies as your value add,” Dressel said. “Don’t mention any product until there’s a problem a product can solve.”

He added, “Whatever tool you use, make sure the client takes home something you can be proud of.”

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