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SEC Fines EnCap for Allegedly Violating Pay-to-Play Rules

Employees of the venture capital firm allegedly made political contributions that could influence its relationship with public pension plans.

  • By Alicia McElhaney

The Securities and Exchange Commission is cracking down on alleged pay-to-play schemes this week.

The regulator issued a cease-and-desist order along with a fine to venture capital firm EnCap Investments on July 10 for allegedly making political contributions that could influence its relationship with several public pension funds. Houston-based EnCap has agreed to pay a $500,000 penalty to settle the allegations without admitting or denying the SEC's findings.

“EnCap is pleased to have reached resolution with the U.S. Securities and Exchange Commission, which puts their inquiry into certain personal campaign contributions behind us,” a spokesperson for the firm said via email Wednesday. “Over 30 years, EnCap has been committed to upholding the highest standards of conduct in our dealings with all of our partners. This core tenet remains intact.”

SEC rules state that employees for investment firms like EnCap are not allowed to make campaign contributions to candidates who, if elected, would be in a position to select the firm to make investment decisions on behalf of public funds. If an employee does, the investment firm will not be allowed to offer investment advisory services to the public funds for two years, according to the SEC. 

Between September 2013 and May 2014, EnCap employees allegedly made campaign contributions to candidates for elected office in Texas, according to the order. This is problematic because those elected would oversee the selection process for investment advisors for Texas public pension funds.

Specifically, on September 4, 2013, an employee at EnCap made a $25,000 contribution to a candidate running for governor in Texas, the SEC said. Another employee made three separate contributions totaling $60,000 in campaign contributions to a candidate for Texas Attorney General between September 2013 and May 2014, according to the regulator.

EnCap has had relationships with several Texas public investment funds.

Between August 2004 and April 2015, the Teachers Retirement System of Texas, the Texas Tech University System, the University of Texas System, the Texas County and District Retirement System, University of Houston System, and the Texas School Land Board invested a total of $2.27 billion in funds EnCap advised, according to the SEC document.

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Texas was not the only state in which Encap’s employees allegedly ran afoul of pay-to-play rules. According to the SEC, on October 9, 2012, an EnCap employee allegedly made a $2,500 campaign contribution to Indiana’s state treasurer. Between May 2009 and April 2015, the Indiana Public Retirement System invested $363 million in 12 funds advised by EnCap. 

Similarly, in Wisconsin during September 2015, an EnCap employee allegedly contributed money to the federal election campaign of a previously-elected state official who held an office that influenced the selection of the state pension plan’s investment advisors. In total, between February 2011 and April 2015, the State of Wisconsin Investment Board contributed $212.5 million in six funds advised by EnCap.

“This resolution will in no way impact our funds, investments, or limited partners and we look forward to continuing our focus on being the leading provider of venture capital to independent oil and gas companies and generating attractive returns for our investors,” the spokesperson for EnCap said via email. 

EnCap isn’t the only investment firm to settle pay-to-play violations alleged by the SEC this week.

Private equity firm Oaktree Capital Management agreed to pay a $100,000 penalty to settle similar allegations involving employees who made political contributions in Rhode Island and California, according to a separate cease-and-desist order dated July 10. Under the settlement, Oaktree neither admitted nor denied the SEC’s findings.

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