Midwest Venture Summit 2008 - Illinois Venture Capital Association

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To our Illinois Venture Capital Association (“IVCA”) PAC contributors –

Numerous recent regulatory changes have changed the dynamics of political contributions, specifically impacting firms in the investment industry.

• Recently adopted SEC rules are designed to prevent influencing public pension decisions via political contributions. Both direct and indirect (e.g., through a PAC) contributions by an investment adviser to any official, including an incumbent, candidate or successful candidate, of a government entity who is directly or indirectly responsible for, or has the ability to influence, the awarding of advisory contracts are now subject to additional restrictions. Generally, if an adviser or a “covered associate” of the adviser has made a contribution to such an official, the adviser is prevented from receiving compensation for advisory services it provides to the associated government entity for two years. Investment advisers subject to the new SEC rule must be in compliance with the rule by March 14, 2011.
• Illinois law regulating “pay-to-play” relationships prohibits contributions by entities whose contracts, or pending bids and proposals on contracts, with the State of Illinois exceed a certain monetary threshold to political action committees established to promote elected public officials or candidates for public office that are (or if elected, would be) responsible for awarding such contracts. (30 ILCS 500/50-37)

• In 2010, the Cook County Board of Commissioners amended the existing Cook County “pay-to-play” regulations as part of a broader ethics and reform package.

In light of these rules, the IVCA Legislative Committee and IVCA-PAC Board have undergone a review of IVCA-PAC procedures to ensure compliance consistent with SEC rules, Municipal Securities Rulemaking Board rules and Illinois law in an effort to ensure that continuing annual contributions to the PAC will not limit a firm’s ability to access state and pension funding within its base of Limited Partners.

The purpose of this memo is to outline the steps that IVCA has undertaken to ensure that our PAC remains a valuable component of our government affairs strategy, and clarify certain aspects of the rules and statutory changes with respect to the continued permissibility of PAC contributions by Illinois-based private equity and venture capital firms. To provide confidence to our investing members, this memo has been reviewed by key attorney members of the IVCA, including Michael Rosenthal of SNR Denton US, L.L.P, Saul Rudo of Katten Muchin Rosenman LLP, and Bruce Ettelson of Kirkland and Ellis LLP.

IVCA-PAC contributions targeted to Illinois office holders have been vital to our continued ability to meet with lawmakers and discuss issues of concern to our industry. The IVCA, supported by the PAC, has been effective in influencing positive legislation regarding the Sudan Act, pension fund reform and earlier, FOIA and repealing the PPRT for investment income. With the support of the PAC, the IVCA continues to educate lawmakers on an ongoing basis about the importance of private equity and venture capital investment in the state to help ensure that they remain positive about strengthening the climate for investment in Illinois. IVCA supports an entrepreneurial spirit in Illinois’s public policy that encourages economic and business development and rewards investment in job creation and job relocations. This year has brought unprecedented change and complexity to the economic and legislative environment and it is imperative that the IVCA represent the industry with a strong voice.
In light of the rules discussed above, the IVCA-PAC has adopted the following procedures and policies commencing March 14, 2011:

• IVCA-PAC contributions are limited to the state-level legislators only.

o Federal contributions are prohibited.
o Contributions to Municipal and County (including the City of Chicago and Cook County) officials (including candidates and fundraising committees for such offices) are prohibited.

• IVCA-PAC will not make any contributions (i.e., give anything of value) to an “official” of any government entity (generally, any state or political subdivision). An official includes a person (including such person’s election committee) who, at the time of the contribution, was an incumbent, candidate or successful candidate for elective office of a government entity, if the office: (i) is directly or indirectly responsible for, or can influence the outcome of, the hiring of an investment adviser by a government entity; or (ii) has authority to appoint any person who is directly or indirectly responsible for, or can influence the outcome of, the hiring of an investment adviser by a government entity.

• The IVCA-PAC will maintain a ‘black list’ of offices and persons deemed to have, directly or indirectly, the legal authority to cause or can influence the awarding of an investment advisory contract. Currently in Illinois, the IVCA-PAC “black list” includes the following five such offices and one additional elected official on the list:

o The Governor appoints pension fund board members (Pat Quinn).
o The Treasurer who serves on a pension fund board and invests the State’s money (Dan Rutherford).
o The Comptroller (Judy Baar Topinka) serves on the Illinois State Board of Investments (ISBI).
o One member of the Illinois House (no one is currently filling this seat) serves on ISBI’s Board.
o One member of the Illinois Senate (currently Senator James F. Clayborne) serves on ISBI’s Board.
o Justice Thomas E. Hoffman of the Illinois Appellate Court serves on ISBI’s Board.

The list will be regularly updated and will include, as applicable, both incumbents holding such offices (as noted in the list above) and any persons seeking election, or elected, to such offices.

The determination as to whether a contribution to an official triggers the two-year ban is in part based on the nature of the office held by the official at the time the contribution is made. So if an official who is subject to the ban (for example, because he has the authority to appoint or influence the selection of an investment adviser) is campaigning for a new position that would NOT be subject to the ban (i.e., he would not have such authority), a contribution made to the official, even if made to his campaign committee for such new position, would trigger the two-year ban.

Since the determining factor is an official’s position at the time the contribution is made, then a contribution to the official (assuming that his current position would not fall within the category of covered officials and that he is not seeking election for such a position) who thereafter seeks election or is appointed to a position that would be subject to the rule’s restrictions, would not trigger the two-year ban so long as such contribution was not made as a means of circumventing the SEC rule, because he was not subject to the ban at the time the contribution was made.
Essentially, a contribution made to an incumbent, successful candidate or candidate not in a covered or prohibited class who subsequently becomes part of a covered or prohibited class should be deemed in compliance with the SEC rules so long as such contribution was not made as a means of circumventing the SEC rule.

• The IVCA-PAC will use reasonable efforts to obtain a written certification from each official that he is eligible to receive the contribution in accordance with the above, although such certifications are not substitutes for appropriate compliance procedures.
• IVCA-PAC will not permit any investment adviser to coordinate the contributions of the IVCA-PAC or solicit the IVCA-PAC to make contributions to “officials” of a “government entity” within the meaning of the SEC rule. The PAC will not communicate, directly or indirectly, with any official for the purpose of obtaining or retaining a client for, or referring a client to, an investment adviser or for the purpose of obtaining or arranging a contribution or payment.
• IVCA-PAC will not make any (i) contribution to any official to which one of IVCA-PAC’s investment adviser members is providing or seeking to provide investment advisory services; or (ii) payment to a political party of a state or locality where any such investment adviser is providing or seeking to provide investment advisory services to a government entity.
• The IVCA-PAC will not do anything indirectly, which, if done directly, would result in a violation of the SEC rule.
• The IVCA-PAC will provide written confirmations to those that make contributions to the IVCA-PAC that such contributions will be used in accordance with these policies.

The IVCA-PAC will continue to monitor the regulatory environment in its mission to comply with any new rules or regulations enacted at the federal, state or local levels affecting its political contributions in Illinois.

For further clarifications, please contact the IVCA lobbyist, Penny Cate at (847) 786-4540 or penny.cate@comcast.net

For further advice on personal, non-PAC contributions, please contact your individual firm’s counsel or any attorney referenced above.