Recent SEC Sweep Highlights The Need For U.S. Investment Advisers Seeking Business From Sovereign Wealth Funds To Develop Policies For FCPA Compliance

High-profile financial scandals in the past few years have focused the attention of the Securities and Exchange Commission ("SEC") on improper practices that have been used to influence the investment decisions of public pension plans in the United States. As a result of these scandals, the SEC has adopted new regulations designed to limit "pay to play" practices by investment advisers.1 In addition, some states have placed significant new restrictions on the use of third-party finders or placement agents.2

Recently, the SEC's Division of Enforcement circulated a widely publicized "sweep letter" to investment advisers requesting, among other things, information about their use of third parties to obtain investments from sovereign wealth funds, and their compliance with the Foreign Corrupt Practices Act ("FCPA").3 This DechertOnPoint highlights provisions of the FCPA that may be applicable to investment advisers seeking investments from foreign governments.

Background

The FCPA initially was adopted by Congress in 1977 in response to scandals involving bribes by U.S. public companies to illegally influence decisions made by foreign governments. The law's importance has increased in recent years as a result of high-profile actions by the U.S. Department of Justice ("DOJ") and the SEC.4 Because of the FCPA's origins, however, there is a common misconception—shared by many investment advisers—that the law only applies to public companies. In fact, the FCPA has a much broader scope and applies to both U.S. investment advisers and their business partners seeking investments from government entities located outside the United States.

The FCPA's Anti-Bribery Provisions

The FCPA's anti-bribery provisions are implicated when, among other things, an investment adviser or its partners give money or "anything of value" to three categories of recipients—(1) a foreign official, (2) a "foreign political party or official thereof or any candidate for foreign political office," or (3) any third party, while knowing that the third party, such as a placement agent or finder, will forward the money or thing of value to a recipient in category (1) or (2) above.5

Under the FCPA, the adviser cannot provide money or any thing of value to a recipient in one of the three categories listed above with the "purpose" of: (1) "influencing any act or decision" of a foreign official, foreign political party or official, or any candidate for foreign office; (2) "inducing [any of those individuals] to do or omit to do any act in violation of [a] lawful duty"; or (3) otherwise "securing any improper advantage," or inducing [the individual] to use his influence with a foreign government or government instrumentality to effect any action.6

The FCPA applies to investment advisers whenever they seek a benefit, directly or indirectly, from a foreign official, as in the course of seeking investments from a sovereign wealth fund. In seeking such investments, there is the risk that, without adequate controls, an adviser's employee, business partner, or...