UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
INVESTMENT ADVISERS ACT OF 1940
Release No. 4959 / July 10, 2018
ADMINISTRATIVE PROCEEDING
File No. 3-18584

In the Matter of
ENCAP INVESTMENTS L.P.,
Respondent.

ORDER INSTITUTING
ADMINISTRATIVE AND CEASE-ANDDESIST PROCEEDINGS PURSUANT TO
SECTIONS 203(e) AND 203(k) OF THE
INVESTMENT ADVISERS ACT OF 1940,
MAKING FINDINGS, AND IMPOSING
REMEDIAL SANCTIONS AND A CEASEAND-DESIST ORDER
I.

The Securities and Exchange Commission (“Commission”) deems it appropriate and in
the public interest that public administrative and cease-and-desist proceedings be, and hereby
are, instituted pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940
(“Advisers Act”) against EnCap Investments L.P. (“EnCap” or “Respondent”).
II.
In anticipation of the institution of these proceedings, Respondent has submitted an Offer
of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the
purpose of these proceedings and any other proceedings brought by or on behalf of the
Commission, or to which the Commission is a party, and without admitting or denying the
findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these
proceedings, which are admitted, Respondent consents to the entry of this Order Instituting
Administrative and Cease-and-Desist Proceedings Pursuant to Sections 203(e) and 203(k) of the
Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions and a
Cease-and-Desist Order (“Order”), as set forth below.
III.
On the basis of this Order and Respondent’s Offer, the Commission finds1 that:

1

The findings herein are made pursuant to Respondent’s Offer of Settlement and are not
binding on any other person or entity in this or any other proceeding.

 Summary
These proceedings involve violations of the Commission’s “pay-to-play” rule for investment
advisers by Respondent EnCap, an investment adviser. Rule 206(4)-5, promulgated under
Section 206(4) of the Advisers Act, is a prophylactic rule designed to address pay-to-play abuses
involving campaign contributions made by certain investment advisers or their covered
associates to government officials who are in a position to influence the selection of investment
advisers to manage government client assets, including public pension fund assets. Among other
things, Rule 206(4)-5 prohibits certain investment advisers from providing investment advisory
services for compensation to a government client (or to an investment vehicle in which a
government entity invests) for two years after the adviser or certain of its executives or
employees (known as covered associates) makes a campaign contribution to certain elected
officials or candidates who can influence the selection of certain investment advisers.
Between September 2013 and May 2014, covered associates2 of Respondent made
campaign contributions to candidates for elected office in Texas, which offices had influence over
selecting investment advisers for public entities in Texas. In September 2015, a covered associate of
Respondent made a contribution to the federal election campaign of an elected state official in
Wisconsin and that state office had influence over selecting investment advisers for a public pension
plan in Wisconsin. In October 2012, a covered associate of Respondent made a contribution to the
federal election campaign of an elected state official in Indiana and that state office had influence
over selecting investment advisers for a public pension plan in Indiana. All of the public pension
plans had been invested in funds advised by Respondent prior to the contributions. Within two years
after these contributions, Respondent provided advisory services for compensation to the public
pension plans. By providing those advisory services for compensation within two years after the
contributions, Respondent violated Section 206(4) of the Advisers Act and Rule 206(4)-5
thereunder.
Respondent
1.
EnCap Investments L.P. (“EnCap”) is a limited partnership headquartered in
Houston, Texas. EnCap reports to the Commission as an “exempt reporting adviser” under Section
204(a) of the Advisers Act and Rule 204-4 thereunder. EnCap reported venture capital fund assets
of approximately $30 billion as of March 29, 2018.

2

Covered associates are defined to include: (i) any general partner, managing member or executive
officer, or other individual with a similar status or function; (ii) any employee who solicits a government
entity for the investment adviser and any person who supervises, directly or indirectly, such employee; and
(iii) any political action committee controlled by the investment adviser or by any of its covered associates.
See Rule 206(4)-5(f)(2).

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 Background
2.
Between August 2004 and April 2015, the Teachers Retirement System of Texas
(“TRST), the Texas Tech University System (“TTUS”), the University of Texas System
(“UTS”), the Texas County and District Retirement System (“TCDRS”), University of Houston
System (“UHS”), and Texas School Land Board (“TSLB”), (collectively, the “Texas Systems”)
committed to invest, and subsequently invested, a total of $2.27 billion in investment funds
advised by EnCap. Between February 2011 and April 2015, the State of Wisconsin Investment
Board (“SWIB”) committed to invest, and subsequently invested, $212.5 million in six funds
advised by EnCap. Between May 2009 and April 2015, the Indiana Public Retirement System
(“IPRS”), committed to invest, and subsequently invested, $363 million in twelve funds advised
by EnCap. During all relevant times, TRST, TTUS, UTS, TCDRS, UHS, TSLB, IPRS, and
SWIB remained invested in their respective funds (the “Funds”). The Funds were closed-end
funds and investors were generally prohibited from withdrawing their money for the life of the
funds.
3.
On September 4, 2013, a covered associate of Respondent made a $25,000 campaign
contribution to a candidate for Governor of Texas.3 On three occasions between September 2013
and May 2014, a covered associate of Respondent made a total of $60,000 in campaign
contributions to a candidate for Texas Attorney General. On October 9, 2012, a covered associate of
Respondent made a $2,500 campaign contribution to the State Treasurer of Indiana. On September
10, 2015, a covered associate of Respondent made a $2,700 campaign contribution to the Governor
of Wisconsin.4 TRST, TTUS, UTS, TCDRS, UHS, TSLB, IPRS, and SWIB had all been invested
in funds advised by Respondent prior to the contributions.
4.
The office of Governor of Texas has the authority to appoint or nominate at least
one member of the boards of each of the Texas Systems, subject to approval by the Texas
Senate. The Attorney General of Texas has the authority to nominate one member of the TSLB
board, subject to approval by the Texas Senate. The boards of the Texas Systems are directly or
indirectly responsible for, or can influence the outcome of, the hiring of investment advisers for
the Texas Systems. The office of Treasurer of Indiana serves as a member of the IPRS board of
trustees and can influence the hiring of investment advisers for IPRS. The office of Governor of
Wisconsin has the authority to appoint several members of the board of trustees of SWIB, which
has influence over the hiring of investment advisers for SWIB.
5.
During the two years after the contributions, Respondent continued to provide
investment advisory services for compensation to the Funds.
3

Rule 206(4)-5 has a de minimis exception, which permits covered associates to make aggregate
contributions without triggering the two-year time out of up to $350, per election, to an elected official or
candidate for whom the covered associate is entitled to vote, and up to $150, per election, to an elected
official or candidate for whom the covered associate is not entitled to vote. See Rule 206(4)-5(b)(1).
4

Rule 206(4)-5 applies to contributions to a covered candidate even if the candidate does not win
the election. See Rule 206(4)-5(f)(6).

3

 6.
Advisers Act Rule 206(4)-5(a)(1) prohibits any investment adviser registered with
the Commission, investment adviser required to be registered with the Commission, foreign
private adviser, or exempt reporting adviser from providing investment advisory services for
compensation to a government entity5 within two years after a contribution to an official6 of a
government entity made by the investment adviser or any covered associate of the investment
adviser. Advisers Act Rule 206(4)-5 also applies to investment advisers, including exempt
reporting advisers, to a covered investment pool in which a government entity invests or is
solicited to invest as though the adviser were providing or seeking to provide investment
advisory services directly to the government entity.7 Advisers Act Rule 206(4)-5 does not require
a showing of quid pro quo or actual intent to influence an elected official or candidate.
7.
As public pension plans or funds, TRST, TTUS, UTS, TCDRS, UHS, TSLB,
IPRS, and SWIB were government entities as defined in Advisers Act Rule 206(4)-5(f)(5). The
contributors were covered associates of Respondent as defined in Advisers Act Rule 206(4)-5(f)(2).
The individuals who received the contributions were officials of government entities as defined
in Advisers Act Rule 206(4)-5(f)(6) because the offices they were associated with or sought to
become associated with had authority either to influence the hiring of investment advisers by the
government entity or to appoint people who could influence the hiring of investment advisers by
the government entity. The Funds were covered investment pools as defined in Advisers Act
Rule 206(4)-5(f)(3) because they would be an investment company under Section 3(a) of the
Investment Company Act of 1940 but for the exclusion from the definition of investment
company provided by Section 3(c)(7) of the Investment Company Act.
8.
Under Advisers Act Rule 206(4)-5, the contributions triggered a two-year “time-out”
on Respondent providing advisory services for compensation to TRST, TTUS, UTS, TCDRS,
UHS, TSLB, IPRS, and SWIB. During the two years after the contributions, Respondent continued
to provide advisory services for compensation to the Funds and received advisory fees attributable to
the investments of TRST, TTUS, UTS, TCDRS, UHS, TSLB, IPRS, and SWIB in their respective
Funds.
5

See Rule 206(4)-5(f)(5).

“Official” includes any person who, at the time of the relevant contribution, was an incumbent,
candidate or successful candidate for elective office of a government entity if the office is directly or indirectly
responsible for, or can influence the outcome of, the hiring of an investment adviser by a government entity or
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. See Rule 206(4)-5(f)(6).
6

See Rule 206(4)-5(c). A “covered investment pool” is defined as (i) an investment company
registered under the Investment Company Act of 1940 (“Investment Company Act”) that is an investment
option of a plan or program of a government entity; or (ii) any company that would be an investment
company under Section 3(a) of the Investment Company Act, but for the exclusion provided from that
definition by either Section 3(c)(1), Section 3(c)(7) or Section 3(c)(11) of that Act. See Rule 206(4)5(f)(3). Rule 206(4)-5 applies to investment advisers even if the government entity was already invested in
the covered investment pool at the time of the contribution.
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4

 9.
As a result of the conduct described above, Respondent EnCap willfully8 violated
Section 206(4) of the Advisers Act and Rule 206(4)-5 thereunder, which makes it unlawful for
any investment adviser registered (or required to be registered) with the Commission, or
unregistered in reliance on the exemption available under Section 203(b)(3) of the Advisers Act,
or that is an exempt reporting adviser, to provide investment advisory services for compensation
to a government entity within two years after a contribution to an official of the government
entity is made by the investment adviser or any covered associate of the investment adviser.
EnCap’s Remedial Efforts
10.
In determining to accept the Offer, the Commission considered remedial acts
undertaken by Respondent.
IV.
In view of the foregoing, the Commission deems it appropriate and in the public interest to
impose the sanctions agreed to in Respondent EnCap’s Offer.
Accordingly, pursuant to Sections 203(e) and 203(k) of the Advisers Act, it is hereby
ORDERED that:
A.
Respondent EnCap cease and desist from committing or causing any violations
and any future violations of Section 206(4) of the Advisers Act and Rule 206(4)-5 thereunder.
B.

Respondent EnCap is censured.

C.
Respondent EnCap shall, within 10 days of the entry of this Order, pay a civil
money penalty in the amount of $500,000 to the Securities and Exchange Commission for transfer
to the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If
timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. Payment
must be made in one of the following ways:
(1)

Respondent may transmit payment electronically to the Commission, which
will provide detailed ACH transfer/Fedwire instructions upon request;

(2)

Respondent may make direct payment from a bank account via Pay.gov
through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or

A willful violation of the securities laws means merely “‘that the person charged with the duty
knows what he is doing.’” Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (quoting Hughes v.
SEC, 174 F.2d 969, 977 (D.C. Cir. 1949)). There is no requirement that the actor “‘also be aware that he
is violating one of the Rules or Acts.’” Id. (quoting Gearhart & Otis, Inc. v. SEC, 348 F.2d 798, 803 (D.C.
Cir. 1965)).
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5

 (3)

Respondent may pay by certified check, bank cashier’s check, or United
States postal money order, made payable to the Securities and Exchange
Commission and hand-delivered or mailed to:

Enterprise Services Center
Accounts Receivable Branch
HQ Bldg., Room 181, AMZ-341
6500 South MacArthur Boulevard
Oklahoma City, OK 73169
Payments by check or money order must be accompanied by a cover letter identifying
EnCap Investments L.P. as the Respondent in these proceedings, and the file number of these
proceedings; a copy of the cover letter and check or money order must be sent to LeeAnn Ghazil
Gaunt, Chief, Public Finance Abuse Unit, Securities and Exchange Commission, Boston
Regional Office, 33 Arch Street, 24th Floor, Boston, MA 02110.
D.
Amounts ordered to be paid as civil money penalties pursuant to this Order shall
be treated as penalties paid to the government for all purposes, including all tax purposes. To
preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor
Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any
award of compensatory damages by the amount of any part of Respondent’s payment of a civil
penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such
a Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order
granting the Penalty Offset, notify the Commission’s counsel in this action and pay the amount
of the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be
deemed an additional civil penalty and shall not be deemed to change the amount of the civil
penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action”
means a private damages action brought against Respondent by or on behalf of one or more
investors based on substantially the same facts as alleged in the Order instituted by the
Commission in this proceeding.
By the Commission.

Brent J. Fields
Secretary

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