As 2024 gets nearer, we find ourselves beginning another election cycle here in the U.S. Amid political commercials, bus-stop ads and “I Voted” stickers, financial professionals have to field another seasonal change: keeping compliant with the rules surrounding political contributions.
To help keep your firm on track during this time of heightened politics, we’re bringing you a refresher on the Security and Exchange Commission’s (“SEC”) Rule 206(4)-5 under the Investment Advisers Act of 1940, also known as the SEC pay-to-play rule for advisers.
What is the SEC Pay-to-Play Rule?
Back in 2010, the SEC adopted the pay-to-play rule, which places restrictions on political contributions made by investment advisers and their associates to certain government officials and entities. The overall goal is to prevent advisers from using political contributions to gain or retain advisory business from government entities.
A recent report from Reuters states that:
“Under the SEC Pay-to-Play Rule, an investment advisor is prohibited from receiving compensation for managing a government entity’s investments for two years after it, a covered employee, or a PAC they control makes a political contribution to certain state or local candidates or officials.”
Pay-to-play restrictions exist at local, state and federal levels, depending on where your firm is located. Failure to comply can result in fines, contractual bans or further action from regulatory bodies.
Related: A look at state and local political contributions compliance regulations
The Fine Print
There are exceptions for certain contributions made by advisers or associated persons. For example, you may find that there is a “de minimis” exception that allows for smaller contributions, often up to $350 (and sometimes capped at $150) – although it’s best to double-check your specific circumstances regardless.
How Can Your Firm Comply with the SEC Pay-to-Play Rule this Election Season?
In the financial industry, maintaining compliance with pay-to-play restrictions is not just good practice; it’s a legal requirement. Here are three steps you can take to ensure each member of your firm is aware of pay-to-play restrictions during the upcoming elections.
1. Train your staff
The first step toward compliance is a comprehensive understanding of the regulations governing pay-to-play practices. This means studying not only federal regulations, but also state-specific rules which can vary widely. Keep in mind that these rules can change, so staying up to date is essential.
Including pay-to-play training in your onboarding process as well as your annual training periods could help to keep all members of your team apprised of pay-to-play rules. You may also wish to offer a reminder or bonus training session during times of higher risk, such as election seasons. For example, this is a good time to remind employees that their spouses and loved ones’ political contributions may also be subject to pay-to-play rules.
Finally, it’s a good idea to implement a preclearance process for any contributions above the de minimis value – this way, your compliance department can approve contributions before they become a problem, thus preventing regulatory errors.
2. Develop clear policies and procedures
Once you fully understand the regulations, the next step is to create and implement a robust compliance program. This includes establishing a system for tracking political contributions made by your employees and covered associates at the federal, state and local levels.
Additionally, if an employee suspects a compliance violation regarding pay-to-play (or any other matter), they should know how to take the next appropriate steps toward minimizing that risk.
And, of course, be sure to have proper documentation procedures in place. Remember, accurate record-keeping will be invaluable if you are subject to an audit or investigation down the road!
3. Automate the process wherever you can to keep it simple
Lastly, it’s a great idea to invest in compliance software that proactively identifies any pay-to-play risks. In a digital-first environment, it’s easy for employees to make a quick, simple mistake that could cost your firm both financially and reputationally.
Compliance software can continuously monitor political contributions made by employees, executives and their immediate family members. This helps firms ensure that no prohibited contributions are being made to political candidates, parties or committees that could potentially trigger pay-to-play violations.
For example, the illumis® political contribution compliance platform integrates thousands of data sources, scouring the most comprehensive public data monitoring available and alerting your firm to any potential or real risks. From there, you can organize records, share notes and easily filter records to avoid false positives – while also producing and sharing documents as needed.
And if you want to implement preclearance procedures, the illumis platform offers self-reporting and preclearance requests for one seamless compliance process.
As election season rolls around, it’s important to keep pay-to-play regulations top of mind for your team with training, proper processes and the right software solutions.
Keep Your Firm Compliant This Election Season
Ready to tackle pay-to-play restrictions with confidence? Click here to connect with a member of our team and get started today.