SEC Rule 206(4)-5, commonly known as the pay-to-play rule, along with FINRA Rules 2030 and 4580, limits campaign contributions by organizations and individuals that do business with or lobby the government, with the intent of preventing firms from making donations to influence future business. Firms are also beholden to state and local regulations in the jurisdictions where they operate.
The contentious political climate of today has seen unprecedented levels of political donations. Firms must anticipate that regulators will be keeping a close eye on the political contributions of both the organization and their employees. And based on past patterns of regulatory enforcement, pay-to-pay compliance needs to be a priority on an ongoing basis—not just during key election years.
Pay-to-play compliance is a concern for firms of all sizes. Firms need policies and procedures in place to monitor employee contributions to identify potential conflicts of interest and avoid the fines, loss of fees and reputational damage that those conflicts can bring.
Are individuals aware of the rules that they must follow?
Covered employees are allowed to donate $350 to candidates for whom they may vote in an election, and $150 to other candidates. As defined by the SEC, a covered associate includes “any general partner, managing member or executive officer, or other individual with a similar status or function, any employee who solicits a government entity for the investment adviser and any person who supervises, directly or indirectly, such employee.”
Even an inadvertent infraction, or a donation just over the de minimis contribution limit leaves a firm subject to enforcement. If the rule is triggered, firms are faced with a cooling-off period during which the effects of a political contribution can be expected to fade, leading to potential lost revenue from uncollected fees. In order to prevent individuals from trying to exert influence indirectly, donations from other entities, including household members, are also covered under the rule.
Firms are subject to a “look back” provision. When an employee becomes a covered associate, either through a role change or new hire, the firm must look back two years prior to determine if a political contribution was made during that timeframe.
Does the firm have a system to monitor donations and mitigate potential risk?
With donor data tracked at the federal, state and local level, and state and local rules differing across jurisdictions, tracking pay-to-pay compliance can be daunting. Running periodic spot checks or relying on employees to self-report donations is not enough. Compliance teams need access to comprehensive political donation data, solid recordkeeping systems in place to satisfy regulatory requirements and must be able to flag prohibited contributions before they are even made.
MCO’s Political Contributions and Donations solution provides firms of all sizes with access to updated donation data across federal, state, and local jurisdictions. Compliance teams can easily and efficiently configure customized rules and run reporting to manage and monitor political contributions.