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March 19, 2019

Potential Pay-to-Play Risks Posed By New Presidential Candidates

The growing field of candidates in the Democratic primary represents increased risk of contributions that violate “pay-to-play” regulations, and thus increased risk to financial institutions serving public sector clients. This is especially relevant this month as Gov. Jay Inslee of Washington becomes the first incumbent governor to launch a 2020 presidential campaign.

And importantly - as a sitting Governor who, for instance, appoints a number of officials to Washington’s state investment boards - contributions to Inslee are subject to pay-to-play statutes, such as Municipal Securities Rulemaking Board (MSRB) Rule G-37, Securities and Exchange Commission (SEC) Rule 206(4)-5 and 15Fh-6 Financial Industry Regulatory Authority (FINRA) Rules 2030 and 4580, and Commodity Futures Trading Commission (CFTC) Rule 23.451.

A contributor to Inslee’s presidential campaign may believe themselves to be in the clear in giving to a federal campaign, but they could instead be exposing themselves and their firm to significant risk of penalties or lost business.

With more state and local officials expected or rumored to be launching presidential campaigns soon - including Mayor Pete Buttigieg of South Bend, Mayor Bill De Blasio of New York City, and Governor Steve Bullock of Montana - this area of risk may grow substantially in the coming months. At illumis, we’re committed to providing the best possible data monitoring solutions to our customers to make sure that - regardless of an individual employee’s full understanding of the intricacies of pay-to-play regulations - compliance teams will have all the information they need to easily identify and address potential risks.

This is intended for informational purposes only and does not represent legal opinion or advice. For any questions or more information about the issues described, please reach out to illumis at support@illumis.com.

Please Note: This post was updated in June 2020 to reflect our company’s new name: illumis
Why real-time data is essential to helping your investment firm avoid violating pay-to-play regulations, SEC rule 206(4)-5

Political contributions made by firm employees pose a significant threat to investment advisory firms. And even firms with the best compliance teams can be at risk of violating pay-to-play regulations, like the Securities and Exchange Commission’s (SEC) rule 206(4)-5, given the complexity of the rules and the myriad of regulations to which firms must comply.

Because of this, investment firms must arm themselves with the access to and support of real-time data, which can help identify potential violations and anomalies in the political donation process.

By leveraging real-time data, investment firms can quickly detect suspicious or unauthorized activities and take prompt action to prevent pay-to-play violations.

Beyond SEC Rule 206(4)-5: A look at state and local political contributions compliance regulations

SEC Rule 206(4)-5 is arguably the most well known regulation regarding political contributions compliance or pay-to-play compliance. However, it certainly isn’t the only regulation to which firms must comply.

In fact, beyond federal regulations, firms which take part in government contracted work must contend with numerous and varied state and local regulations as well. Such regulations present unique challenges because of the various requirements within each, which should they be neglected, can cause significant financial and reputational damage.

Aligning pay-to-play rule 206(4)-5 compliance practices with your investment firm’s regulatory compliance program

While it would be almost too easy to treat the Securities and Exchange Commissions’ (SEC) pay-to-play rule 206(4)-5 as a special requirement implemented only during election years, that mistake can cause serious, firm-wide damages. In fact, for investment firms, establishing a compliance program which actively and regularly incorporates compliance with the SEC pay-to-play rule is essential to avoiding fines, sanctions, lockout periods, loss of revenue and a damaged reputation.