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January 7, 2021

Webinar Recap: Pay-to-Play Compliance and the 2020 Election

We recently hosted a webinar around pay-to-play compliance with two experts on the topic—Ki Hong of Skadden, Arps, Slate, Meagher & Flom, and Heather Traeger of TRS, where we covered important, timely issues around the 2020 election. Given the complexity of pay-to-play regulations and potential severity of penalties for violations, as well as the historic political involvement in this election cycle, understanding and monitoring for these risks has never been more important.

During the webinar, our CEO and Founder Mike Phillips shared some data, pictured below, surrounding the sharp rise in the volume of federal and state contributions being made—with the number of contributions in 2020 doubling the prior cycle.

The rest of the conversation focused on the relevant regulations around pay-to-play and political contributions. Our guests provided background around four major federal pay-to-play regulations (MSRB Rule G37, FINRA Rule 2030, SEC Rule 206(4)-5, and CFTC Rule 23.451), and more than 20 additional state and local pay-to-play laws, and highlighted the various risks that exist for companies soliciting government business. Pay-to-play regulations are often fairly broad and can include not only the companies in question but also their PACs, senior employees, and board members, as well as the spouses and dependent children of their covered employees. The repercussions for inadvertent contributions by these donors to covered candidates or committees include, but are not limited to, bans on doing business in different jurisdictions, and clawbacks on management fees. Our panelists also spoke to the danger of indirectly contributing to a covered candidate via PACs, party committees, and other organizations, and offered advice on mitigating this risk.

Heather also detailed best some practices for companies seeking to protect themselves from pay-to-play risk, and offered the following steps for vetting political contribution preclearance requests:

  1. Identify whether you’ve got a covered associate. She highlighted the importance of “being mindful of state laws…[and]…any kind of M&A activity” and mentioned the six month look back period for new hires (or two year period, if they are in a solicitor position).
  2. Decide whether an employee’s contributions are direct or indirect contributions.
  3. Identify who the employee is making a contribution to. It’s important to make the distinction of a contribution to a candidate, speaker at an event, or an organization (which might then be giving to a political cause).
  4. Look at the political committees status. Determining whether it’s a campaign committee, PAC, ballot measure committee, or committee controlled by an affiliate is an important part of due diligence here. Heather also offered a reminder that “companies covered under the federal pay-to-play rules cannot make corporate or PAC political contributions at the state or local level.” On employees’ contributions, she highlighted the importance of assessing whether the employee is entitled to vote for that candidate, and what the de minimis threshold is for the contribution.
  5. Remember the requirements of public funds and others. The investor policies of public funds may also speak to what permissible contributions are, and include prohibitions or disclosures that have to be made around contributions.

If you weren’t able to make it to the webinar, you can sign up here to watch a recording.

At illumis, we provide the leading monitoring solution to help reduce risk and increase transparency around pay-to-play rules. Our platform continues to set the standard, with cutting-edge technology to help ensure comprehensive coverage. Interested in a demo of the illumis Compliance platform? Click here or email solutions@illumis.com.
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.