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April 8, 2022

Pay-to-Play Compliance: Off Years Still See Increase in Political Contributions

Early last year, we published a blog citing multiple statistics on the rapid influx in political contributions, specifically showcasing an increase on the federal level – unsurprising, given that 2020 was a presidential election year.

Because 2021 is classified as an off year, it would be easy to assume a rather drastic drop-off occurred over the next 12 months. No federal election means less contributions, and thus less pay-to-play risk. Right?

However, following that line of thinking is flawed in the sense that the comparison verges on the old apples to oranges conundrum. After all, we really shouldn’t be comparing election years to non-election years as a means to averaging political contributions and thus pay-to-play risk.

In fact, there are hundreds of state and local elections across the country in off years, with contributions flowing to candidates in jurisdictions that are higher risk, harder to track, and often times, subject to additional state local regulations.

A better way to analyze political contributions and gain a clear insight into your firm’s pay-to-play risk is to compare similar years and circumstances, gaining transparency into whether or not you face a cause for compliance concern.

Understanding the need for firms to gain better insight into this potential risk factor, we aggregated the political contributions – both state and federal – from similarly “off years.”

As you’ll see, while there is no doubt a steep decline occurred between 2020 and 2021, when comparing 2021 to 2017, you’ll actually note an increase. A trend which extends both in terms of count and spend on the federal level as well as the state and local level. And in fact, on a federal level, the spend nearly doubled between 2017 and 2021.

Moving beyond 12-month comparisons allows us to note a clear and substantial increase in political contributions, which in turn signals a need for firms to seriously and proactively address pay-to-play risk or face the consequences. How?

  1. Identify whether or not you have a covered associate
  2. Decide whether an employee’s contributions are direct or indirect contributions
  3. Identify who the employee is making a contribution to
  4. Look at the political committee status
  5. Remember the requirements of public funds and others

Unfortunately for firms, pay-to-play risk doesn’t simply turn off during the off years. However, with the right technology, your firm can mitigate risk and continue your work without the storm cloud of potentially problematic political contributions.

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.