August 29, 2022

Pay-to-play rules in 2022: five risk areas that your firm cannot afford to overlook

Political activism is at an all time high. And with it? The pay-to-play risk for financial firms who rely on government contracted work. As the number of state and local pay-to-play rules increase, so do the number of stipulations compounding the complexity for firms potentially already struggling with the risk of violation. Not only do firms have to worry about complying with commonly known federal regulations like the SEC and FINRA pay-to-play rules, but also additional, specific state or local rules.

Adhering to the federal, state and local rules warrants hours upon hours of work, delineating the applicable and relevant regulations and determining the policies that must be incorporated in order to fully comply. However, despite the complexity, this isn’t an area of financial regulation and compliance that should be swept under the rug. Because at the end of the day, the penalties for pay-to-play rules violations are simply too steep.

Addressing federal, state and local pay-to-play rules: the top five risk areas

To help you continue to comply with all relevant pay-to-play regulations we’ve gathered the top five areas of risk that could significantly impact your financial firm.

Direct vs. indirect contributions

If direct contributions are made up of your run-of-the-mill employee donations to a political candidate, indirect contributions constitute everything else. This can be complicated, especially in states where indirect contributions apply to an employee’s extended family. To best mitigate risk, it is critical for firms to first understand what and who is classified under indirect contributions within their state and locality, and what, if any, indirect contributions are being made by your employees and their family members.

Look back provisions

Adding to the complexity of pay-to-play rules is the stipulation that these regulations don’t simply apply to current political contributions. In fact, look back provisions can extend anywhere from six months to two years back. Because of this stipulation, firms must ensure due diligence is performed on all new employees, examining any historical political contributions to ensure their past doesn’t create conflicts for the future of your firm. Additionally, look back provisions often apply to any employees obtained through M&A activity, making that merger just a little more complicated.

In-kind contributions

In-kind contributions can be more difficult to track because they aren’t physical payments made to political parties. Instead, they are donations of goods or services, which, depending on the amount given, can equate to a substantial monetary value.

Accidental contributions

In certain instances, political contributions are tied to events such as 5Ks and dinners. In these cases, your employees may not even realize they are making a contribution. Covered employees must be vigilant about the types of events they participate in and attend, ensuring they don’t accidentally contribute to a politician’s electoral race and inadvertently violate a pay-to-play rules in the process.

Committees

The variation in eligibility for covered associates to give to different committees can create an additional layer of complexity for firms. When it comes to committee contributions, a good rule of thumb for all covered associates is to write out specifically who you are contributing to, ensuring you have a written record of the contribution.

How technology helps ease the complexity of pay to play rules

Financial firms must take political contribution monitoring seriously. Implementing tailored processes and regularly training all firm employees on said policies can help mitigate the risk of violating the federal pay-to-play rules (as well as the countless other localized regulations) and facing the consequences. However, with the number and monetary value of contributions being made, many firms are simply overburdened, diligently monitoring risk across 50 or more employees making it nearly impossible to focus on any other compliance priorities.

The answer? Automating your firm’s political contributions monitoring can help reduce risk and expand transparency at your firm. illumis’ political contributions monitoring solution offers several benefits:

  • It helps firms maintain regulatory compliance with federal, state and local pay-to-play regulations.
  • It offers the most comprehensive and accurate campaign finance data across all 50 states and D.C.
  • It helps firms avoid costly risks of regulatory penalties and sanctions, lockout periods and adverse headlines.
  • It allows for look back provisions, so compliance officers can examine past political contributions to ensure that the firm does not have a conflict of interest.
  • It empowers compliance officers and firms to leverage timely, actionable data.

illumis is a trusted partner in helping firms maintain compliance with pay-to-play regulations like:

  • SEC Rule 206(4)-5.
  • MSRB Rule G-37.
  • FINRA Rules 203 & 4580.
  • CFTC Regulation 23.451.
  • State & local pay-to-play regulations.

For more guidance on pay-to-play rules and the strategic benefits of automating your firm’s political contributions monitoring, download the Ultimate Guide to Pay-to-Play Compliance.


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.

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.

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.