September 12, 2022

Pay-to-play compliance: Top five takeaways from the political contribution risks webinar

Fact: political contributions are on the rise.

Specifically, we are seeing both the monetary value and physical number of political contributions continue to increase, even in “off years.” But what does that mean for your financial form?

This level of activity has created increased risk to those financial firms who rely on government contracted work. To continue to comply with federal, state and local regulations, firms must take a proactive approach to their pay-to-play compliance program.

Top five takeaways to help guide your pay-to-play compliance program

During a webinar on Aug. 2, political contribution compliance experts shared their insight regarding federal, state and local regulations, hidden risks of noncompliance with pay-to-play regulations, and what firms can do to ensure ongoing compliance in on and off years.

Ready to talk takeaways? Let the countdown begin.

1. There is heightened political contribution risk during midterm or presidential election years.

Although risk of pay-to-play noncompliance is heightened in any election year, you firm needs to be prepared even during off years. Some best practices to mitigate risk of pay-to-play compliance include:

· Identifying applicable regulations for your firm.

· Identifying whether you’ve got a covered associate.

· Deciding whether an employee’s contributions are direct or indirect.

· Identifying who the employee is contributing to.

· Assessing political committee status and remember public funds requirements.

2. There is a complex array of federal, state and local regulations at play.

Not only do firms have to comply with the federal pay-to-play regulations, but they also have to comply with all relevant state and local regulations. Here are some additional complexities to consider:

· What constitutes a covered person varies across these regulations.

· Covered persons may not only include the employee, but also the employee’s spouse, partner and children.

· Covered persons may include all employees, affiliates and e­­ven affiliate officers.

· Covered recipients also vary, and may include all elected officials, officials involved in contracting or only a single official (such as the governor or state treasurer).

· Some laws have no de minimis exemption – even a $1 contribution can trigger a ban.

3. There are potential “hidden risks” that could result in serious enforcement action.

There are several “hidden risks” firms have to account for in reference to pay-to-play regulations. For instance, covered employees may not even realize they have made a political contribution. These contributions, although accidental, can put your firm at risk. Accidental contributions and in-kind contributions, such as volunteer service or hosting a fundraiser, present pay-to-play risks that are difficult to track. For that reason, a local politician’s run for a federal level position may trigger a ban of some kind that could significantly impact your firm. One of the most effective ways for firms to avoid these “hidden risks” is to educate their employees on the relevant pay-to-play regulations and all associated risks.

4. Firms need to do their part in addressing and mitigating risk.

Firms should educate their employees about pay-to-play regulations and best practices to avoid noncompliance. In some instances, covered persons don’t know that they are covered persons, but might engage in activities that could put the firm at risk. Having a compliance officer who will readily educates all covered and non-covered persons, answering their questions and addressing new risk points, can be helpful in mitigating risk.

Firms should also maintain a quality record-keeping process. 6% of firms surveyed recently reported they were not monitoring contributions at all. Your firm should have a thorough process of monitoring all covered associates and their family members, depending on your state and localities regulations. Additionally, you may want to consider implementing a policy that tracks associates who may be covered in the future. These practices will ensure that when your organization audits contributions, it does so thoroughly and is not as likely to overlook potential risks and violations.

5. There are many benefits to automating your political contribution compliance.

To continue to comply with federal, state and local regulations, firms must take a proactive approach to their pay-to-play compliance program. This can entail creating, documenting and communicating extensive policies and procedures, and implementing technological support to ensure no unauthorized contributions slip through the cracks. Automating your political contribution compliance can have several benefits:

· Your firm’s critical data will be aggregated into one comprehensive source.

· Your firm will have an automated monitoring system with customized alerts.

· Your firm will have streamlined workflows.

· Your firm’s political contribution monitoring system can serve as evidence of documentation.

Firms cannot afford a pay-to-play violation. Although the fines can be steep, the cost to your firm’s reputation are often steeper. Your firm must do its due diligence to educate its covered members and avoid a pay-to-play violation.

For more guidance on pay-to-play regulations and how your firm can avoid a violation, watch the on-demand webinar “Addressing political contribution risk during a midterm election year.

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.