February 8, 2023
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.
Why? Employee political contributions occur during on and off election years, making it a critical aspect of your ongoing regulatory compliance program.
In this blog, we’ll highlight how your firm can align your pay-to-play compliance with its other compliance practices, creating a compliance program which is cohesive, effective and thorough enough to mitigate your compliance risk.
Best practices to ensure your investment firm is in compliance with the pay-to-play rule
While some firms’ Code of Ethics prohibits employees from making political contributions, for those firms which allow employee political contributions, adjustments must be made to your overarching compliance program to ensure all covered employees abide by and comply with relevant pay-to-play regulations.
Here are some tactics to ensure that your investment firm remains in compliance with the pay-to-play rule:
- Include thorough pay-to-play policies and procedures in your investment firm’s overarching compliance manual.
- During your firm’s regular organization-wide meetings, talk about compliance, including what pay-to-play compliance looks like.
- During regular training sessions at your firm, offer up-to-date training on the pay-to-play rule and any requirements.
- Incorporate a political contribution preclearance process for those employees covered by the rule. This process should likely align with your employee trading preclearance requirements as well.
- During your firm’s quarterly and or annual reviews, incorporate testing to verify all political contributions have been reported.
- Integrate a comprehensive compliance technology which accounts for all types of employee preclearance and monitoring, including political contributions.
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.