February 22, 2023

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.

States and localities with political contribution compliance regulations

While financial firms which rely on government contracted work should speak to an authority to determine ALL regulations to which they must comply, the following states and localities have incorporated political contributions compliance regulations.

States which have enacted pay-to-play regulations include, but are not limited to:

  • California.
  • Colorado.
  • Connecticut.
  • Florida.
  • Hawaii.
  • Illinois.
  • Indiana.
  • Kentucky.
  • Louisiana.
  • Maryland.
  • Montana.
  • Nebraska.
  • New Jersey.
  • New Mexico.
  • Ohio.
  • Pennsylvania.
  • Rhode Island.
  • South Carolina.
  • Vermont.
  • West Virginia.

Localities which have enacted pay-to-play regulations include, but are not limited to:

  • County of Delaware Pennsylvania.
  • District of Columbia.
  • Hoboken, New Jersey.
  • Los Angeles, California.
  • New York, New York.
  • Newark, New Jersey.
  • Philadelphia, Pennsylvania.
  • San Francisco, California.

Understanding what you must comply with is only the first step. In order to achieve and maintain compliance, many firms now rely on technology to aggregate and analyze critical data records necessary to monitor covered employees. Because while public data records are widely available, combing through the various systems to find the necessary information is not only time-consuming, but open to human error.

The illumis Political Contribution Monitoring solution provides access to the most comprehensive and accurate campaign finance data, including:

  • All 50 states and D.C.
  • Federal data.
  • Hundreds of cities, counties and local jurisdictions.

Ready to see how illumis can help you illuminate your path to political contributions compliance? Schedule a demo today!

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.

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.

compliance updates

For financial firms who rely on government contracted work, complying with the Securities and Exchange Commission (SEC) Pay-to-Play Rule, in addition to any other relevant political contributions compliance ruling, is essential to maintaining your contract and avoiding potential fines, sanctions, lockout periods and, ultimately, loss of revenue.

While the pay-to-play rulings do limit which campaigns your employees can contribute to, it does not completely rule out contributions across the board.

Which is where the political contribution preclearance process comes into play.