December 21, 2022

Preparing for 2023 SEC exams focused on political contribution monitoring

We may just be wrapping up the final run-up elections for the 2022 midterm year, but for financial advisory firms subject to pay-to-play regulations such as the Securities and Exchange Commission (SEC) Rule 206(4)-5, the regulatory ramifications are just getting started. As was made obvious in 2022 with the SEC’s fines and penalties reaching a recording breaking $6.4 billion, the Division of Examinations is making strides to ensure firms are regarding rules, regulations and penalties with the necessary level of consideration.

While 2022 didn’t see many major enforcement actions in terms of political contribution monitoring, it can be expected to be a priority and focus area in the coming year, as election contributions are calculated and accounted for. And with midterm elections bringing in significantly high contributions, firms would be wise to ensure their policies and procedures are up to date before an audit is conducted.

So, what can you do to prepare?

  1. Read up on relevant regulations.

Understanding what regulations apply to your firm is the first step to mitigating the potential for noncompliance. Read up on pay-to-play risk on a federal, state and local level to ensure you are well-versed in the rulings which govern your firm and its covered associates.

Bonus: Check out illumis’ Election Insights Report which analyzed nearly 1,000 candidates running for a House or Senate seat in the 2022 general election to learn more about the candidates who ran for office, and what their current occupation is — including those who are state or local officials and who may be subject to pay-to-play regulations.

  1. Understand the potential risk points within your firm.

Not all risk is created equal. Indirect contributions including in-kind contributions and accidental contributions can be extremely difficult to track and monitor. In order for your firm to have a proper view of all risk points, it is essential to monitor these kinds of contributions being made by employees and, in some cases, their families. Learn more about risk points by watching our 2022 pay-to-play webinar.

  1. Invest in a technology to monitor active and archived employees.

Manually tracking, verifying and monitoring your employee’s political contributions is an exceptionally time-consuming task. However, should the SEC ever come knocking, it is critical for your firm to be able to prove compliance with all relevant regulations, which so often means, providing the documentation. The illumis platform provides in-depth reporting on all covered associates, including any associates which have left the company. With the new archiving features, firms can easily remove employees who have left the firm from active monitoring, while continuing to store the necessary information to prove to regulatory bodies that the appropriate protocols were in place.

The election year is behind us, but regulatory action is likely just getting started. Schedule a demo today to learn more about the illumis platform and how we can help you achieve political contribution monitoring compliance.

In November of 2021, ComplySci announced the acquisition of illumis, a premier data aggregator and technology provider whose solutions are used by financial services firms to identify and mitigate risk from employee political contributions. While the initial acquisition saw the firms operating as two independent organizations, we are thrilled to announce the merging of the illumis and ComplySci brands. With this initiative, we aim to arm our clients with a more comprehensive solution to mitigating compliance risk, which includes the increased risk associated with employee political contributions.

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.