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March 23, 2023

Why real-time data is essential to helping your investment firm avoid violating pay-to-play regulations, SEC rule 206(4)-5

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.

How can real-time data help your investment firm mitigate risk of violating the SEC’s pay-to-play rule?

In several ways! Having access to real-time data can help your investment firm:

  • Identify potential pay-to-play violations

Having access to real-time data can help investment firms identify potential violations, such as donations which exceed specified contribution limits or those made to officials who may be involved in awarding contracts or other benefits. With real-time data, investment firms can quickly identify these violations and take action to prevent them from escalating into serious pay-to-play risks.

  • Monitor political contribution trends

Access to real-time data can reveal political contribution trends, such as sudden increases in donations or unusual patterns of giving. This can provide investment firms with important insights into the behavior of donors and government officials and help them identify potential pay-to-play risks.

  • Improve political contribution transparency

Real-time data can help investment firms improve transparency in their political donation process by providing stakeholders with real-time information about political contributions. This can help build trust and confidence in the investment industry and reduce the risk of pay-to-play.

  • Support compliance efforts

Real-time data can support investment firms' compliance efforts by providing them with accurate and up-to-date information about political contribution rules and regulations. This can help firms ensure that their contributions comply with the law, prevent any potential pay-to-play violations and create a culture of compliance.

Having access to real-time data is essential in an investment firm’s efforts to mitigate pay-to-play risks effectively. By leveraging this data, investment firms can quickly detect potential violations, monitor political contribution trends, improve transparency and support compliance efforts.

Ready to see how illumis can help you illuminate your path to political contributions compliance? Schedule a demo today!
ComplySci and illumis: Two regulatory compliance solutions joining together to benefit clients’ regulatory needs

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.

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.

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.