Donations are a key part of the U.S. political system. As reported by OpenSecrets, the 2020 election cost approximately $14 billion—by far the most of any election in American history. Future elections are projected to be even more expensive. Many people want to use their financial resources to make a difference in our country. However, individuals, businesses, and organizations in the financial service industry with government clients must be aware of the SEC’s pay-to-play rules.
At Aristotle, we have a comprehensive political contribution database. Further, our team provides the most accurate pay-to-play-compliance services to the full range of financial services firms. Financial professionals and financial firms must comply with the law. In this article, you will find an overview of the SEC’s pay-to-pay regulations, the risks associated with falling out of compliance, and the most effective political contribution monitoring techniques.
Political Contribution Monitoring: Why it Matters
Securities brokers, registered investment advisers (RIAs), and licensed brokerage firms are subject to some specialized professional obligations under state and federal regulations. Among other things, these rules are designed to limit conflicts of interests—particularly in regards to political contributions. Securities and Exchange Commission (SEC) regulations—most notably, the Advisers Act Rule 206(4)-5—put restrictions on the political contributions that financial professionals and financial firms can make when they have government clients.
In effect, Advisers Act Rule 206(4)-5 holds that covered persons—defined broadly in a manner that can include both individual investment advisers and financial firms—cannot donate directly or indirectly to a government official that has the ability to allocate funding or make investment decisions for a government client. When a financial professional or financial firm makes such political contributions, they are “disqualified” from receiving any form of compensation for their services from that government client for a minimum period of at least two years.
Violations of the Pay-to-Play Rules Can Lead to Serious Consequences
Investment advisers and licensed broker-dealers have a proactive responsibility to ensure that they are in full compliance with SEC pay-to-play rules and all other applicable federal, state, and local regulations. Making a donation that is in violation of SEC rules can lead to serious consequences. Notably, the SEC has been stepping up enforcement action on this issue in recent years.
As an example, in 2019, the SEC fined the Ohio based brokerage firm Ancora Advisors, LLC $100,000 for a pay-to-play violation. The SEC alleged that two of the firm’s covered associates made donations to political candidates who had influence over the selection of investment advisers for Ohio’s pension system. That system was a client of the brokerage firm. While the political contributions in question were relatively modest, the SEC still levied a significant fine.
Setting Up an Effective Contribution Monitoring Program
The risk of violating the SEC’s pay-to-play rules is significant. Among other things, financial firms could face stiff financial penalties and the loss of high-value clients. Here are some of the key things to know about the techniques for crafting an effective donation monitoring program.
Know the applicable rules and regulations
As a starting point, it is imperative that the compliance department at your firm has a thorough understanding of the pay-to-play rules and compliance best practices. Beyond reviewing Advisers Act Rule 206(4)-5, you should be sure to assess state and local regulations as well. The bottom line is that if you’re an investment professional and/or a manager of a financial services firm, you need to comply with contribution monitoring requirements if you currently have any government clients or you would like to be eligible to have any government clients in the future. In this context, the term “government client” is broad—it includes clients such as public universities.
Identify employees that are covered by pay-to-play
In addition to knowing the rules and regulations that apply, it is also crucial that your firm has identified all employees that are covered by the pay-to-play regulations. The SEC uses the “covered associate” to refer to the individuals that must comply with pay-to-play political contribution requirements. Once again, this is a relatively broad term. It includes everyone from managing partners to individual investment advisers. Even a brand new hire with no decision-making authority can still be classified as a “covered associate” for the purposes of SEC regulations.
Consider developing a self-reporting system
Brokerage firms and other financial services firms should know that not all individual financial professionals are aware of the SEC’s pay-to-play rules for political contributions. It is generally a best practice to educate covered associates of their professional responsibilities. Further, financial services firms can benefit from developing an effective self-reporting system. It is usually best to have a “pre-approval” process where individual associates self-report intended political contributions ahead of time so that a comprehensive compliance checks can be run.
Implement the technology to seamlessly monitor contributions
Relying entirely on pre-approval and self-reporting is not sufficient. The SEC and comparable state regulators do not view an employer’s “ignorance” of an individual employee’s political contribution as a valid defense against sanctions. Broker-dealers and other financial services firms should implement the technology needed to monitor political contributions databases so that any issues can be flagged and addressed as soon as possible.
Political contribution monitoring is complicated. It is crucial that financial firms have the proper system in place. There are tremendous risks associated with violating SEC regulations. At Aristotle, we provide comprehensive pay-to-play compliance services. You can request database access today.
Get Help With Pay-to-Play Compliance from Aristotle
Offering the most accurate and up-to-date political contribution database is important when gathering political data. Aristotle helps financial companies and organizations with the full range of pay-to-play compliance matters. If you have any specific questions or concerns about political contribution monitoring, we are here to help. Give us a call now or connect with us online to learn more about our services. From our primary office in Capitol Hill in Washington, D.C., we help clients with pay-to-play compliance in all 50 U.S. states.