The 2016 election season may be generating more heat than this very hot summer. Especially in a year that’s more politically partisan than most, it’s a good time to think about and refresh our understanding of the SEC Pay-to-Play rule – the one concerned with political contributions by certain advisers.
The rule, adopted and effective in the 2010-2011 timeframe, comes under the Investment Advisers Act of 1940. It’s a relatively new development that many advisers haven’t gotten their arms fully around yet. But not getting up to speed and including Pay-to-Play policies in your compliance program can be risky indeed.
The Pay-to-Play rule’s key provision prohibits a registered investment adviser from providing advisory services for compensation to a government client for two years after the adviser and/or most of its executives and employees make a contribution to elected officials or candidates.
In addition, an adviser is prohibited from soliciting advisory business from any government entity directly or through a third party, unless that party is a registered broker-dealer or registered investment adviser, also subject to pay-to-play restrictions.
Further, the rule prevents an adviser from soliciting or coordinating contributions to elected officials or candidates or payments to political parties if the adviser is providing or seeking government business.
Every aspect of the rule extends to most every employee. So training is a critical element of keeping on the good side of Pay-to-Play.
Recordkeeping is Required and Complex
Those advisers obligated under the Pay-to-Play rule must make provisions of the rule part of its compliance policies and procedures and keep records to provide proof of compliance. As outlined in the executive summary of the rule:
- The adviser’s records of contributions and payments must be listed in chronological order identifying each contributor and recipient, the amounts and dates of each contribution or payment and whether a contribution was subject to rule 206(4)-5’s exception for certain returned contributions.
- An adviser that has government clients must make and keep a list of its covered associates, and the government entities to which the adviser has provided advisory services in the past five years.
- Advisers to covered investment pools must make and keep a list of government entities that invest, or have invested in the past five years, in a covered investment pool, including any government entity that selects a covered investment pool to be an option of a plan or program of a government entity, such as a 529, 457 or 403(b) plan.
- An investment adviser, regardless of whether it currently has a government client, must also keep a list of the names and business addresses of each regulated person to whom the adviser provides or agrees to provide, directly or indirectly, payment to solicit a government entity on its behalf.
For a registered advisory firm of any but the smallest size, we’re talking about a great deal of complexity and lots of data. Good luck tracking this information manually – along with everything else you have to track and flag today to avoid infractions and enforcement actions.
That’s why we developed the Campaign Checks™ module of Financial Tracking’s all-in-one compliance software. It’s specifically designed to keep you in compliance with the Pay-to-Play rule. As far as we know, it’s the only solution that automatically flags violations to your company’s political contributions rules or provides for pre-clearance of contributions by employees, or both. Utilizing our political contributions database consisting of federal, state and municipal contributions, the Campaign Checks™ module alerts you when employees fail to pre-clear contributions, make prohibited contributions, give amounts greater than permitted, or a combination. Compliance can also use the lookup database for additional forensic testing.
Campaign Checks™ is a ‘must have’ element of capital markets broker-dealers’ compliance programs. Please connect with us for a demo to see how Campaign Checks™ and other elements of our cloud based solution can support your compliance team in this election year and every year thereafter.
To learn more about Pay-to-Play and other aspects of protecting your company from regulatory risk, and to train key executives on the basics and fine points, check out the Regulatory Compliance Association’s upcoming symposium, “Compliance, Risk & Enforcement”, taking place on November 2, 2016 in New York City at the Marriott Marquis Hotel — 42nd Street next to Grand Central Terminal. Beef up your compliance game and earn continuing education credits to boot.