Financial services professionals: Check your political contributions for compliance to avoid pay-to-play fines


In these final weeks of the 2022 election season, campaigns are ramping up urgent and last-minute fundraising efforts. Financial services professionals must not let their guard down in the face of this turmoil. The fines recently published by the Securities Exchange Commission (SEC) are a reminder that a contribution from these persons could have consequences for their employer and for themselves, according to SEC Rule 206(4)-5, the so-called federal pay-to-pay. game rule.[1] As seen in regulations recently unveiled by the SEC with four investment advisers, the most common source of a pay-to-play violation comes from an associate contributing to a governor or other chief executive, such as a mayor. . With 36 states and three territories electing governors in 2022 (not to mention countless municipal elections), the SEC holds the proverbial sign of yield with its announcement of these colonies so close to elections. These cases serve as a reminder that financial services firms should remind their professionals about compliance checks before making political contributions.

The SEC Pay-to-Play Rule

SEC Rule 206(4)-5 imposes limits on political contributions made by certain “covered associates” of an investment adviser who has a contract with a government client. However, only contributions to candidates for office who have the power to influence the government’s award of an investment advisory contract will trigger the pay-to-play rule. If a “covered associate” makes such a contribution, the investment adviser is prohibited from providing investment advisory services for remuneration to a government client for two years from the date of such contribution, and if engages in these services, it is subject to penalty. It may also be necessary to return previously collected fees.

There are limited means by which a “covered associate” can make contributions. SEC Rule 206(4)-5 permits certain de minimis “covered associate” contributions of up to $350 to a candidate for whom the associate is eligible to vote and contributions of up to $150 for other candidates.

Recent colonies

With less than 60 days to go until the November election, the SEC’s settlement of gambling payout allegations with four investment advisers neither admitted nor denied the violation and contains a total of $300,000 in penalties, ranging from $45,000 $ to $90,000. While these violations and fines appear consistent with other SEC regulations, there are three key points to remember from a compliance perspective.

  1. State and citywide offices pose the greatest risk of compliance.

Notably, three of the four settlements involved contributions of $1,000 to three different 2018 gubernatorial candidates, the other being contributions to a New York mayoral candidate for the 2021 election.

  1. The SEC rule is one of strict liability.

As Commissioner Hester Pearce points out in her statement criticizing the settlements, the pay-to-play rule is a “brutal” instrument. In law, there is strict liability under the rule – the intention of the donor does not matter, only the fact that the contribution was made to a certain official above the de minimis threshold.

  1. There is a limited possibility of repair.

The contributor in the case of the $1,000 contribution to the Massachusetts candidate sought and received reimbursement of the contribution, but to no avail. A refund of the Contribution will only void the violation if (1) the Contribution does not exceed $350; (2) the advisor discovered the contribution within four months of the date of the contribution; and (3) the contributor obtains a refund within 60 days of becoming aware of the contribution.

Although the SEC’s pay-to-play rule applies throughout the year, the months leading up to an election present an increased risk of inadvertent violations, given the momentum of campaigns and the desire of donors to support the candidates and the causes that are close to their hearts. As these regulations show, even a contribution of up to $50 on the de minimis limit can trigger a significant penalty, a reminder of the importance of proactive compliance and enforcement.


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