How Do You Supervise for SEC Pay-to-Play Violations?

If you wanted more information about the contours of the SEC’s Pay-to-Play Rule, or how the SEC may enforce it, three recent Settlement Orders against large investment advisers for “over de minimis” political contributions provide some insight regarding one of the prohibitions: Contributions by Covered Associates to certain Government Officials over the specified Exception amount (capitalized words are terms in the SEC’s rule). If a Covered Associate makes a prohibited Contribution, the Rule requires the adviser to take a two-year time out from receiving fees from the relevant Government Client or Investor. Here are some reminders and takeaways, from the language of the respective Settlement Orders:

  • the SEC will enforce the Rule against exempt reporting advisers
  • the Rule can apply to contributions to a covered candidate even if the candidate does not win the election
  • the Rule can apply to candidates for federal office
  • the Rule does not require a showing of quid pro quo or actual intent to influence an Official or Candidate
  • the Rule can apply to Contributions made after the Government Entity has invested with the adviser

Interestingly, in some instances, the Covered Associates had requested and/or obtained a Returned Contribution (the Rule outlines a procedure for this). The Orders are not clear on whether a Returned Contribution could have cured the violation, or avoided the enforcement proceeding; in all instances where there was a returned contribution, there also had been other over de minimis Contributions.

If you have or may have government clients or investors, you must be monitoring contributions and payments and otherwise preventing Pay-to-Play violations. Although some of the contributions in these cases were large, any amount over the specified de minimis amounts will be a violation. (Here, we are just talking about violations under the SEC’s Rule; state and local regulations have their own requirements, and many may prohibit certain contributions of any amount.) Remember, if you are hiring a new employee who will come within the definition of a Covered Associate–either by Rule or your policy–you must confirm whether s/he made relevant contributions in the past, before joining your firm–either 2 years or 6 months depending on the new employee’s position. Take this time to do Pay-to-Play training for your firm, particularly as we are heading into mid-term election season. Ascendant Compliance Management – a CSS Company – often recommends that all contributions are pre-cleared to ensure compliance with the Rule, and we recommend compliance officers check public websites that provide candidate and donor information.

Post written by Eugenie Warner


This Pay to Play Alert originally appeared in Compliance Matters, a weekly regulatory enforcement alert provided to all Ascendant Compliance Manager (ACM) subscribers.

Also with ACM, Covered Associates and employees can preclear political contributions through the ACM Code of Ethics Module. Through ACM, compliance teams can monitor employee personal trading, political contributions, and gifts; manage policies; and distribute trainings—all through a single platform that leverages best-in-breed technology.  Contact us at info@ascendantcompliance.com or (860) 435-2255 to schedule a demo.

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