I recently attended a panel discussion designed to provide tips to stay on the right side of pay-to-play requirements. Asset managers that manage investments of public entities (primarily state and local municipalities and their agencies) need to avoid the strict liability standards that are triggered by crossing the line. Of course, the panel started with an overview of SEC Rule 206(4)-5 and similar rules by other regulatory bodies (FINRA, CFTC, MSRB, and several state agencies), which generally prohibit advisers from receiving compensation for two years if the adviser or any covered associated makes a political contribution to a government official.
As part of the overview, the panel discussed de minimis carve-outs ($300 if the donor is eligible to vote for the official and $150 if the donor is not eligible to vote in that election), as well as direct, indirect and in-kind contributions and different classifications of covered associations.
For asset managers that want to market to this space, here are 10 useful tips that you should consider when evaluating your firm’s pay-to-policy.
- Be intentional when defining who fits into the role of “covered associate.” If you simply categorize every associate as a covered associate, there are increased opportunities to violate the rule. However, if you have a tightly defined subset of associates, it is imperative that you keep the list updated.
- Carefully review the contribution history of new associates and associates coming on-board as a result of an acquisition or merger. Their history can come back to haunt you.
- Don’t make your internal policies more restrictive than the applicable regulatory requirements or you may end up unintentionally violating state labor and employment laws.
- Apply caution when independently researching an associate’s contribution history in order to remain a-political.
- Compare your associate names with the public databases available since the regulators are doing the same exercise.
- Be clear on which federal candidate groups are eligible to receive donations and which ones are off-limits for advisers.
- Warn your covered associates about the risk of supporting federal candidates who currently hold state positions and are therefore ineligible for receiving donations as a matter of course.
- Research applicable state laws and be mindful of other state entities which are caught in the restriction such as state university endowment funds.
- Evaluate your own facts and circumstances to identify any issues or potential violations.
- Explore ways to mediate prior donations by applying for a refund, requesting a waiver from the applicable regulator, or providing disclosure that addresses the actual or potential conflict of interest.
With election season quickly approaching, the risks of crossing blurred lines in the pay-to-play space can be monumental. One relatively small donation by a covered person, even if benign, can cause the firms to lose business or have to waive advisory fees. Additionally, violations can be a potential hit to your firm’s reputation, so it’s best to be cautious and curious upfront rather than scrambling after the fact!
If you have any questions or need help with your pay-to-play policies and procedures, click the button below to contact us.