Pay to Play – How to Protect Your Firm

By Buddy Doyle

Abstract Backgrounds

In 2010, the SEC passed the “pay to play” rule (Rule 206 (4)-5) which gives advisors a choice between allowing employees and independent contractors to provide meaningful financial support to political candidates that represent their views or earning fees for managing accounts for government entities. In general, the rule prohibits an investment advisor from providing advisory services to a government entity for two-years if the advisor or their associates have made a political contribution to certain officials of the entity. This rule does not just limit the individual ability to support a preferred candidate, but also prohibits the individual from indirectly supporting them through family members, attorneys and so forth.

So how do firms approach political contributions? It depends on the business model. Some firms don’t have clients that are municipal pension plans or similar government entities that would initiate the requirement to provide services for no compensation. In those cases, firms typically don’t require employees to report their political contributions.

Other firms use governance, risk, and compliance workflow tools like Oyster Solutions to track political contributions. There are a few important things to consider when establishing a risk assessment, policy, procedure and workflow around political contributions, including:

  • Voting District: Can the employee vote for the candidate? This rule does exempt contributions of up to $350 per official or candidate per election if the individual is entitled to vote for that candidate. Otherwise, the limit is $150 per election if the candidate is not someone that the individual can vote for. Workflows or forms should have questions that allow for both. The Commission has left open the possibility of raising these limits but did not prescribe a mechanism that would trigger such a review.  It is a best practice to  revisit the limits with each election cycle.
  • New Hires: Employees bring their contribution history with them. It is possible to be disqualified by the SEC from earning compensation if you hire an employee who made a contribution in the past that exceeds the limit. Consider a political contribution question in your pre-hire review workflows to make an informed decision about the impact of onboarding a candidate.
  • Routine Attestations: An individual does not have to make the contribution to trigger the ban on compensation. Influencing a contribution or having a spouse make a contribution can also trigger the prohibition on earning fees. Attestation workflows or forms may be used to cover the topic on a routine basis.
  • Vendor Assessments: Using solicitors or finders to help attract government business can cause certain aspects of the rule to be implemented. Adding the question to vendor assessments may be appropriate.

Now is a good time to look at your client base and decide if it is time to review and update your pay to play policies and procedures.

Whether it is writing Policies and Procedures or Written Supervisory Procedures (WSPs), Oyster will update your firm’s guidelines, and conduct a deep dive into your firm’s practices and procedures. We ensure your guides match actual business practices and provide reasonable solutions based on your unique business model. 

About The Author
Photo of Buddy Doyle

Buddy Doyle

As the CEO of Oyster Consulting, Buddy Doyle has led the charge to create a successful organization built on the belief that transforming experienced industry practitioners into consultants adds more value to our clients.