The 2018 midterm elections are behind us but candidates are already declaring their intentions to run for office in 2020. For financial services firms with government clients or investors, this means an increase in employee campaign contributions. Unfortunately for firms without effective monitoring programs, it also means an increased risk of pay-to-play rule violations.
Compliance policies and controls should make it simple for employees to pre-clear or self-report their intended political contributions, and for the compliance department to match and verify those contributions. Regardless of the method, tools, or solutions your firm uses, your pay-to-play compliance program should include the following elements:
- Identify all covered employees. The definition of who is covered by the pay-to-play rules is broad, hinging more on employees’ job responsibilities rather than job titles. Some firms take a blanket approach, including all firm employees in their political contributions monitoring so as not to accidentally exclude someone who should otherwise have been covered.
- Include new employees. Depending on what position a new employee holds with your firm, you may need to inquire about his or her historical political contributions for up to two years before he or she joined your firm. Your policy and monitoring procedures should include this requirement and incorporate mechanisms for your compliance team to verify compliance for new hires who are covered employees.
- Automate preclearance or enable self-reporting. Many firms have adopted a preclearance model, where employees must report intended political contributions to compliance before making such contributions. Using customized reporting forms and automated workflows with built-in donation thresholds can facilitate the pre-approval process without creating unnecessary bottlenecks. The system checks intended contributions against the firm’s policies, employee-specific donation limitations, and other established rules before automatically approving or denying the employee’s contribution request.
- Validate and verify reported contributions. Validating and verifying the contributions employees disclosed can help your firm identify exceptions and issues with reported data, giving your compliance department an opportunity to research these exceptions to clean up the firm’s data. This step can have a meaningful impact on the firm’s compliance (or non-compliance) later and shouldn’t be overlooked. Your data should be aggregated against Federal, state, and municipal data and should cover a sufficient time period to accommodate different reporting timelines.
- Generate reports on-demand. Your political contributions monitoring program should enable you to generate real-time reports of donation and request activity by employee, by department, by candidate, by geographical area, and any other groupings you deem helpful in your reviews.
The Risks of Non-Compliance are High
Both broker-dealer and advisory firms run the risk of regulatory fines and the negative publicity that comes with sanctions when their compliance controls fail. In addition, investment advisers who violate pay-to-play rules, even inadvertently, must forego the receipt of investment advisory fees for up to two years from the impacted client accounts.
Financial firms that advise or serve governments, agencies, or political figures must take political contributions monitoring seriously. Implementing tailored policies, procedures, and technology solutions designed to mitigate risk can help firms navigate pay-to-play rules with confidence.