Political activism throughout the 2016 and 2020 elections reflected a massive increase in campaign spending. As politics in the United States becomes more polarized, and more people are tuned into the process, it’s vital that your firm takes pay-to-play compliance seriously.
The penalties for violating pay-to-play rules are severe and can include significant fines, reputational damage, and a 2-year time out period from receiving compensation advisory services. In 2018, to provide one example, the SEC fined a Texas-based venture capital firm $500,000 for prohibited political contributions. Regulators don’t take Pay-to-Play violations lightly, and it’s necessary to enforce compliance at your firm.
ComplySci recently hosted a webinar on pay-to-play compliance with Eric Swick, Director in the Financial Services Compliance and Regulation Practice at Kroll, and Anthony Parsio, CCO at Hedgeye Risk Management. Below are some key takeaways for your firm.
- Vet and Verify: While some firms’ Code of Ethics prohibits employees from making political contributions, it’s still important to run testing and training to ensure full compliance. When it comes to pay-to-play, the penalties are too serious to assume employees understand and comply with the rules.
- Indirect Contributions Count: According to Swick, pay-to-play rules don’t just apply to individuals at a firm. An employee’s spouse also fits within the scope of the regulation, and is something compliance teams need to consider.
- Donating in the Digital Age is Easy: Digital software has made it easier for people to make contributions, and harder for firms to manually keep track of them. Rather than write a check, employees today are using digital software to donate with the click of a button. This, combined with increased political participation, means that your firm must have a robust solution to proactively identify and address non-compliance.
“It’s hard to disprove a negative unless you take some affirmative action. Someone could say, ‘there’s no conflict here,’ and that’s probably the case. But to instead say, ‘There’s no conflict here and we’ve vetted and verified’ is a better approach.” ~ Anthony Parsio, CCO, Hedgeye Risk Management