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2020 Political Climate: Is your firm at risk with employee pay-to-play conflicts of interest activities?

For financial services firms, being able to effectively monitor and track employees’ political contributions is always important, perhaps never more so than during a presidential election year when political leanings and loyalties are deeply divided across the nation. Projected political media spending in 2020 is projected to top six billion dollars, a growth of 57 percent over 2019 spending. These political expenditures, of course, are designed to mobilize citizens to get involved and to donate to their favorite candidates.

An increased awareness of, interest in, and participation in the political process by citizens is ultimately a good thing. However, for financial services firms subject to strict regulatory requirements, it also requires increased vigilance.

Why Political Contribution Monitoring?

* Marketwatch   ** OpenSecrets   *** Axios

Investment advisory firms and broker-dealers without effective monitoring and recordkeeping tools run the risk of reputational harm in addition to regulatory fines and sanctions. And, for investment advisers who run afoul of pay-to-play regulations, the consequences can mean foregoing the receipt of advisory fees from affected clients’ accounts, for up to two years. Fortunately, there are industry best practices and RegTech solutions designed to keep firms – and their employees – operating firmly within the rules.

Understanding the Requirements

The specific requirements your firm must follow will vary, depending on which regulators’ rules the firm is subject to.

  • SEC. The Investment Advisers Act of 1940 was modified in 2010 with the adoption of Rule 206(4)-5, the “Pay-to-Play” rule. This rule was modeled after the MSRB Pay-to-Play rule. Covered advisers are strictly prohibited from providing payment to anyone for soliciting a government entity for the firm’s advisory services. Advisors cannot provide investment advisory services for a fee to a government entity for two years if the firm or a covered person made a political contribution to certain government officials.
  • FINRA. Broker-Dealers are subject to similar restrictions. FINRA rules 2030 and 4580, implemented in 2017, impose similar restrictions on firms and require member firms to maintain records of the firm’s and its covered persons’ political contribution activities.

Firms must also be mindful of state and local Pay-to-Play requirements. In addition to being vigilant about current contributions, firms are also subject to look-back provisions for contributions made by covered associates before they became covered associates. Because of this, compliance programs must also be structured to encompass the new employee onboarding process.

Best Practices and RegTech Solutions

If your firm serves clients that are government entities, it is critical that you have effective controls and safeguards in place to ensure compliance with Pay-to-Play rules.

Best practices start with understanding all applicable rules and assessing the firm’s risk. Re-evaluate existing policies and procedures to evaluate their effectiveness. Are controls designed to manage employees’ contribution activity at the local, state, and national levels?

Next, consider the effectiveness of the firm’s mechanisms for capturing and reporting on political contributions. What tools and processes are in place, and are they meeting your firm’s needs? An astonishing 63 percent of firms surveyed recently reported they were monitoring contributions manually, and another six percent admitted they were not monitoring contributions at all. Just 31 percent of firms are using a RegTech provider’s automated service to manage the political contribution and Pay-to-Play processes.

Political Contribution Monitoring: By the Numbersi

i Live polling of compliance personnel at ComplySci Summit 2019

How Can RegTech Help?

Implementing an automated political contribution solution makes the compliance process simpler on everyone involved: Employees, supervisors, compliance personnel, and even regulators.

The most effective RegTech products allow firms to preclear political contributions, helping avoid situations where the firm inadvertently runs afoul of the rules, only learning about contribution activity after the fact. Automated systems can also be used to verify reported contribution activity matches data captured by municipal, state, and federal entities, and to reconcile activity after the fact.

ComplySci’s Political Contribution Verification service helps keeps firms – and their associated persons – in compliance with the rules, automating what can otherwise be arduous and time-consuming processes, reducing risk.

Is Your Firm Adequately Meeting Political Contribution Compliance Requirements?

The risks are high – and growing – for firms that are not managing or effectively monitoring covered persons’ political contributions. More than 1,100 financial services clients trust ComplySci to help them manage their regulatory obligations, including managing the political contributions process and maintaining compliance with Pay-to-Play rules.

Request a demo of ComplySci’s Political Contribution Verification solution today to see for yourself how the tool could help your firm stay out of the regulators’ crosshairs.