Keeping Political Contributions Compliant

Advisor diligence in reviewing contributions is rewarded: Return of contributions less than $350 if they are discovered within four months of the date of contribution and returned within 60 days of the advisor’s discovery will not result in a two-year ban from receiving compensation for advisory services.

Two-Year Ban for Rule Violation
Except for the limited donations referenced above, an advisor, senior executive or any other personnel (“covered associate”) involved in soliciting investments from government entities, and who makes contributions to candidates or officials to influence the hiring of the advisor by the government client, may not provide advisory services for compensation to the government client for two years. Making or agreeing to make payments to any person to solicit a government entity on behalf of the advisor is prohibited, unless such person is an SEC-registered advisor or broker-dealer and a member of a registered national securities association that has adopted rules addressing pay-to-play and political contributions. The advisor can provide investment advisory services to the government entity without receiving any compensation. Prohibited contributions made by a former covered associate in the past are not forgiven with that person’s resignation or termination. Under the rule, a violation by a former employee could potentially result in a two-year ban!

Policies and Procedures
Advisors are required to adopt and implement policies and procedures governing their compliance with the rule. The firm’s policies and procedures should track contributions by covered associates; engagement by the advisor of third parties who may solicit government entities; and maintain records of compliance which would be subject to SEC examination. Procedures should include delegation of tracking employees’ political contributions to the CCO. Policies and procedures could prohibit all covered persons from making political contributions to candidates and parties as a blanket prohibitory rule. The issue here is whether broad prohibition is enforceable. It is prudent to utilize a “pre-approval process” for the CCO to screen political contribution requests. “Preapproval process” should document donor, recipient, amount, and grant of approval or rejection by the CCO. Corroborating documents should be maintained to provide to the SEC during an examination.    

Thomas D. Giachetti is chairman of the Securities Practice Group of Stark & Stark, a law firm with offices in Princeton, New York, and Philadelphia that represents investment advisors, financial planners, broker-dealers, CPA firms, registered reps, and investment companies, and a regular contributor to Investment Advisor. He can be reached at [email protected].