With another election season upon us, it is an appropriate time for compliance and other officers for financial services firms to assess whether their compliance policies and procedures fully capture activities that could be covered by various political law regimes.

Those in the financial services sector run up against political law regimes on a daily basis, and recent changes in campaign finance law provide some level of uncertainty as to what can and cannot be done (i.e., super PACs, joint fundraising committees, aggregate limits or lack thereof). Besides federal campaign finance limits, firms will need to keep track of:

  • State and local campaign finance limits and disclosure obligations; 
  • Federal pay-to-play regimes that restrict campaign contributions from certain employees of municipal securities dealers, investment advisers and swap dealers; 
  • State and local pay-to-play regimes that restrict contributions from those doing business with that  state or locality; 
  • Federal, state and local gift and entertainment restrictions that those doing business with state and  local government officials and employees face; and 
  • Federal, state and local lobbying registration and reporting obligations and restrictions.

Numerous federal regulators, including the Federal Election Commission and the U.S.Securities and Exchange Commission, and state and local bodies will be responsible for enforcing their own sets of rules and regulations, thus creating a patchwork of obligations that are inconsistent, and at times, conflicting. With that said, regulators have stated in the past that good compliance policies are the best defense against an enforcement action, should one be triggered.

Private equity firms, hedge funds and other asset management companies should have compliance policies that address, in detail, the issues described above. Yet, day-to-day monitoring is necessary to make sure employees’ actions comply with the policies and do not run afoul of the law.

Even inadvertent violations may still trigger prohibitions and violations, with consequences that may severely hamper business or even result in criminal prosecution. Further, not only is there legal risk involved, but headline risk as well with strong reputational repercussions.


As a general matter, pay-to-play rules restrict campaign contributions to certain officials (or candidates) from firms, and their key employees, that have — or plan to have — contractual dealings with a government entity. Depending on the election, multiple pay-to-play regimes, including federal, state and local rules, could apply to a firm and its employees.

Under federal law, pay-to-play rules restrict the political activities of those in the financial services sector, and a single violation could result in severe consequences. Municipal securities dealers, investment advisers and swap dealers are governed by MSRB Rule G-37, SEC Rule 206(4)-5, and CFTC Rule 13.451, respectively.

For investment advisers, Rule 206(4)-5 subjects an investment adviser to a two-year ban on compensated investment advisory services if the adviser, or a covered associate, makes a contribution (above a de minimis amount) to a covered official. Determining who are covered associates and covered officials is key to ensuring effective compliance.

Rule 206(4)-5 includes in its definition of “covered associate” general partners, managing members and executive officers (or others with similar status or function); employees that solicit a government entity for the investment adviser, and any person that directly or indirectly supervises such an employee; and any political action committee controlled by any person previously described.

On the other side of the equation, a “covered official” is defined by the office that person holds or seeks and if that office “is directly or indirectly responsible for, or can influence the outcome of, the hiring of an investment adviser by a government entity,” or “[h]as authority to appoint any person” that can do so. See 17 CFR § 275.206(4)-5(f)(6). The SEC has not published a list of offices that would qualify, so individualized analysis is necessary to determine whether an incumbent or candidate would meet the definition.

If a contribution is made by the investment adviser or a covered associate above the de minimis amount to a covered official, that investment adviser is subject to a two-year ban from receiving compensation for its investment advisory services to the entity of that covered official. Some advisers choose not to do any business with that entity, and instead make campaign contributions. If the adviser receives compensation, however, it is in violation of the rule. Many advisers, however, want to avoid such a ban due its negative impact on business.

Compliance officers should be aware of the entities and candidates to whom an employee seeks to make a contribution. Just because the election happens to be federal, as opposed to state or local, does not mean that Rule 206(4)-5 does not apply.

For instance, a U.S. Senate candidate may be an incumbent state treasurer, and therefore, a covered official for purposes of 206(4)-5; and a contribution by a covered associate above the de minimis amounts could result in the two-year ban or lead to a violation of the rule.

Other violations can result when the adviser or covered associate: solicits contributions (raises funds) for certain covered officials or state or local political parties, or attempts to circumvent the rule by, for example, making a contribution in another’s name or transfers money to a PAC so that it may contribute to a covered official.

Finally, 206(4)-5 creates a structure that forces an adviser to put in place strict onboarding procedures so that new covered associates, whether new employees or current employees in new positions, do not subject the adviser to any bans or violations based on activities during the look-back period prior to that individual becoming a covered associate.

Investment advisers, however, not only have to monitor compliance with Rule 206(4)-5, but also the various state and local pay-to-play rules. The applicability of these rules will frequently hinge on whether the entity is doing business or seeking to do business with the jurisdiction, therefore creating a wider group of entities being covered. In other words, state and local pay-to-play rules may cover not just those in the financial services industry, but possibly any entity that seeks to do business with the jurisdiction.

Compliance challenges can arise when these regimes overlap, thus creating seemingly conflicting limits and categories of individuals covered. For example, investment advisers that do business with New York City would be covered not only by Rule 206(4)-5, but also by New York City’s Doing Business limitations, which posed compliance challenges for employees of firms seeking to contribute to candidates running in New York City’s 2013 elections.

Crafting the right pay-to-play policy is essential to ensure compliance, and while there is no one-size-fits-all policy, a hallmark of any policy should be mandatory pre-clearance of campaign contributions by, at a minimum, those considered covered associates under the federal pay-to-play rule.

Campaign Finance

There are additional campaign finance considerations that firms need to be aware of when either their employees or officers become active in electoral politics. The type of election will determine what set of laws apply, and there are various limits and disclosure obligations depending on the jurisdiction.

First, a corporate resource policy should be in place that outlines the restrictions surrounding campaign activities, in order to prevent against incidental in-kind contributions. The policy should set out the parameters surrounding what employees are and are not allowed to do during the workday and list the restrictions of using corporate resources such as computers, email and phone.

Second, it is not uncommon for those at financial services firms — especially those in leadership positions — to be politically active and wish to contribute to candidates, parties and PACs that support their philosophies. Additionally, many may be asked to contribute to — or fundraise for — joint fundraising committees, which are comprised of several other candidate or party committees and solicit a single check from donors that are divided to its committees based on a previously disclosed formula.

These PAC and party contributions should be scrutinized to make sure the PAC will not pass along the contribution to covered officials. Obtaining letters from PACs and parties that represent that the entity will not make such contributions is essential, and any solicitation activities should keep in mind 206(4)-5 prohibition on soliciting contributions to covered officials or state or local political party.

Third, independent expenditure-only committees, otherwise known as super PACs, are now spending vehicles in campaigns. A super PAC can raise unlimited amounts and spend unlimited amounts on independent expenditures, since it makes no contributions to candidates. Contributions to these entities should still be pre-cleared, and firms should obtain representation letters to ensure compliance with both campaign finance and pay-to-play laws.

Fourth, depending on the nature of the election, state or local campaign finance limits and disclosure obligations will apply. Frequently, for those in the financial services industry, state and local elections will also have pay-to-play implications. In these cases, there will be multiple sets of limits that may apply depending on the status of the individual (i.e. covered associate), and it further demonstrates the importance of contribution pre-clearance.

Gift and Entertainment Restrictions

Funds that solicit public pension systems typically interact with system officials, and those interactions may occur during meals or entertainment. If the firm seeks to pay for the expenses of the government employee or official, gift and entertainment restrictions will be implicated, and vary by state, and also within the state.

On top of the state or locality rules, public pension systems frequently have gift rules in their codes of ethics that apply as well. Finally, in many jurisdictions, there is a separate set of prohibitions on gifts from those registered as lobbyists within that particular jurisdiction.

Various disclosure obligations may also apply to the government official or employee, and at times, to the firm giving the gift, if that firm is doing business (or seeking to do business) with the jurisdiction or public pension system.

Compliance policies should take into account the differing rules, rather than just setting a limit on gifts (including meals) and entertainment. For instance, such a flat limit in a compliance policy may still exceed the limit of the jurisdiction (see the discussion below regarding lobbyist prohibitions).

Further, employees should not rely on the advice of the government official since there are nuances that may cause that advice to be incorrect. Running afoul of these rules can be a violation of law and could also prohibit your entity from doing business with the jurisdiction or system.

Lobbying Compliance

Certain jurisdictions consider solicitations of services or products (otherwise known as procurement lobbying) as lobbying, and while there are frequent exceptions, solicitation activities could result in the need for financial services entities (or its employees) to register under the lobbying law.

As expected, each jurisdiction has its own set of lobbying rules — including the thresholds for registration, reporting requirements and prohibitions. Yet each jurisdiction also has various exceptions that may apply, which would alleviate the need for registration (i.e., responding to a request for quotation). It is possible that a conversation over dinner could trigger a lobbying regime, so it is beneficial to know the rules of the jurisdiction in advance to fully understand the thresholds and obligations.

Becoming a registered lobbyist (the terminology will change depending on the jurisdiction — at times the individuals will be lobbyists and the firms will be lobbying entities) can bring significant restrictions. For instance, in Chicago, those registered as lobbyists with the Board of Ethics are barred from making contributions to Mayor Rahm Emanuel’s political fundraising committee. See Executive Order No. 2011-02.

In New York City, while there is a $50 gift limit otherwise, registered lobbyists (or those that are required to register) with the city are subject to an outright gift prohibition. Note that both limits contain various exceptions.


Political law regimes can pose unique challenges for financial services firms. It is vital for firms’ compliance policies to address these issues and for those responsible for compliance to understand the various jurisdictions’ rules before interactions with government officials. These proactive steps will not only help to ensure compliance, but also to make sure that the candidates, and not your firm, get headlines this election cycle.