The Past, Present & Future of Political Donations
How the SEC’s ‘Look Back’ Provision Can Affect Employee Compliance
Recently, the US Securities and Exchange Commission (SEC) charged Obra Capital Management, LLC with violating the “Pay-to-Play Rule” – SEC Rule 206(4)-5 – due to a $7,150 campaign contribution made before an individual joined the firm. In today’s regulatory landscape, strong employee compliance programs are crucial to protecting companies, employees, and stakeholders, especially with this Rule’s ‘look-back’ provision, which can trigger violations from past actions.
[Definition] SEC Rule 206(4)-5 includes a ‘look back’ provision that requires advisors to check if a covered employee made a political contribution within two years before being hired. This rule still applies even if the employee was involved in a merger or acquisition.
A well-designed employee compliance program, integrated with tools for managing political contributions, can help firms avoid regulatory penalties. But don’t underestimate the importance and necessity of focusing on the “look-back” provision and its role in protecting firms from political contribution-related risks.
Getting the Best out of Your Employee Compliance Program
Effective compliance programs provide the foundation for adhering to internal policies and external regulations. Without a best-in-class program, companies risk fines and reputational damage. And when it involves political contributions, they can pose a risk when employees move into regulated roles or when new hires bring previous contributions with them.
An employee compliance program should:
- Educate employees about relevant regulations
- Monitor activities for potential risks
- Mitigate violations by fostering informed decision-making
Understanding the “Look-Back” Provision
The “look-back” provision under SEC Rule 206(4)-5 can be extremely challenging because this ‘Pay to Play’ rule applies to contributions made before an employee becomes a Covered Associate.
[Definition] Covered Associate: Any firm partner, managing member, or individual with a similar status or function; any employee who solicits a government entity for the advisor; any political action committee, or PAC, controlled by the adviser or a covered associate
Firms that fail to account for past contributions may face severe penalties, even if the contribution occurred before the individual joined the company or transitioned into a regulated role.
Incorporating Political Contribution Diligence into Onboarding
To avoid these pitfalls, companies should integrate political contribution reviews into their new hire onboarding process by taking the following steps:
- Conduct pre-hire screening to identify potential risks from political contributions.
- Educate new employees about the firm’s pre-clearance processes regarding political contributions.
- Reduce the risk of future regulatory violations through upfront diligence on past political contributions.
- Establish a thorough onboarding process to set the tone for a culture of compliance from day one.
Pre-Clearing Contributions for All Employees
To minimize risks associated with the “look-back” provision, firms should consider requiring all employees, not just those in regulated roles, to pre-clear political contributions. This ensures that any potential conflicts are identified before they become a regulatory issue. By adopting a comprehensive pre-clearance policy, firms reduce risks as employees transition into Covered Associate roles through internal promotions or job changes.
Tracking and Maintaining Records
Another essential part of compliance management is maintaining accurate records of Covered Associates and their political contributions. The SEC requires advisers to maintain these records as part of their overall compliance obligations.
Best practices for managing these records include:
- Regularly updating lists of Covered Associates
- Utilize technology to automate tracking
- Deploy employee compliance monitoring software
Long-Term Benefits of Proactive Compliance
In the arena of political donations and the SEC’s ‘Look Back’ provision, a proactive employee compliance program will not only help firms avoid regulatory penalties but also enhances trust with stakeholders. Employees who are informed and engaged in compliance practices become part of the solution and can better navigate complex regulations, protecting their own careers and the company’s reputation.
Building a strong employee compliance program that addresses the risks posed by political contributions and the “look-back” provision is essential to protecting your firm from regulatory pitfalls. Implementing pre-clearance processes, maintaining accurate records, and ensuring that employees understand their obligations will mitigate the risks of non-compliance.
For firms looking to enhance their employee compliance efforts, StarCompliance (Star) offers a comprehensive, SaaS-based software solution designed to manage employee compliance effectively. Our platform simplifies pre-clearance, recordkeeping, and reporting, ensuring that your firm stays ahead of regulations.
Learn more about how Star can help your organization manage political contributions and protect against the challenges posed by this SEC provision, safeguarding both employees and stakeholders by requesting a demo today.
When Employee Political Donations Become a Business Challenge
