Name: 2026 Midterms: Navigating Pay-to-Play Risk
Uploaded: 2026-03-12T15:51:05.989Z
Duration: 35 min 8 s
Description: 2026 Midterms: Navigating Pay-to-Play Risk

Transcript for "2026 Midterms: Navigating Pay-to-Play Risk": Alright. Appreciate everybody joining today. We got a good one for you today on pay to pay compliance. I'm Trent Lanning, product marketing manager here at Comply, and I'm joined by Lydia Gabbard. Lydia, would you like to introduce yourself? Sure. Thanks, Trent. As Trent was saying, I'm Lydia. I'm the director of the managed services team here at Comply. The managed services team does various ad hoc compliance tasks for our clients, one of which is political contribution, administration, and review. So I think it makes sense for me to join this webinar. And, yeah, back to you, Trent. Awesome. I appreciate it, Lydia. Yeah, folks. So look, political contributions are almost certainly going to be increasing amongst your employees. We're on the precipice of another incredibly large and really monumentous election season twenty '26, but by most accounts is going to break records for the midterm. So we'll dive into some more of that in a second. First, I did want to just give a quick overview of comply. We give firms a complete view of compliance from daily employee oversight to firm wide governance. We bring compliance technology, consulting services, and education together in one place with the goal of helping you build a stronger compliance program. Now, today's agenda, we're gonna be covering the why behind pay to play rules. We're gonna provide insight into the upcoming midterms, cover what key rules require, talk through challenges and enforcement examples, and close practices to help you prepare. Now setting the stage. To begin, I think it's really important to understand the genesis behind these rules. Pay to play rules exist to protect the integrity of public investing. It's about avoiding situations where advisors receive favorable treatment from the government, particularly via contracts as a result of making political contributions. It's about mitigating conflicts of interest and ultimately preserving public trust. And jumping into some of the data, some of the interesting findings for the twenty twenty six midterms. First of all, now is as good of a time as ever to make sure you've got your ducks in a row when it comes to monitoring the political contributions of your employees. 2026 is shaping up to be a record setting election season. Ad spend will reach new highs, employee activity including contributions is definitely going to spike. And, you know, you look at the numbers, we have multiple high profile senate seats, plus thousands more seats at the state and local level that'll be up for grabs. It's a big election season, and, you know, that's why we're here today, to provide some insight and help you prepare. So the midterms are coming. When are we going to see employee activity start to spike? Well, it might already be. It is only going to continue to increase over the next several months. So what we're looking at here is data extrapolated from Comply's political contributions monitoring solution. From the last two major election cycles, we see contribution spikes around March, midsummer, and November. March is big because the primaries are starting to ramp up. Campaigns want to show early fundraising strength, so it's really important they get off get off to, like, a really strong start. We see another peak in midsummer. Around this time, most states have wrapped up their primaries, and the election fields have become much more clear. This is when campaigns go from inner party politics to usually red versus blue. And then there's November. These are the last minute contributions, donors who are really invested, give one last push to their preferred candidates. And of course, those candidates are making their last urgent donation, please. Media coverage, of course, too is a big one. It's hard not to see political coverage in early November, which can get even relatively disengaged people interested. And then a note about the difference between 2022 and 2024. So in the twenty twenty two midterms, we saw more clear spikes in particular months, whereas 2024 was more evenly distributed across the year. This tracks because presidential election years have longer media cycles and broader donor engagement across the year. I'd expect this year's midterms to look more like the 2022 breakdown with more defined spikes during early primaries and the lead up to general elections. Now pivoting to some of the rules, some of the key rules at play. Lydia, did you wanna take the lead here on rule two zero six four dash five? Yeah. Time for some of the fun compliance stuff. So the SEC rule 20,645, that's the pay to play rule. It's the one that most of my clients are familiar with for the most part. So this is just kind of a high level overview of what this rule looks like. Generally speaking, so we cannot you cannot, as a covered associate, donate to a political campaign or a PAC to win or keep government clients. So breaking that down a little bit, who is a covered associate? These are Executive Officers or managing members of Registered Investment Advisors, employees of Registered Investment Advisors who solicit government clients, and PACs that are controlled by the advisor or covered associate. And just backtracking a little bit, just to clarify PACs, I mean Political Action Committee. And then what triggers a timeout? So a contribution to an official or a candidate that can influence the selection of the advisor will trigger this timeout. And just so you all know, the contribution does not have to be large. There does not need to be proof of intent here, proof of intent to influence the selection. It's a strict liability thing. No quid pro quo necessary either. If the official has influence over the decision, the rule is triggered. So let's move on over to the consequence. There are other consequences that we'll also get into, but the major one under the SEC's Pay to Play Rule 20,645 is this two year prohibition on receiving compensation from the government entity that there is a donation that impacts. So again, intent doesn't matter here. Like the consequences still are going to be applicable. And something that I definitely want to flag that I've talked about with a lot of my clients is that indirect contributions still count. This is typically I always do like one or two examples here when I'm talking to my clients, but one that I could think of for an indirect contribution is a covered associate like let's say, a managing partner of your registered investment advisory firm donates to a state level PAC. And then the primary purpose of that PAC is to finance a state officials campaign. So let's say like a state Treasury campaign, the State Treasurer. And then the State Treasurer has the authority to select an Investment Advisor for a State Pension Fund. And the advisor, going back to the Registered Investment Advisor, manages assets for that State Pension Fund. So in this case, the rule would be triggered and if the covered associate donated above certain de minimis thresholds and triggered this Rule 20,645, there would be a two year time out period, meaning that the advisor cannot receive compensation from any State Pension Fund assets. So no, you can't collect a fee off of any of the State Pension Fund assets. So that's really important to keep in mind. And one other thing that I'll flag for you is that I mentioned these de minimis thresholds. These exceptions allow Advisors to make small political donations, usually 350 if the adviser can vote or the the covered associate can vote in that election, or a 150 if it's to a candidate that they cannot vote for. And usually that's below the pay to play penalties, but that's just under this federal rule and we'll move on to state and local, which could be a little stricter later in the presentation. Right. Appreciate it, Lydia. Yeah, think, you know, folks probably most familiar with 02/1945, but there are certainly more. So we'll jump into one that's especially relevant for the broker dealers in the audience. MSRB rules G37 and G42, these address the same core concern as the SEC rule. Some subtle differences here, but first, who these rules apply to, probably the most obvious difference, they apply to broker dealers engaged in municipal securities business and to municipal advisors. They also extend to individuals inside the firm, especially MSPs and MAPs. Next, what triggers a timeout? So a timeout here is triggered, similar to the SEC role, a political contribution, but in this case to a municipal official who can influence the award of municipal securities or advisory business. As with the SEC rule, the contribution doesn't need to be large, and it doesn't require intent. If the official has influence over the decision, the restriction applies. The consequence is significant. Once triggered, the firm faces a two year prohibition on municipal securities or advisory business with that municipal entity. You'll also see a note at the bottom regarding Rule G42. This is important because it reinforces that pay to play controls are not standalone. Municipal advisors are required to identify, manage, and document conflicts of interest, including political contributions as part of their fiduciary and supervisory obligations. I'm going to jump now to where things can get really tricky. State and local pay to play rules. These often go further than federal requirements. They can be imposed by states, counties, cities, public pension plans, and other government agencies. In some cases, they're tied to specific industries or even specific contracts. That means firms aren't just dealing with one standard, they're dealing with many. And second, why these rules are often more restrictive? Well, state and local regimes frequently use broader definitions of who's covered, they might apply lower or even zero de minimis thresholds, and they might extend look back periods. Some also link restrictions directly to things like bidding, contracting, or licensing activity. So what does this mean for firms? Well, federal compliance alone is not sufficient. Firms need to assess pay to play exposure by jurisdiction because local rules can independently restrict business even when the federal rules are satisfied. Lydia, anything else you would add there? No, I think you covered it all here. I think the main thing to double down on is that there could be a mismatch between like a federal or a local, state, or municipal type of rule. These rules are really tricky. I do not purport to be an expert at the state and local level. It's important that you're doing your due diligence here from a compliance perspective. And I can get more into that later on in the webinar, but no, Trent, I think you crushed all that. Awesome. Well, me kind of just alluded to this, but let's talk about some maybe additional pain points here. Pay to pay compliance can be very tricky. It can be very fragmented. And again, federal, state, local jurisdictions can be incredibly difficult to follow. And then enforcement, like it's not necessarily just bad actors. It can also just be, you didn't document things correctly. You didn't supervise correctly and you don't have a record of monitoring those contributions. Did want to jump here quickly to what you had just mentioned, the federal versus local compliance mismatch. Did you want to touch again a little deeper on what that situation might look like? Yeah, absolutely. So there could be, like I was saying, I am more familiar with the SEC's rules, but there could certainly be an issue here. And we talked about those de minimis thresholds under rule two zero six four five a few slides ago, and that's under the SEC's rule. And then Trent also touched on the FINRA rules as well. So you have this federal level that applies to federal registered investment advisers. But then also, you could potentially trigger some state and local rules. A common scenario that we may see is that a contribution is allowed under these SEC de minimis rules. So meaning 350 if you're able to vote in that election, and then a 150 if you are not able to vote in that election. But it might trigger another state's rules as opposed to just at the federal level. And this is something that I've seen with my clients sometimes. Yeah, so if this happens, you could I want to go back to the time out period because you could lose eligibility for being compensated for local government business like the pension plan plan is what I usually go back to. And then also, you could trigger some sort of state or local rules penalty in this situation as well. So I know Trent, you listed an example here, like in New Jersey, a $300 contribution may be under the SEC limits, but they can trigger reporting or disqualification rules for firms seeking local government contracts. And then also, we included the Connecticut example of state contractors and principals being generally prohibited from making contributions to certain state candidates. So as you can see, the state rules can be a lot stricter than that more general SEC prohibition that we talked about earlier. Yep, definitely important to ensure you're dialed in and understand what those requirements are at your particular state or local level. Really, anywhere where you're conducting business, you need to ensure that the contributions in that area are being monitored. Speaking of just, like, zooming out a little bit, like, what makes this so difficult? If you're watching, you might have a good idea. Some of these might resonate with you as I'm kind of listing them off. But some of the things like when we see contributions made without preclearance, indirect activity from spouses or packs that maybe isn't captured, manual tracking that's burdensome across all of those different jurisdictions. I think the key point to kind of touch on when we talk pain points is the contribution itself isn't the only risk. Your firm also needs to know that it happened in the first place. Lydia, anything that you would add there? Yeah. Something else that I see just like practically speaking that is a pain point for the compliance officers that I work with is where this political contribution data is housed. So if you're trying to track down a covered associate at your firm who may have, done some political contributions that may or may not trigger the pay to play rule. You're doing your due diligence here. You have many, many databases to have to potentially look through. It's not just the fec.gov that a lot of people know about. It's many databases. So just the search itself is difficult. And, you know, if you have someone with a relatively common name like a John Smith, for example, it might be hard to track down what that individual's political contributions are because there are a ton of John Smith's in Raleigh, North Carolina, you know, wherever you are. So they're just the diligence aspect. It's really important, but doing that can also be difficult. And I think I'll talk about this later, but I would just want to bring up now because it's always important is documenting any of your due diligence here. But we'll talk about that in the compliance practices. But if I could bring it up seven times, I would because it's that important. Definitely. Yeah, that makes sense. Why don't we actually kind of break down some recent cases, like some actual enforcement actions where firms did misstep. First one being an SEC example. So this is for an SEC case with an RIA. The commission found that the firm violated two zero six four zero five, the pay to play rule, by continuing to receive compensation from a government entity client during the two year time out period. Here's what makes this case particularly interesting. The triggering contribution was not made while the individual was employed at this firm. It was made before they joined. But once hired into a covered associate role, that prior contribution became the firm's problem. Under the SEC rule, the look back provision applies to certain new hires. If a covered associate made a contribution to an official who can influence the selection of investment advisers, the firm may be subject to a two year compensation ban. This is exactly what happened here. The firm continued to provide advisory services and received compensation during that blackout period, and the SEC imposed a cease and desist order. They censured the firm and assessed a $95,000 civil penalty. Lydia, what kind of realities is this enforcing? Like what do folks need to know about a case like this? I think this highlights the importance of your due diligence during onboarding. So pre hire due diligence is not optional. Your political contribution history for a new covered associate that is coming on board your firm should be reviewed, before you even begin that onboarding process. And I think it also highlights that the risk does not begin on the employee's start date. This can follow an employee right in the door. And I think it also highlights the intent aspects that we talked about, and I'm just kind of piggybacking on what you were saying there, is the intent is not what they're looking at. It's just the reality of what the contribution was and what that effect could be on the firm. And yeah, this was an unfortunate one, but a good example to use because it highlights the importance of that due diligence at the beginning particularly, and then also ongoing due diligence, making sure you're checking on employees' political contributions. Right. Makes sense. Due diligence is incredibly important, especially during the onboarding process. Jumping now to a FINRA example. So this is a 2025 FINRA enforcement action involving a firm that was a broker dealer and investment bank. The case centers on MSRB rule G37, which we covered just a few minutes ago, and specifically supervisory failures. So FINRA found that this firm did not maintain written supervisory procedures reasonably designed to prevent violations of the rule, particularly rule G37's political contribution requirements. Importantly, this was framed as a supervision issue. Also in this case, FINRA concluded that the firm was not adequately monitoring and reporting on political contributions. The result here was a $90,000 fine and a formal censure. Lydia, any comments on this one? Yeah. So, just kind of doubling down on what you were saying, FINRA expects that you have very specific procedures, your internal compliance manual, your policies and procedures in place for this rule. And, these must be enforceable and operational and specific. And the monitoring of your program must be structured and documented, that keyword, making sure that you're documenting everything. So that in the event that the regulators come in to examine you or if they ever have questions, you should be able to show how you identified, escalated, and reviewed these contributions. So really important to have solid policies and procedures in place as a broker dealer as well. Right. Makes sense. We've covered the rules, kind of the landscape as we head into the twenty twenty six midterms, some enforcement examples, some pain points along the way. We're not going to close this thing out without covering some best practices as well. Lydia, why don't you take us away here starting with one of the most core things, which is good policies and procedures. Right. And we've talked about these rules and these rules are lengthy and they're tough. And I know that all of the compliance officers that I talk to want to get down to like the specifics of how do I practically ensure that my firm is complying with these rules to the best of our ability. And I think that just generally speaking, even before we get into these policies and procedures, that proactive compliance is so important. I think having policies and procedures in place shows that you have a proactive compliance program. So I think that's really key and it also demonstrates a culture of compliance and those are kind of buzzwords that you'll hear regulators use a lot. They'll be like, Show me how you demonstrate a culture of compliance and here we go. We have these really detailed and clear policies and procedures that the covered associates at our firm can follow. So that's really important. And generally speaking, they also help to prevent risk like financial risk to your firm if there's a time out period that somebody accidentally triggers because they're not aware of these policies and procedures. Reputational risk if there's some sort of fine or censure on the firm. So all of that is really important. And in the policies and procedures, here are some of the things that we typically see like clearly defined covered associates and contribution limits. These should align with the rules at the federal level and then at any state applicable any applicable state level. You'll also want to define ensure that those align with the definitions that you have in your policies. And you'll we don't like to fear monger, but it's also really important that you talk about this two year look back period because hey, you want to make money off of government clients that you're managing their money. So make sure you address that in the policies and procedures too. And there should be an escalation procedure that you include in there. Some other stuff that I see, I'll see like very clearly outlined certifications that are in the policy. So for example, most of my clients will do either an annual certification and then also a certification during onboarding. And what I mean by that is you are basically providing a list of political contributions or you're certifying that you have not contributed to any campaigns or packs or anything like that. And that's also what you should include in your policy is there should be some verbiage about packs and super packs and what contributions are allowable there, generally speaking. And then another big thing is pre clearance, but I think I'm talking about that on the next page a little bit more. Yeah. So pre clearance, I guess just since we're moving on from policies, really want to reiterate the importance of having those clear policies and procedures that folks at your firm can follow tailored to your firm but also making sure that they reflect the rules at the federal and or state level. And something that is really good and demonstrates some proactive compliance is having pre clearance processes in place. So for your covered associates, ensuring that they're getting any sort of political contribution pre cleared ahead of time. This process should be as simple as possible for employees. Your firm pre clearance procedures, whether it's like getting trades pre cleared or whatever you all do at your own firm. Oftentimes, my clients will follow the similar process for the political contribution stuff. And I also one thing I want to flag here that maybe I should have talked about on the last slide, but I think it's worth bringing up is sometimes these procedures will also include spouses because of indirect triggers of the political contribution rule. So I talked all about how you can accidentally trigger this rule. Well, a spouse's contribution could also accidentally trigger the rule if it's like an indirect way of your household contributing to someone. So just wanted to flag that in your policies. You might want to also include spouses and also have them follow the same pre clearance processes here. Just thought about that. But yes, make sure you're maintaining that clear approval and denial documentation and your reasons why so that you have something defensible in case the regulators come in and examine you. You can say, here's why I approved this political contribution and here's why I didn't. And you also, it just shows that you know what the rules are, you're doing your due diligence, and you're doing your best here. So pre clearance is really great, helps to cover the CCO, and it also makes your testing and ongoing monitoring and stuff much easier because you have a list. And then, perfect! I didn't even mean to do that transition, but here we are. Ongoing monitoring is so important and documentation. I mean, if you look at the SEC's Books and Records rule, which is a whole other beast, it's super long, talks about how important documentation is of all of this stuff. So just wanting to flag the documentation aspect again. But ongoing monitoring. I talked about this earlier. We don't need to get into it much more, but identifying the relevant databases. FEC, there are more databases than just fec.gov, which is the one that most people think of here. Be sure to also check the state and local databases. Be sure that you're looking for covered associates and that you know who fits into that covered associate bucket because you have good policies and procedures in place, going back to that. So that will help you with your ongoing monitoring. Regularly monitoring contributions and comparing these against pre clearance requests. Making sure that when you do that testing, meaning that you're looking in these databases and you're searching for covered associates, you compare against your pre clearance requests or your other policies and procedures, anything else that's in your policies and procedures that you're required to do. Something that I'll say here is filtering can be pretty important and that's something in our system. We have a political contribution system that will scour the databases and you can filter by the employee's name and the address and of their employer, like all kinds of things to help you in your search if you do have someone with a more common name. So just wanted to flag that you can do that. And then, investigating and documenting issues. If you see any issues, you're going to need to look into this. You're going need to talk to the employee, see what happens, see what you need to do to remedy, see if there is this two year trigger. And if you want to be extra cautious, you're not even sure but you think that you shouldn't accept a fee for two years, Those are the kinds of discussions that you'll want to have with your Chief Compliance Officer and any sort of outsourced consultant as well. And again, just finishing up by saying document. All of this is subject to Federal documentation rules, so just make sure that any sort of testing or reviewing or ongoing monitoring is documented with either screenshots or whatever internal procedures you have in place for documentation. All right, Lydia. I appreciate you imparting us with some of your wisdom there from the best practices angle. I mean, I do think this is a good opportunity one more time to just let folks know that like, comply can help. Totally understand. If you're currently doing political contributions without a dedicated tool, my goodness, that is really difficult. We understand because it's not just as Lydia alluded to the FEC database. If you're doing business, you know, at various state or local levels, we're talking dozens, potentially hundreds of different databases to monitor. Manually, that's incredibly difficult. It's why we have a dedicated political contributions verification solution that aggregates all of those different data points, allows you to search by employee name, zip code, all of the various details to find the correct records and to really establish an ongoing monitoring system. So when a donation or a contribution is logged, like we identify it, we notify you if something is out of the ordinary, we have alert setups that you will receive notification. It's a really comprehensive solution to ensure that your pay to pay compliance is updated, streamlined streamlined, and essentially just much easier for you. We also have the managed services component from Lydia's team. So it's not just the technology. We can also help you with other review process as well. Lydia, do you wanna touch one more time on kind of what your team can help with in that regard? Yeah, absolutely. And as I mentioned earlier, my team, the managed services team, handles ad hoc compliance types of services within our various different software platforms, one of which is political contribution administration. So my team will go into our system and help you with that ongoing monitoring aspect of your compliance program by searching for covered associates, political contributions, making sure that you've properly documented those contributions, and also helping with various different administrative tasks like the filtering that Trent was talking about. My team can be like a hand holding service within the platform that can help you with this large political contribution monitoring duty that you have. So thank you folks for taking some time and joining us today. As we discussed, like we are on the precipice of another really huge election season, and now is the best time you're gonna have this year to make sure that your pay to pay compliance is dialed in. So it's a great opportunity to just pause, reflect, see what kind of controls you could possibly improve within your program. Hopefully, we helped provide some insight today. If you have any questions, if you were in the chat, if you were asking things and we weren't able to get back to everyone, please feel free to just reach out to me directly. My email is tlanningcomply dot com. That's t l a n n I n gcomply dot com. Happy to help answer questions, happy to point you in the right direction and ensure that you're comfortable and confident as we approach the twenty twenty six midterms. Thank you everyone for joining today and we hope to see you in another session real soon here. So thank you. Bye. Thanks.