Harris-Walz Campaign Contributions May Trigger Pay-to-Play Rules

With the selection of Minnesota Governor Tim Walz as the 2024 Democratic Party candidate for Vice President of the United States, federal, state, and local rules on political contributions come into sharp focus.

Investment advisers

Rule 206(4)-5 (the Rule) under the U.S. Securities and Exchange Commission’s (SEC’s) Advisers Act prohibits registered investment advisers, exempt reporting advisers, and foreign private advisers from providing investment advisory services for compensation to certain state and local “government entities” for two years after the adviser or a covered associate of the adviser contributes to or solicits campaign contributions for a person seeking state or local government office, whether or not that person presently occupies the office.

“Covered associates” under Rule 206(4)-5 include:

• Any general partner, managing member or executive officer, or other individual with a similar status or function
• Any employee who solicits a government entity for the investment adviser and any person who supervises, directly or indirectly, such employee
• Any political action committee controlled by the investment adviser or by any covered associate

Government entities include any state or political subdivision of a state and encompass anything from a large state pension plan to a university endowment.

Significantly, the Rule does not apply to advisory services performed for the federal government, federal government officials, or candidates for federal office. However, Governor Walz remains an official of Minnesota state government, bringing contributions to his campaign squarely within the rule.

Because Kamala Harris and Tim Walz are running a joint campaign, advisers and their covered associates cannot contribute to the campaign for Kamala Harris without subjecting the adviser to the Rule’s restrictions. On the other hand, contributions made to Kamala Harris before the announcement of Tim Walz as her running mate on August 6, 2024 do not trigger the rule.

De minimis exceptions

The Rule exempts contributions of:

• $150 or less to candidates for whom the donor is not entitled to vote
• $350 or less to candidates for whom the donor is entitled to vote

Fixing errors

Rule 206(4)-5(b)(3) expressly exempts advisers from the Rule’s prohibition on accepting compensation if the adviser detects an improper contribution of $350 or less within four months after it was made and the contribution is returned within 60 days after it is discovered, provided the adviser:

• Has not already corrected two other contributions that violates the Rule within that calendar year or,
• If the adviser has more than 50 employees, the adviser has not already corrected three such violations.

Advisers that do not qualify for this exception can apply to the SEC for an exemption under paragraph (e) of the Rule if the adviser can demonstrate that they:

• Adopted and implemented reasonable policies and procedures to comply with the Rule
• Took reasonable steps to have the contribution returned
• Has taken other remedial actions if appropriate

SEC enforcement

The SEC recently emphasized the importance of the political contributions rule with a 2024 enforcement case against an adviser that continued to collect advisory fees on two closed-end funds purchased by (coincidentally) the Minnesota state investment board nine and ten years prior, after a covered associate made a political contribution to a candidate for that board. Although the adviser had no plans to solicit further business from the state board, the SEC found that continuing to accept advisory fees after the contribution was made violated the Rule.

SEC examinations

While SEC examinations in recent years have focused less on compliance with the pay-to-play rule, now that Governor Walz has joined the race, the SEC is likely to make compliance with Rule 206(4)-5 a higher examination priority in the coming year.

Political contributions by other financial service providers

Broker-dealers, municipal advisors, swap dealers, and security-based swap dealers are also subject to federal regulations on political contributions, including the Municipal Securities Rulemaking Board’s (MSRB's) Rule G-37 regarding municipal advisors and registered broker-dealers that underwrite municipal securities; Financial Industry Regulatory Authority (FINRA) Rule 2030 that regulates broker-dealers soliciting government investors for affiliated or unaffiliated investment advisers, and Commodity Futures Trading Commission (CFTC) Rule 23.451 regarding political contributions by swap dealers.

State and local laws

Advisers should also check the laws of the states and local governments where they do business. At least 19 states, including Colorado, Connecticut, California, Hawaii, Illinois, Indiana, Kentucky, Louisiana, Maryland, Nebraska, New York, New Jersey, New Mexico, Ohio, Pennsylvania, Rhode Island, Vermont and West Virginia, and many county and local governments, including Chicago, Philadelphia, Denver, New York City, and Los Angeles have adopted laws governing political contributions, and their requirements vary considerably.

Our guidance

Firms should review their policies and procedures on political contributions, ensure that their lists of covered associates are up-to-date, and remind their employees and directors of their responsibilities regarding political contributions.

Firms may want to consider a targeted notice to their covered associates asking whether they contributed more than $350 to the Harris-Walz campaign on or after August 6, 2024 (or more than $150 for covered associates not entitled to vote in the election), and if so, take action to have these contributions canceled.

How we help

The compliance environment has never been more complex or demanding. We can help you to navigate the regulatory landscape while considering your firm’s unique compliance requirements.

• Our award-winning ComplianceAlpha^® technology automates checks of public databases for employee political contributions. This tool helps monitor compliance, communicate policies, manage preclearance requests, and track political contributions efficiently. Our managed services experts can help you manage the process, saving your team time and effort.
• ACA Signature combines compliance advisory services,  innovative technology, and managed services for a scalable solution that can help you gain expert insight, guidance, and support to help you stay on top of emerging compliance concerns.

Reach out to your ACA consultant or contact us today to find out how ACA can help you ensure pay-to-play rule compliance as this election season heats up.