Midterm Elections Are Coming Up: How is Your Firm Monitoring Contributions and Government Relationships?

The midterm elections are a few short months away, and a number of recent administrative proceedings against both registered investment advisers and exempt reporting advisers by the U.S. Securities and Exchange Commission (“SEC”) should serve as a valuable reminder of the importance of actively monitoring for risks that exposure to government entities or political parties may present. Here are helpful insights and suggested action items to help advisers mitigate these risks.

Industry Best Practices for Monitoring Political Contributions and Government Relationships

• Review Your Compliance Manual: An adviser’s compliance manual should include political and charitable contribution policies; these policies may mirror the rule or take a more conservative stance.
• Confirm Recordkeeping Requirements: There are recordkeeping requirements for tracking contributions. Among other data points, advisers must document all state and local political contributions by covered associates, as well as all government entity clients and investors.
• Employee Attestation: As part of the process of onboarding a new employee, it is important that advisers receive an attestation from the new employee that no contributions were made that could result in the firm’s inability to collect fees. Additionally, the adviser should consider conducting a search of the employee’s and spouse’s contributions using publicly available resources to verify the attestation is accurate.
• Screen for Unreported Contributions: Due to the limited window of time that prohibited contributions are eligible to be returned, it is important that advisers regularly screen for unreported political contributions. There are a number of sites that aggregate contributions, but oftentimes conducting searches solely on those sites will not allow for the contribution to be caught within the necessary time frame due to these sites’ lag time when posting information.
• Conduct Targeted Electronic Communications Reviews: Advisers should add search parameters to electronic communications reviews that focus on the exchanges with existing government entity investors and targeted keywords around the topic. Additionally, advisers should consider incorporating targeted search terms to identify potential unreported contributions.
• Clearly Define the Non-Monetary Contributions: It is important to remember that contributions do not need to be monetary. Hosting events, attending events, and donating time can also be considered contributions, and present the same risks as monetary contributions.
• Employee Reminder and Training: Now is the perfect time to send an email to your entire organization reminding them of the Pay to Play rule. Advisers with upcoming employee compliance training should add this topic to the agenda.

Government Entity Investors

Many advisers manage money for government entities and seek to onboard new government entity clients and investors on a regular basis.

ACA recommends that advisers should:

• Ensure all client/investor-facing employees are aware of any political contributions that would prohibit the adviser from retaining the government entity as a client and/or investor;
• Confirm if they should register as a lobbyist before taking on new public pools of money to manage; and 
• Be cognizant of the multitude of state and local regulations that may apply when gifts or entertainment are provided to or received from government entity clients and investors.

Political Intelligence Agencies

As part of the investment research process, it is common for advisers to engage political lobbyists or political intelligence firms, or communicate directly with government personnel. Most advisers will require employees to consult with the Chief Compliance Officer (“CCO”) prior to these interactions. Reference recent enforcement actions from the SEC also highlight the importance of conducting ongoing diligence of such providers and effective surveillance of interactions with such parties.

ACA recommends that:

• CCOs conduct due diligence to ensure the agencies have established appropriate procedures to prevent against the use and transmission of MNPI; and
• CCOs consider implementing surveillance of agencies that may include call monitoring/chaperoning or focused electronic communication reviews.

For More Information

It is important for advisers to establish policies, procedures, and effective testing strategies for monitoring the risk that such interactions may present. If you are interested in learning more about how ACA helps clients in mitigating these risks, please contact Sean McKeveny.