Pay-to-Play: Political Contributions (SEC 206(4)-5)

To meet the pay-to-play: political contributions (sec 206(4)-5) requirement, you must prevent any “covered contribution” from triggering a two-year ban on receiving compensation for advisory services to a government entity. Operationally, that means defining who is covered, pre-clearing political contributions, tracking them, and blocking or escalating any government business impacted by the rule. (17 CFR 275.206(4)-5)

Key takeaways:

• A triggering political contribution can bar compensated advisory services to a government entity for two years. (17 CFR 275.206(4)-5)
• The control system is mostly operational: preclearance, attestations, monitoring, and deal/client gating.
• Exams focus on whether your process is written, consistently followed, and supported by evidence. (2025-exam-priorities)

The SEC’s pay-to-play rule is a business-restriction rule disguised as a political-contributions rule. The operational risk is simple: a single covered contribution can trigger a two-year prohibition on providing advisory services for compensation to the affected government entity. (17 CFR 275.206(4)-5)

For a CCO or GRC lead, the fastest path to compliance is to treat pay-to-play as a gating control over government-entity revenue. You need a documented policy, a clear definition of “covered persons” in your org chart, and a workflow that forces political contribution preclearance before money leaves anyone’s hands. You also need a way to identify which clients and prospects are “government entities” and which officials could create a conflict for that relationship.

SEC exams tend to test whether controls operate in practice, not whether a policy exists. The Division of Examinations highlights focus areas through its exam priorities, which you should treat as a signal to make your controls testable: evidence of preclearance decisions, periodic attestations, training completion, and escalation records when potential issues arise. (2025-exam-priorities)

What the requirement means (plain English)

The pay-to-play: political contributions (sec 206(4)-5) requirement prohibits an investment adviser from providing investment advisory services for compensation to a government entity within two years after a covered contribution to an official of that government entity. (17 CFR 275.206(4)-5)

In operator terms:

• If a covered person makes a covered political contribution to an official connected to a government client (or a government prospect you are pursuing), you may have to stop charging fees for that government relationship for the restricted period. (17 CFR 275.206(4)-5)
• The rule is therefore a “prevent and detect” problem. Your program must stop contributions that create a restriction and detect/report contributions that slip through.

Your controls should be designed around two high-risk moments:

1. Before a contribution occurs (preclearance and education).
2. When you onboard, renew, or expand any government-entity relationship (client/prospect classification and gating).

Who it applies to (entity + operational context)

This requirement applies to investment advisers that provide, or seek to provide, advisory services to government entities and to the supervised personnel whose political contributions could trigger restrictions. (17 CFR 275.206(4)-5)

Operational contexts where the rule becomes “real”:

• Government-entity client onboarding: identifying that the client/prospect is a government entity and mapping relevant officials.
• Business development and RFP response: contributions made during pursuit periods can create acute risk.
• Senior leadership and client-facing staff activity: executives, rainmakers, and relationship owners typically present the highest exposure because their contributions are more likely to be linked to business influence.
• Third parties: placement agents, solicitors, or other third parties involved in government business can create indirect exposure; you should treat them as part of the control perimeter even when the primary prohibition is framed around adviser activity. (17 CFR 275.206(4)-5)

Regulatory text

Regulatory requirement (excerpt): “It is unlawful for an investment adviser to provide investment advisory services for compensation to a government entity within two years after a covered contribution to an official of that government entity.” (17 CFR 275.206(4)-5)

Operator translation: you must implement controls that (a) prevent covered contributions tied to government officials, and (b) stop or escalate compensated government advisory services when a triggering contribution occurs. Your written policies should clearly state the business impact (fee prohibition risk) so staff understand this is not a “PR issue”; it is a revenue and client-service restriction with regulatory consequences. (17 CFR 275.206(4)-5)

What you actually need to do (step-by-step)

1) Define scope: “who is covered” and “what relationships are government entities”

Build two inventories that stay current:

• Covered Persons Roster: list the roles and individuals whose political activity must be precleared (common inclusions are executives, partners, client relationship managers for public plans, and anyone involved in soliciting government entities). Tie it to HR data so joiners/movers/leavers update automatically.
• Government Entity Register: list all government-entity clients and active prospects, including the jurisdiction, relevant board/committee oversight (where applicable), and key officials connected to hiring or retention decisions.

Control objective: every preclearance decision checks the proposed recipient against the Government Entity Register.

2) Put a hard preclearance workflow in front of all political contributions

A workable preclearance workflow has four properties: required, fast, logged, and enforceable.

• Required: policy states no covered person may make a political contribution without written pre-approval.
• Fast: approvals happen quickly enough that staff do not route around them.
• Logged: every request has a record (requestor, amount, recipient, date, decision, approver).
• Enforceable: violations trigger consequences and remediation steps.

Practical design:

• Use an intake form that captures recipient identity, office sought/held, jurisdiction, and whether the requestor has any direct or indirect role with government business.
• Require Compliance sign-off and require Legal escalation when the recipient matches a government entity in your register.

3) Implement periodic attestations and training that tie directly to the workflow

Make attestations specific:

• “I have not made any political contributions outside the preclearance process.”
• “I have disclosed all political contributions made by me that may be in scope.”

Training should be short and role-based:

• Covered persons: mechanics, examples, and consequences (loss of ability to receive compensation tied to government clients). (17 CFR 275.206(4)-5)
• Non-covered personnel: how to route questions and why contributions should be disclosed when in doubt.

From an exam-readiness standpoint, training and attestations are easy to evidence and often requested as part of broader compliance program reviews. (2025-exam-priorities)

4) Add “pay-to-play gating” to government business workflows

You need operational guardrails at the moments that generate revenue:

• RFP/RFI checklist: include a pay-to-play clearance step before submission.
• Contracting and invoicing controls: require Compliance confirmation that no restriction exists before billing a government entity.
• Client/prospect acceptance committee (or equivalent): require a pay-to-play sign-off for any government entity.

If your firm uses a CRM, add a mandatory “Government Entity?” field and an automated trigger for Compliance review when marked yes.

5) Monitor and detect contributions that bypass preclearance

No workflow is perfect. Add detective controls:

• Quarterly personal trading/political activity attestations (political activity component).
• Expense report monitoring for political-event tickets or donations coded as business expenses.
• Email keyword monitoring can be high-noise; if you use it, confine it to covered persons and known campaign terms, and document why it is proportionate.

6) Incident response: what to do if a potential triggering contribution occurs

Write a playbook that answers:

• Who investigates (Compliance lead, Legal counsel, business owner)?
• How you assess impact (which government entity, which official, which accounts, what services/fees)?
• What immediate restrictions apply (pause billing, pause solicitation, client communications plan)?
• What gets documented (facts, timeline, decisioning, remediation, senior management notifications).

This playbook matters because exams test not only prevention but also how you respond when controls fail. (2025-exam-priorities)

Required evidence and artifacts to retain

Keep evidence in a form that can survive an exam request with minimal scrambling:

• Pay-to-play policy and procedures (current version + prior versions).
• Covered Persons Roster with effective dates and role criteria.
• Government Entity Register (clients + prospects) with ownership and update logs.
• Contribution preclearance tickets: requests, approvals/denials, escalation notes, and timestamps.
• Training materials, completion logs, and training assignments by role.
• Attestation templates and signed/recorded responses.
• Government business gating evidence: RFP checklists, onboarding checklists, contracting sign-offs.
• Incident files: investigation notes, communications, billing decisions, remediation actions.

Daydream can help by centralizing these artifacts into a single control record with recurring tasks (attestations, roster refresh, register refresh) and an evidence checklist that maps directly to the pay-to-play: political contributions (sec 206(4)-5) requirement.

Common exam/audit questions and hangups

Expect questions that probe whether the process works under pressure:

• “Show us all political contribution preclearance requests for the review period and the approval rationale.” (2025-exam-priorities)
• “How do you determine who is a covered person, and how do you ensure the list stays current?”
• “How do you identify government entities, especially when invested through intermediaries or managed accounts?”
• “What controls stop a new government client from being onboarded without pay-to-play review?”
• “How do you test the control (sampling, exception tracking, remediation)?” (2025-exam-priorities)

Hangups that create delays during exams:

• No single authoritative Government Entity Register.
• Approvals happening in chat/email without a durable audit trail.
• Attestations that are too general to be meaningful.

Frequent implementation mistakes and how to avoid them

1. Policy-only compliance

   • Mistake: a written policy exists but contributions happen without preclearance.
   • Fix: require preclearance through a tracked system; block reimbursements for political spend absent approval evidence.

2. Static covered-person definitions

   • Mistake: list isn’t updated when someone changes roles or joins from a competitor.
   • Fix: integrate roster updates with HR onboarding and role-change workflows; require Compliance review for any role tied to government solicitation.

3. No revenue gating

   • Mistake: Compliance reviews contributions, but billing and contracting proceed without checks.
   • Fix: add pay-to-play sign-off in contracting/invoicing workflows for any government entity.

4. Weak documentation of decisions

   • Mistake: approvals have no rationale; denials have no escalation record.
   • Fix: require approvers to document recipient match checks against the Government Entity Register and any escalations.

Enforcement context and risk implications

The rule’s core risk is commercial: you can lose the ability to receive compensation from a government entity for the restricted period after a triggering contribution. (17 CFR 275.206(4)-5) That can force fee disruptions, contract amendments, client relationship strain, and disclosures to consultants, boards, or procurement offices.

From a control-risk perspective, pay-to-play failures often signal broader governance weaknesses: weak supervision of supervised persons, poor recordkeeping, and inconsistent adherence to pre-approval processes. Those themes align with exam focus on compliance program effectiveness and the ability to evidence that policies operate as written. (2025-exam-priorities)

Practical execution plan (30/60/90-day)

First 30 days (stabilize and prevent)

• Assign an owner (CCO or designee) and name backups.
• Publish an interim rule: covered persons must preclear all political contributions; no exceptions without written Compliance approval. (17 CFR 275.206(4)-5)
• Build the initial Covered Persons Roster and Government Entity Register (minimum viable lists).
• Stand up a logged preclearance intake and approval queue (ticketing system or GRC workflow).

Days 31–60 (operationalize and gate revenue)

• Embed pay-to-play checks into RFP response and government onboarding processes.
• Launch role-based training and a first attestation cycle for covered persons.
• Create an incident response playbook and run one tabletop exercise with Legal and business leads.

Days 61–90 (harden, test, and prove)

• Run a control test: sample preclearance requests, trace to approvals, and verify register checks.
• Review exceptions and close gaps (missed attestations, undocumented approvals).
• Formalize metrics for senior management: volume of requests, turnaround time, exceptions, and remediation status.
• Centralize evidence collection in Daydream so you can answer exam requests with a single exportable package.

Frequently Asked Questions

Who should be considered a “covered person” for pay-to-play controls?

Treat anyone who can influence government-entity business or who solicits/maintains those relationships as covered, plus relevant executives. Document the role criteria and keep a named roster tied to HR changes. (17 CFR 275.206(4)-5)

Do we need preclearance even for small political donations?

Yes, if the person is in scope of your program, preclearance is the cleanest way to prevent accidental triggering contributions and to document supervision. The rule risk is the resulting compensation restriction tied to government entities. (17 CFR 275.206(4)-5)

What’s the minimum evidence an examiner will expect?

A written policy, a working preclearance log with approvals/denials, a current roster of covered persons, a government-entity list, and proof of training/attestations are the typical baseline artifacts. Exams evaluate whether controls operate consistently. (2025-exam-priorities)

How do we handle political contributions discovered after the fact?

Treat it as an incident: open a case file, assess whether it is a covered contribution tied to any government entity relationship, determine immediate business restrictions, and document remediation. Keep the full timeline and decision trail. (17 CFR 275.206(4)-5)

Do third parties (like placement agents) matter for pay-to-play risk?

Yes. Even when the rule text focuses on adviser activity, your government business pipeline often depends on third parties, so contract terms, diligence, and monitoring should align to your pay-to-play controls. (17 CFR 275.206(4)-5)

How does Daydream help operationalize this requirement?

Daydream helps you run pay-to-play as a repeatable control: assign owners, automate recurring attestations and roster reviews, and store preclearance decisions and evidence in one place for exam readiness. (2025-exam-priorities)