Although the 2020 presidential vote is still many months away, the election cycle is in full swing. As media coverage increases with each primary debate and voters begin to coalesce around preferred candidates, we can expect to see a sharp increase in political contributions by fund managers and their employees — to down-ballot campaigns as well as the race for the White House — which may lead to intensified scrutiny of those contributions by financial regulators and clients.
In fact, political contributions by fund managers are already on the rise. The last midterm cycle witnessed the highest level of donations ever in a midterm year from fund managers, according to the Center for Responsive Politics. The hedge fund industry alone contributed $101 million to federal candidates, political action committees and outside spending groups during the 2018 election cycle.
During a presidential election year, contributions go up not only for federal candidates, but also state and local races because of higher interest in the political process. However, such civic engagement creates unique challenges for the financial sector. Fund managers and advisers need to be aware of the risks of violating "pay-to-play" rules that regulate and limit political contributions to any official who may have a role in awarding investment mandates. Effective compliance policies and processes can protect funds from the risks of monetary penalties, lost fees and reputational damage.