Some firms outright ban it, while others set stringent compliance rules.

With less than two weeks remaining to the mid-term elections, private equity firms are making known to their employees about complying with Rule 206(4)-5 under the Investment Advisers Act of 1940.

Firms want to avoid violating the Securities and Exchange Commission’s so-called “pay-to-play” rule, which carries a two-year ban on doing business with a state pension fund. Some firms with strict compliance rules prohibit employees from contributing to candidates during their campaign run, on the SEC’s view that their election into office financed by employee contributions would lead to that public position influencing investment into the firm and thus “violate the public trust.”

One chief financial officer said that his firm was constantly reminding employees — and, in turn they should inform their spouses because the rule extends to spousal donations in some areas — to not make campaign contributions at all, even at the federal level.

“It’s a time when people of either political party can be excited about the elections and forget compliance,” he said. “We found it was cleaner to prohibit everything. There was less risk of violating the rules. The trade-off is that you’re working here.” The CFO, like all the people pfm spoke with for this article, agreed to speak on condition of anonymity.

The November 6 vote will likely have significant consequences on US politics leading up to the 2020 presidential election, and people’s emotions are running high. Democrats have the potential to overturn the Republican Party’s majority control in the Senate and the House of Representatives. At the state level, 87 of 99 legislative chambers are holding general elections, according to Ballotpedia. The website reports that Republicans control 32 of the country’s 50 state legislatures, while the Democrats control 14 and four are split between the parties. Ballotpedia is tracking 22 states — including Florida and New York — where it sees a possible party shift.

Another firm even went as far as to have employees sign and certify that they understand and follow the policy on campaign contributions during their mandatory annual training. An audit firm follows up to ensure that employees have been compliant because most campaign donations are publicly reported, said the partner at a top-tier firm.

“Our firm has a very robust compliance program, any contributions and political activity of any sort have to be pre-cleared by our compliance department,” he said. “It gets either approved or denied by our compliance department before anything happens. So if an employee, like me for example, if I wanted to make a political contribution, I’m allowed to do that if I have it cleared by our compliance team.”

Some firms have run afoul of the rule recently. Oaktree Capital Management, Sofinnova Ventures and EnCap Investments settled with the SEC in July over pay-to-play infractions over campaign contributions by its employees from 2012 to 2016. Of the three, Encap paid the largest settlement, at $500,000, after being accused of making campaign contributions in Texas, Indiana and Wisconsin totaling $90,200.

A partner at another firm said that it’s also simpler for his firm to prohibit staff from making political contributions in any form since they are raising capital from public pension funds. Conversely, to avoid additional potential conflicts of interest that could come from an investor or service provider, any gifts or invitations to sporting events must be reported and approved by the firm’s compliance team. Ultimately, showing responsibility can help to retain and woo investors, he said.

The partner added that some investors who conducted due diligence on back-office operations were impressed with the firm’s efforts “to have created and fostered a process and culture of compliance.”

Dominic Diongson contributed to this article.