SEC Proposes Rescinding Pay-to-Play Rule for Advisers
The SEC has proposed to eliminate Rule 206(4)-5 under the Investment Advisers Act, but counsel should note that other federal, state, and contractual restrictions on political contributions would remain in place.
The SEC has proposed the full rescission of Rule 206(4)-5 of the Investment Advisers Act, its "pay-to-play" rule. Adopted in 2010, the rule prohibits an investment adviser from receiving compensation for services to a government-entity client for two years if the adviser or its associates make a political contribution to an official in a position to influence the award of advisory business. The proposal acknowledges industry criticism that the rule's rigid, strict-liability framework has led to severe consequences for minor violations.
Rescission would be a significant change for advisers managing assets for state and local governments, particularly public pension funds. However, counsel must recognize that this is only a proposal, which will not be finalized before the 2026 midterm elections. Even if the rule is ultimately rescinded, the SEC emphasized that pay-to-play conduct can still be prosecuted under existing antifraud provisions. Furthermore, advisers must continue to navigate a complex web of other regulations from FINRA, the MSRB, and the CFTC, as well as state laws, specific pension-plan policies, and contractual side-letter undertakings that impose similar or stricter contribution limits. Firms should not yet alter their compliance programs.